WHAT TO DO NOW: Not much has changed with the market during the past week, so we’re sticking with our stance—the Model Portfolio has 40% in cash and holding six resilient stocks. We continue to believe the next major market move is up, but in the near-term, you should take your cues from the market and individual stocks. We have no changes tonight.
Current Market Environment
The market finished modestly higher today, with the Dow rising 41 points and the Nasdaq inched ahead 3 points.
Not much has changed during the past weeks, as our Cabot Tides remain negative (you can call them neutral-to-negative if you prefer), while our Cabot Trend Lines and Two-Second Indicator are both still positive. We’ve seen just one reading of 40 new lows (and it was exactly 40) during the market’s latest dip, which is an encouraging sign.
Overall, the market is about six weeks into a correction. If you look at the 10-day average of the number of stocks hitting new highs on the Nasdaq, it was in the 130 to 150 range all of July and August, but has been sliding since, now nearing just 60 or so.
In the short-term, it remains a coin flip as to which direction the market heads (if any). All the uncertainties out there could easily keep the market heading sideways or cause another leg down. At the very least, no real money is being made in the current environment, so we don’t advise pushing the envelope.
Longer-term, we remain optimistic because of the factors we’ve cited in recent weeks—the major trend is up, the number of new lows is small, many big-cap liquid leaders are still holding up, sentiment is apathetic at best, and so on.
Also, from a chart perspective, the action of most indexes looks normal. The S&P 500, for instance, was capped by the 2,100-2,130 area for more than a year, broke out in July, and is now retesting that same area. In theory, there should be plenty of support here, which is what we’ve seen so far.
All in all, then, it’s best to hold some cash and ease up on new buying until the bulls show up. But don’t stick your head in the sand, either—should the bulls take control, we think the upside could be much bigger than most expect.
Model Portfolio
Abiomed (ABMD 128) fell a couple of points on light volume today, but overall, it’s held up well during the past couple of weeks, consolidating in the 126 to 131 area even as the market and many growth stocks have fallen off. We can’t rule out a test of the 50-day line (now nearing 124), but the next big move will probably come down to earnings, which are due out next Thursday (October 27). We’ll stay on Buy, but as usual, keep any new positions small this close to the report. BUY.
Last week there were reports that the IPO of Alibaba’s (BABA 104) former subsidiary Ant Financial was being put off, but today, it sounds like the IPO is back on, possibly later this year, which would be a plus. Elsewhere, Alibaba is looking to raise about $1 billion from outside investors to fund the expansion of its local services platform (dubbed Koubei), valuing the overall business at $8 billion. As for the stock, it took a steep dive to its 50-day line last week and has bounced decently since. Earnings are due out November 2, which will be the big event. Barring a huge earnings miss or a market meltdown, we still believe BABA is a new liquid leader that can do very well in the months ahead. BUY.
Facebook (FB 130) remains in a super-tight range (126 to 131 during the past five weeks), though it’s showing a little spunk recently. One analyst just upped his price target as he waved away worries about a declining advertising load and said consensus estimates for Instagram revenues are likely too low. Separately, the firm launched a variety of features today on its Pages section, including the ability to order food (see GrubHub below), get professional services quotes or buy movie and event tickets. As with most of our other stocks, the upcoming quarterly report (due out November 2) will be vital for the stock, though long term, we continue to see years of rapid growth as Facebook monetizes all of its platforms. BUY.
GrubHub (GRUB 42) took a small hit at the opening today after Facebook said it would allow some online food ordering on its site, but shares quickly recovered. Food ordering isn’t a major focus on Facebook but an added feature, and besides, GrubHub is the hands-down leader with a network that’s far larger than any competitor’s. Moreover, we’re actually impressed with GRUB’s recent action, as the stock staged four straight good-volume up days after testing its 50-day line early last week. Earnings are due out next Wednesday (October 26). HOLD.
Along with the S&P 500, the ProShares Ultra S&P 500 Fund (SSO 69) briefly dipped to its lowest level since early July last week before rebounding. We’ll continue to hold on above our mental stop area (65 to 66), as SSO isn’t far off its highs and because of the longer-term positives we wrote about earlier. HOLD.
Ulta Beauty (ULTA 256) finally showed some life last week after the company raised guidance at its analyst day—not only did the firm bump up its expectations for the rest of this year, but it also raised its long-term goals for store count (1,400 to 1,700, compared to 1,200 previously) and e-commerce potential. Shares spiked on the news, though they’ve given back about half the move since then. We still think ULTA likely needs more time to consolidate, but the action is a good sign that a bottom could be in. We’ll stay on Hold for now; a drop all the way back down to 240 would look abnormal at this point. HOLD.
Watch List
Nevro (NVRO 100): NVRO hasn’t had a big pullback in many months, which is a warning sign in this environment. But its recent resilience and triple-digit growth are attractive. Earnings are likely out the second week of November.
Diamondback Energy (FANG 103) and Parsley Energy (PE 37): Both of these Permian explorers should see 30%-plus output growth next year, with some of the best acreage in the most lucrative basin in the U.S. PE’s quarterly report is due November 3.
ServiceNow (NOW 79): ServiceNow’s productivity-enhancing software has widespread applications in all kinds of enterprises; analysts see 30%-plus sales and earnings growth going forward. The stock is perched near multi-month highs. A positive reaction on earnings (due out October 26) could be buyable.
Shopify (SHOP 43): SHOP has chopped sideways for nine weeks, but there’s been little big-volume selling and shares popped nicely today. Earnings are due out November 2.
XPO Logistics (XPO 35): XPO has taken on some water, but it’s still in a trading range and is a reasonable three points from multi-month highs.
Zillow (Z 34): Z’s earnings are likely out in two or three weeks, and a positive reaction (after 12 weeks of basing) could mark the beginning of a new uptrend. We think earnings growth will be huge as real estate ad money moves online.
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 | 128 | 11% | Buy | |||
| Alibaba (BABA) | 8/12/16 | 96 | 104 | 9% | Buy | |||
| Facebook (FB) | 8/1/13 | 38 | 130 | 246% | Buy | |||
| GrubHub (GRUB) | 9/6/16 | 42 | 42 | -1% | Hold | |||
| ProShares Ultra S&P 500 Fund (SSO) | 5/12/16 | 64 | 69 | 8% | Hold | |||
| Ulta Beauty (ULTA) | 11/6/14 | 121 | 256 | 112% | Hold | |||