WHAT TO DO NOW: Remain bullish. The market is in good shape, and we’re starting to see some growth stocks reassert themselves. There are still some potholes out there, but we believe you should remain heavily invested. In the Model Portfolio, we sold Five Below (FIVE) on a Special Bulletin yesterday, replacing it with GrubHub (GRUB), and today, we’re placing Facebook (FB) back on Buy. We now have eight of a possible 10 stocks and a cash position near 22%. We’ll be looking to put that cash to work should the market and leading growth stocks get going from here.
Current Market Environment
The market finished narrowly mixed today, with the Dow losing 12 points but the Nasdaq inching ahead by 8 points.
All three of our market timing indicators remain bullish, so we’re staying positive. During the past three or four weeks, we have seen some sloppy action among some individual stocks, but we’re starting to see improvement.
One of the more encouraging aspects is the broad market, as small- and mid-cap indexes are leading the way to new highs (most big-cap indexes are still within their tight trading ranges). Also, the number of stocks hitting new highs on the Nasdaq hit its highest level in more than a year yesterday. And, of course, our Two-Second Indicator remains in fine shape.
Moreover, we’re beginning to see some liquid growth stocks push higher; the three that we own (AMZN, BABA and FB) have all lifted to new price highs this week on good volume. That’s a good sign that institutional investors are active.
Of course, not everything looks rosy; the fact that the major indexes are still range-bound could lead to more choppy action, and rotation among individual stocks and sectors remains extreme. (Retail stocks now look like the dog’s dinner, for instance.) But by our measures, there’s little doubt the weight of the evidence is positive.
On a special bulletin yesterday, we sold Five Below (FIVE), which couldn’t find support following its quarterly report, and replaced it with GrubHub (GRUB). Details below.
Model Portfolio
We’ll start with our newest addition, GrubHub (GRUB 42), which we think has great potential in the gigantic ($45 billion annually) takeout industry in the U.S. The firm’s EBITDA (a measure of cash flow) growth has been accelerating in recent quarters, as has the company’s take-rate (how big a cut it gets from every transaction), which is a great sign considering worries about competition. The stock is acting like a new leader, soaring on earnings a month ago and hitting new highs recently despite the sideways market. The stock could pull back a bit, but the main trend is up. BUY.
Abiomed (ABMD 119) looks a lot like the major indexes, with some ups and downs since mid-July but no real progress. Still, ABMD is holding around its 50-day line, which should offer support. If you don’t own any, you can buy some on this consolidation. BUY.
There are never any sure things in the market, but we continue to think Alibaba (BABA 102) is likely a new liquid leader. The stock is starting to show its muster, lifting on good volume in recent days to new highs. It doesn’t hurt that many Chinese stocks are acting well, too. If you own BABA, sit tight, and if you don’t, you can buy some around here or preferably on dips of a couple of points. BUY.
Amazon (AMZN 784) also popped to new highs yesterday on good volume. This stock’s momentum isn’t as pronounced as BABA’s, but the trend is up, and we see AMZN as a unique piece of market merchandise: A highly liquid stock of a dominant company with gigantic earnings estimates (up 81% in 2017). BUY.
Facebook (FB 131) has finally kicked into gear, lifting to new price highs while its RP line reached its highest level since its spike in February. We don’t expect the stock to move like it did in its 2013 glory days, but more and more investors are coming around to the view that the firm’s growth isn’t destined for a rapid deceleration. (One analyst came out today saying just that as he raised his price target.) With the stock showing some life, we’ll go back to Buy. BUY.
Five Below (FIVE 45) was sold on yesterday morning’s special bulletin. We still like the story, but the pronounced weakness in retail stocks (especially other dollar stores) and the firm’s own so-so quarterly report hasn’t been able to stop the stock’s slide. We booked our modest profit and moved on. SOLD.
ProShares Ultra S&P 500 Fund (SSO 72) is trapped in a tight range just like the S&P 500, though it came close to nosing out to new highs yesterday. We can’t rule out another dip, but with our market timing indicators still positive and bullish blastoff indicators from late-June and early July portending a solid rally, we think SSO remains a good buy. BUY.
Ulta Beauty (ULTA 247) continues to struggle, which isn’t a surprise given its earnings wallop a couple of weeks ago. We’re content to hold our small remaining position (about 6% of the portfolio) and give it a chance to build a bottom in the weeks ahead. Fundamentally, there’s nothing wrong here, and it’s important to note that the slowdown seen in same-store sales from most retailers wasn’t apparent in Ulta’s recent report (12% growth, including e-commerce). HOLD.
Veeva Systems (VEEV 41) has been hovering just above 40 since its positive earnings reaction last week. The company’s cloud software has a long runway of growth, and investor perception continues to improve. If you don’t own any, try to grab shares on dips toward the 25-day line, which is at 39 and rising. BUY.
Watch List
Parsley Energy (PE 34): Even at today’s modest oil prices, Parsley’s wells in the Permian Basin sport solid returns. And if energy prices head higher, the firm’s cash flow should explode as its production ramps higher. The stock is trading tightly near its all-time high.
Shopify (SHOP 43): We think Shopify has tremendous potential as more small- and mid-sized customers sign up to grow their online businesses. A pullback or rest period is likely, which should set up a good entry point.
Twilio (TWLO 57): TWLO remains volatile but its overall pattern is sound. The firm’s cloud communications platform is very pervasive and should lead to consistent growth for a long time to come.
XPO Logistics (XPO 36): We’re not huge fans of transportation stocks, but XPO’s story revolves around its CEO and his history of building huge winners through acquisitions. The company’s bottom line has turned up in a big way and should soar going forward.
Zillow (Z 35): Z is now in its sixth week of base building, with a calm correction (17%) after a big run this spring and early summer. A good-volume move back above 36 or 37 could signal the start of a new uptrend. We still think the firm’s online real estate service has a very bright future.
That’s it for now. Your next issue of Cabot Growth Investor will be sent to you next Wednesday, and, as always, we’ll send a Special Bulletin should we have any changes before then.
| Stock | Date Bought | Price Bought | Current Price | Profit | Rating | |||
| Abiomed (ABMD) | 7/11/16 | 116 | 119 | 3% | Buy | |||
| Alibaba (BABA) | 8/12/16 | 96 | 102 | 7% | Buy | |||
| Amazon (AMZN) | 8/9/16 | 770 | 784 | 2% | Buy | |||
| Facebook (FB) | 8/1/13 | 38 | 131 | 248% | Buy | |||
| Five Below (FVE) | 7/4/16 | 40 | 45 | 11% | Sold | |||
| GrubHub (GRUB) | 9/6/16 | 42 | 42 | 0% | Buy | |||
| ProShares Ultra S&P 500 Fund (SSO) | 5/12/16 | 64 | 72 | 13% | Buy | |||
| Ulta Beauty (ULTA) | 11/6/14 | 121 | 248 | 104% | Hold | |||
| Veeva (VEEV) | 7/7/16 | 36 | 41 | 14% | Buy |