Search

Today I wrote about a company that announced a new CEO! I then went back and added to the story. My conclusion remains unchanged: I expect the stock to perform poorly through year-end and possibly quite a ways into 2019.

The market is positive, but it’s not powerful, with a generally choppy, narrow and rotational environment in recent weeks. Even so, we’re encouraged by the action in some growth stocks, so after getting knocked out of a few names during earnings season, we’ve begun to put some money back to work.

The most bullish thing a market can do is hit new highs, and that’s what we’ve seen from this market in recent days, with most indexes and stocks participating on the upside. And with interest rates remaining tame, our dividend stocks have been doing well, too.

All of this is good, though it makes this month’s choice of a featured stock a bit more difficult, as many names are a bit extended to the upside. In the end, I went with a strong stock that gives us leverage to the strong U.S. economy—both the stock and dividend payment are likely to head higher over time.

Things are looking up for emerging market equities. They’re not fully healthy, yet, but there has been definite improvement since the August 16 low. In today’s issue, I have some thoughts about whether or not this is a bottom in emerging markets, and how we will know one when it appears. I also have an intriguing new IPO for you to consider.

Current Market Outlook


Leading stocks stabilized somewhat during the second half of last week, but we’re still seeing plenty of potholes (mostly on earnings reports) and a bunch of rotation out of fast-growing names and into more cyclical, defensive areas. That’s not to say all growth stocks look terrible—we’re still seeing a good number of positive earnings gaps, including a few in today’s issue—but there remain a bunch of crosscurrents on a day-to-day basis, making it difficult to latch onto top performers. As for the overall market, it’s in solid shape, with the intermediate-term trend tilted up. All in all, we don’t advise hiding in the closet, but it’s important to hold some cash and honor your stops, and on the buy side, to pick your entry points and focus on names that have shown recent, powerful buying.

This week’s Top Ten has a diverse mix of stocks, and happily, it includes a good number of stocks with solid growth stories. Our Top Pick is Paycom Software (PAYC), which staged a fantastic earnings gap (and follow-through) last week.

Stock Name	Price	Buy Range	Loss Limit
BJs Wholesale (BJ)	36.69	24.5-26	22-22.5
CarGurus (CARG)	41.58	42-45	38-40
Chart Industries (GTLS)	72.05	73.5-77	66-68
Greenbrier (GBX)	57.73	56.5-58.5	52-53
Illumina Inc. (ILMN)	289.74	320-330	295-302
Ingevity Corp. (NGVT)	99.98	96-100	87-90
Neurocrine Biosciences (NBIX)	123.40	110-114	100-102
Paycom Software (PAYC)	0.00	127-133	114-117
SodaStream (SODA)	142.91	111-116	98-101
Zendesk (ZEN)	82.19	59-62	53.5-55.5

The market remains challenging, in that we really don’t know if growth stocks are cooked, or China is in trouble or housing has peaked—but uncertainty has always been part of the game. If you want certainty, buy a bond.

The possibility of a trade war between the U.S. and China has dealt a blow to many Chinese stocks. Most of the damage is being done by withdrawals from China exchange-traded funds and broader emerging-market or ex-U.S. funds. But whatever the source, the reality is that we have a new warning signal from the Cabot Emerging Markets Timer.

We’re adding a pure-play security solutions provider to Cabot Small-Cap Confidential to increase our security software exposure. This company is growing revenue well over 20% and is expanding its portfolio of solutions to address large and rapidly growing markets.

The shift from Wednesday’s pullback to today’s nice market bounce is just par for the course as investors scramble to figure out the fallout from alarming headlines and conflicting predictions. It’s not an easy market to navigate, and the portfolio is dealing with it by holding a heavy (50%) cash position and cutting back on most buying. But we’re still finding attractive stocks for our watch list, and will be ready when we finally get a green light from the Cabot Emerging Markets Timer.

While emerging market stocks (especially Chinese stocks) remain under pressure, we’re starting to see some signs that things may be turning around. Our stocks have been knocked around a bit by earnings season, but we’ve also had some good winners. And we continue to build a watch list of companies with excellent stories and intriguing charts that we will be ready to buy when the general tone of the market improves. Read on for my view on what’s happening right now and why it’s a good time for optimism.

Last week’s “surprise” failure by Facebook to meet growth expectations has kicked off a correction in growth stocks that will likely run for a while, while allowing other types of stocks to come to the fore. This is natural. Our job is to follow the leaders, and to discard stocks that are no longer doing what we hired them to do.

One of the minor predictable patterns that the stock market has developed over the years involves the days before and after holidays (like the Fourth of July). Basically, stocks do a little bit better on those days, but the pattern is neither big enough nor dependable enough to make money on. Still it’s worth keeping in mind as you watch the action of stocks this week.

Current Market Outlook


The selling pressure that appeared two weeks ago carried through to last week, with many leading stocks breaking down and others falling back into consolidations. That said, it’s not the end of the world—many major indexes are now testing their 50-day lines, and a bunch of stocks are in the same boat. There’s no question that the evidence has worsened lately, which is why our Market Monitor is back down to a reading of 6 (out of 10), but we’re most interested in what happens from here, which will probably go a long way toward determining the market’s next intermediate-term move. All told, you should still hold your strong, profitable stocks, but we also think it’s best to cool your heels a bit, keeping new buys small and holding some cash as we wait to see the market show its hand.

In the meantime, we’re using this brief period of market weakness to identify the stocks unaffected by the selling, as those will likely do the best when the market resumes its major advance. This week’s list has plenty to choose from, and our Top Pick is Wayfair (W), which is unusually strong—keep positions small and try to buy on dips.

Stock Name	Price	Buy Range	Loss Limit
Five Below (FIVE)	134.58	93-97	83-85
Ligand Pharmaceuticals (LGND)	267.14	202-211	185-188
Netflix, Inc. (NFLX)	423.92	385-400	345-355
Oasis Petroleum (OAS)	12.57	12.1-12.9	11-11.3
Supernus Pharmaceuticals (SUPN)	52.50	54-57	49-51
Teladoc, Inc. (TDOC)	127.95	56-60	49-51
Ultragenyx Pharmaceutical Inc. (RARE)	87.63	74-78	66-68
Wayfair (W)	167.03	112-117	100-104
WellCare Health Plans, Inc. (WCG)	271.83	238-245	220-225
WPX Energy (WPX)	0.00	17.4-18.5	16-16.7