Cabot Growth Investor 1459

There remain a ton of crosscurrents and news-driven action out there, but after a vicious rotation a week and a half ago, growth stocks have firmed up and the overall market is in good shape. Thus, we’re starting to put some money to work, averaging up in one of our stocks and starting a half-sized position in another. And if the good vibes continue, it shouldn’t take us long to get heavily invested.
In tonight’s issue, we review all of our stocks, talk about a couple of rare, blastoff-type measures that flashed that bode well for the major indexes and highlight a couple of smaller names in one growth sector that have great stories, numbers and charts.

Cabot Growth Investor 1459

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Wild—but Positive—Action
The healthiest market environment is generally one where most participants are rowing in the same direction—the vast majority of stocks and sectors glide higher (with the occasional pullback or shakeout, of course) as investor perception of the future steadily improves. Even if the broad market isn’t in gear, having a large set of growth leaders motoring smoothly northward is a sure sign that big investors are building positions on a consistent basis.

Today, though, is not that kind of environment, at least when you look under the market’s hood. One day cyclical stocks are spiking after reports of a promising virus vaccine; the next, they are resting while growth stocks pick up, only for those names to sag the following day while some other sector or theme perks up—much of it driven by an avalanche of news (vaccine, shutdowns, economy, etc.). It’s fair to say there have been a ton of crosscurrents out there resulting in a sloppy, news-driven, meat-grinder state of affairs.

The real question, though, is whether that whippy action is slowly dissipating, and on that topic we’re seeing some encouraging signs. While further short-term volatility is possible (likely), both our Cabot Tides and Cabot Trend Lines remain firmly bullish, the number of new lows has evaporated (seven straight days of fewer than 10 on the NYSE; similar bullish readings on the Nasdaq), and as we write later in this issue, some blastoff-like indicators have recently flashed, portending nicely higher prices for the major indexes in the months ahead. We still believe the next big move will be up.

Moreover, when narrowing in on growth stocks, there was a vicious rotation out of growth and into value/cyclical stocks at the beginning of last week when the first vaccine news was released. But since then, things have begun to settle down despite some further vaccine-related headlines—it’s far from perfect, but the longer growth stocks avoid a second wave of intense selling, the greater the chance that rotation was a yet another short-term pothole.

As we wrote above, this isn’t one of those times when everyone is on the same side and big investors are accumulating shares en masse day after day. But, for the overall market, there are plenty of bright signs, and after last week’s shot across the bow, growth stocks seem to be firming up. The action remains wild, but it’s growing more positive, so we’re putting a little money back to work in tonight’s issue.

What To Do Now
The Model Portfolio came into this week with a bunch of cash on the sideline, and with the improvements mentioned above, we’re going to fill out our position in Roku (ROKU) and add a new half-sized position in Uber (UBER), leaving us with around 42% in cash. Ideally this is the start of a sustained buying spree—if growth stocks flex their muscle, we’ll quickly add to our exposure, but as always, we’ll take it day to day.

Model Portfolio Update
While the market has shaped up nicely in recent weeks, the bucking bronco environment for growth stocks chopped us out of a couple of names—combined with our lack of new buying, that ballooned our cash position to north of 50%. We thought that was too high, but we decided to wait a few days given the meat-grinder situation for growth stocks out there. Happily, though, we’re now seeing more growth titles shape up.

Because of the improvement, we’re doing some buying tonight, though because growth stocks remain whippy, we’re not diving in with both feet: We’ll fill out our position in ROKU and start a half position in Uber (UBER), which will bring us down to around 42% in cash. If things kick into gear, it won’t take us long to put most of that remaining cash to work, but we’ll see how it goes.

Current Recommendations

Datadog (DDOG)—DDOG is one of a few trades of late that’s gone bad for us, but we have no regrets when it comes to the buying decision (though, to be fair, we probably could have cut bait earlier). The stock had a great, big-volume breakout on powerful news (integration into Microsoft’s Azure), and that came after a normal 11-week rest. Generally speaking, seven out of 10 of these trades will work at least somewhat (one or two might really get going), but this obviously wasn’t one of those times—the weakness in growth stocks and, last week, projections of decelerating growth, cracked DDOG. We swallowed our loss and are looking for better-positioned names in the next uptrend. SOLD.

Five Below (FIVE)—Five Below is set to release quarterly results on December 2 (analysts see sales up 18% and earnings of 19 cents per share), which will tell the intermediate-term tale. But so far, FIVE is certainly on the right track—after some ups and downs following our initial recommendation, the stock has ratcheted higher as perception improves that 2021 will see a huge fundamental rebound (analysts see earnings more than doubling), kicking off a return to the company’s reliable 20%-plus earnings growth path. We’ll stay on Buy, but this isn’t a go-go stock, so if you don’t own any, consider starting small or looking for dips of a few points. BUY.

Novocure (NVCR)—Our half position with Novocure is off to a relatively quiet start—we got in after its first pullback to the 50-day line, and it’s since chopped around with growth stocks. The firm received European approval last week to launch its Optune Lua system (to treat mesothelioma) in that continent, where there are 13,000 new cases annually. It’ll probably take a few months to get things up and running but this should eventually provide a nice bump to business. Back to the stock, NVCR is now six weeks into a normal rest period following an initial breakout; we’ll keep our eyes open, but we continue to think the stock will head higher from here. BUY A HALF.

Pinterest (PINS)—We took partial profits in PINS last week, partly because the stock was taking on water and partly because we had a good-sized position after its recent run. But that might have been a mistake, as the stock has bounced excellently off its 25-day line since then and threatened new highs today! There’s a view that Pinterest could be dinged by any economic normalization going forward, and maybe that’s true to some extent; user growth has accelerated nicely during the past two quarters (up nearly 40%) as people looked for ideas in the new work/play-at-home reality. But as opposed to some “pandemic” stocks, we think growth here is likely to remain very strong—an economic recovery will actually boost advertising overall (as we saw in Q3), and the bigger idea here is company-specific, as Pinterest’s website offers advertisers an entirely new step in the buying process to actually get in front of customers (not to mention the company’s improved ad tools and e-commerce related links are helping the cause). Obviously, the stock is not the company, so we don’t rule anything out, but Pinterest has the look and smell of a fresh leader that’s set for years of rapid growth no matter how or when the pandemic ends. If you took some off the table with us, just sit tight and give the stock room to maneuver. If you don’t own any, we’ll restore our Buy rating, but aim to start small and on weakness. BUY.

ProShares Ultra S&P 500 Fund (SSO)—There are still plenty of near-term uncertainties and crosscurrents out there; we certainly can’t rule out some more wobbles as the environment is divergent (read: lots of rotation and re-rotation) and news-driven. But we’ve always viewed the ups and downs of the past two and a half months as a normal rest period following the March-August surge, and we’ve actually grown even more bullish given the unusual strength seen a couple of weeks ago. (See more later in this issue on the Three Day Thrust and New High Buy signals.) All of that should play into another good run for SSO; we might consider adding a few more shares to our position if the fund tightens up for a few days, but right here, we’ll stick with what we’ve got, and if you don’t own any, feel free to start a position here. (As an aside, with small-caps kicking into gear, owning something like UWM, which moves twice the Russell 2000 each day, is a fine choice. But we’re going to keep it simple and stick with SSO.) BUY.

Roku (ROKU)—ROKU reminds us a bit of Pinterest when it comes to perception surrounding any coming end to (or lessening of) the pandemic. Has the stay-at-home trend benefited Roku? Most likely, yes—in Q2 and Q3 combined, user accounts lifted nearly 16% while streaming hours bumped up 20%. But this isn’t a story dependent on everyone staying inside; the trend toward cord-cutting has been strong for years, and Roku has the top operating system (via its own streaming sticks and players, and integration into other best-selling smart TVs) and neutral portal (reports surfaced today that AT&T’s HBO Max will be brought to Roku’s platform, reinforcing the idea that its portal is vital for streaming players) that should attract an avalanche of advertising as firms move ads away from traditional TV and toward connected TV. The stock has been all over the place during the past two months, but like many growth stocks, it’s firmed up lately (held its 10-week line) and exploded higher on big volume today after the HBO news. We’re not ruling out further volatility, but we think ROKU has more gas left in the tank—we’ll fill out our position by adding another half-sized stake (5% of the portfolio). BUY ANOTHER HALF.

Twilio (TWLO)—One thing we’re seeing a decent amount of are growth stocks that are forming base-on-base formations—basically, this happens when a stock breaks out of a multi-week range, but the environment is still iffy, which leads to the stock to etch another five- to 10-week consolidation. TWLO is one example, as it’s had lots of movement but no net progress since early August but could be rounding out its second launching pad (today’s big-volume move was encouraging). The firm has been relatively quiet on the news front of late, but the backdrop remains bullish with the completed acquisition of Segment and the 30%-plus annual organic growth goal for the next few years. If you don’t own any, we wouldn’t argue with a small buy around here; a bit more strength could have us restoring our Buy rating. But given that TWLO still has plenty of resistance to chew through, we’ll stick with our Hold rating for the moment. HOLD.

Uber (UBER)—We’re always on the lookout for huge (one-year or two-year) post-IPO consolidations, as powerful breakouts from there often lead to good-sized runs. That’s just what UBER has done recently, gapping above resistance after some positive ballot results in California and surging further after a solid Q3. Of course, this isn’t just about the chart. Uber has its hands in the economic recovery pie via its Rides business, which has shown a steady improvement since the pandemic lows (Q3 saw bookings up 94% from the prior quarter, while revenues rose 72% sequentially and cash flow was in the black). But the company is also benefiting from its booming Delivery segment—it’s the fastest-growing food delivery service in the world, with bookings up 145% from a year ago in Q3 and revenues up 191%! In fact, Delivery brought in more revenue than Rides last quarter, though both should grow nicely going forward—Rides as the virus dissipates and Delivery thanks to secular trends (there’s been a sea change in people using delivery instead of take-out). Frankly, given the volume on the breakout, we’re not expecting a major retreat, but because UBER is a bit extended we’ll start with a half-sized position (5% of the account) and look to buy another half if we get off to a good start. BUY A HALF.

Watch List

• Anaplan (PLAN 66): PLAN made a run at new highs this week, though we’re content to see what comes on earnings, which are due out November 24.
• Carvana (CVNA 227): Carvana is turning the corner toward cash flow profitability, should see accelerating growth in 2021, and the stock has been base-building since Labor Day.
• Cloudflare (NET 66): NET continues to act very well, and we think it has all the makings of an emerging blue chip as thousands of firms turn to it for better performance, scalability, and security for its web properties.
• Halozyme (HALO 39): HALO is growing fast, is profitable, and should see surging royalty revenue as its Enhaze drug delivery technology is launched by more and more partners. See our writeup later in this issue.
• Tesla (TSLA 499): TSLA has begun to perk up after 13 weeks of rest thanks to news that it’ll be added to the S&P 500. These additions don’t usually lead to sustained moves, but there’s no question the overall pattern looks good.

Other Stocks of Interest
FuboTV (FUBO 22)—Roku remains our favorite way to play the trend of cord-cutting and streaming services, but another way to go is FuboTV, which is one of many competitors that’s actually replacing cable (along with YouTube TV, Hulu Live TV and others). And it’s carved out a solid niche for itself: It’s the leading sports-first cable TV replacement, with over 110 channels that feature thousands of live sporting events. But it’s beyond just having content, as Fubo is the only provider that streams live sports in 4k (highest quality), and its Multiview feature allows certain users to watch up to four games at once (split screen). Both industry tailwinds (more people leaving traditional cable) and the company’s offering have led to rapid growth—Q3 revenue was up 71% thanks mostly to a 58% gain in subscribers (to 455,000) and a 150%-plus gain in advertising revenue. Management sees those growth trends continuing (paid subscribers to be north of 500,000 by year-end), and longer-term, TV-related growth alone should be enough to keep big investors interested (revenues expected to rise 78% in 2021). But there’s also another angle here, with Fubo being in the early stages of jumping into the online sports betting market, which makes sense as many of its subscribers would be interested in having a few bucks on a few of the games they’re watching. The top brass thinks eventually sports betting could be as big as its advertising business (currently 12% of revenues and rising), but we’ll have to see how it goes. As for the stock, FUBO was just listed on the Nasdaq a few weeks ago (you can see how volume has mushroomed since early October) and has risen sharply even as the environment has been tricky. It’s very volatile, so if you decide to take a swing at FUBO, keep it small, aim for dips and use a liberal loss limit.

Shockwave Medical (SWAV 96)—We’re seeing more and more biotech and medical names lift off in recent weeks (see our writeup on the next page for more on that), and one of the best-looking of them is Shockwave Medical, which has what could be a new standard of care for treating atherosclerosis. Traditional balloons and other products run the risk of side effects (especially tissue damage), but Shockwave’s solution uses what’s known as intravascular lithotripsy, which projects sonic waves in a localized area, leaving tissue unharmed while cracking the calcified plaque in the artery (Lithotripsy is a method that’s been used for decades to break apart kidney stones). The product has been shown to increase the effectiveness of stents and balloons and is reportedly easy to learn, so adoption has been rapid: Shockwave’s revenues were growing at triple-digit rates before the pandemic, and while Q2 saw a hiccup in demand (fewer procedures during COVID), growth has already begun to reaccelerate and analysts see the top line lifting 90% next year. But given the firm’s small size (just $60 million in revenue during the past year), the runway of growth here could be many years—management believes its approach can work anywhere calcified plaque is an issue (not just coronary arteries), which is north of five million procedures annually with an addressable market of $6 billion! As big investors have gotten wind of the story, they’ve been adding shares (298 funds owned a position at the end of September, up from 160 a year ago), which has helped the stock dazzle. There’s been a very persistent advance since July, a mild three-week shakeout, and then a near-vertical move in the two weeks since the Q3 report. It’s probably too thinly traded for us (less than $50 million of volume per day), but if you’re game, a well-deserved pullback of a few points could be tempting.

Terex (TEX 31)—We’re typically not into cyclical stocks, but there’s no question these types of names can make big moves when they kick into gear, and, whether it’s because of the vaccine, valuations or something else, such a run could be getting underway now. If you’re going after a cyclical stock, it’s usually best to look for one that has the most leverage to any economic recovery—like Terex, which is about as old-world a company as you can find. Terex is a major player in aerial work platforms and material processing equipment (crushers, conveyors, wood grinders, washing systems, etc.), just the sort of thing that other companies need when construction and building activity picks up. Obviously, business imploded during the brief recession, with sales likely to fall 30% in 2020 as a whole. But there are already subtle signs that earnings are going to soar in the quarters to come; Q3’s bottom line of 31 cents per share topped estimates by 27 cents, and forward-looking indicators were very encouraging (Q3 bookings rose 10% from a year ago for aerial work platforms and a big 24% for materials processing equipment). Analysts have been quickly hiking expectations for next year (earnings forecast to rebound to $1.24 per share), but usually, these figures prove way too conservative as all the cost-cutting during the downturn means any uptick in business during the recovery falls right to the bottom line. And the stock seems to be sniffing that out; TEX was in the doghouse for years before bottoming at 12 before and after the crash this year, but it’s been trending up since then, with a powerful recent move that’s brought it to 52-week highs. It’s not sexy but our guess is TEX will put on a solid show in the months ahead.

Unusual Strength Begets More Strength
While the intermediate-term evidence has gone back and forth during the past couple of months, the longer-term outlook really hasn’t changed since springtime, when a couple of our time-tested blastoff indicators flashed buy signals; the 90% Blastoff indicator was the first to speak up back on May 27—and the S&P 500 is up 17% since then.

And, despite the crosscurrents, we’re seeing confirming signs that the market as a whole should put in a good show in the months ahead. In the last issue on this page, we wrote about seasonal factors; when the market has gained 8% or more during the “worst six months,” as it did this year, the Dow returns an average of 14% during the ensuing “best six month” period (November through April).

Adding to that was some unusual strength seen two weeks ago, pre- and post-election.

The first came via the Three Day Thrust signal, which occurs when the S&P 500 notches three straight days of 1.5% gains. That happened two weeks ago, and the nine other times since 1970 all led to solid gains going forward: Six months later, the S&P advanced as much as 14% on average, while a year later, the average maximum gain was 22%.

The other indicator that flashed was our New High Buy signal. This occurs when, for the first time in at least 12 months, the new high total on the Nasdaq reaches a two-year peak. The New High Buy signal has triggered 11 times during the past 40 years, and it also has a great track record: The average max gain for the Nasdaq came to 17% six months after the signals and 27% within a year after the signals.

To be fair, neither of these measures are in the same league as the time-tested 90% Blastoff Indicator mentioned earlier. The reason: About half the time, the Three-Day Liftoff and New High Buy signals precede some near-term weakness (sometimes retesting a prior low). The 90% measure, by contrast, mostly speaks up very early in a fresh bull market—often leading to a couple of years of great gains and very little risk. Indeed, the average maximum loss from a 90% signal is less than 2%!

Even so, these two recent rare shows of strength definitely bode well for the market. The short-term may be tricky, but the major indexes are likely to enjoy a very nice run sometime in the months to come.

A New Batch of Medical Leaders: Halozyme (HALO)
We’ve been waiting for a long time for a group move to get going in the medical and biotech arena (the group hasn’t led since back in 2015), but we do sense a change in character recently, with a few young titles racing to new highs.

One of those was written up earlier in this issue; Shockwave Medical is small ($60 million in revenue) but has a potentially revolutionary product to help with calcified plaque in arteries, and another we’re really intrigued by is Halozyme (HALO), which has a better mousetrap when it comes to drug delivery.

Thanks to its Enhaze technology, the firm’s platform uses a proprietary enzyme that breaks down some barriers to bulk fluid flow just below the skin, allowing for increased absorption and dispersion of relatively large amounts of therapeutics in subcutaneous injections. There are many benefits, especially quicker treatment time (three to five minutes instead of many hours!), potential to combine two therapeutics into a single injection and potentially extending dosing intervals.

It looks like a hit, and Halozyme has partnered with a ton of big names (Roche, Pfizer, AbbVie, Alexion, J&J, Eli Lilly, and others) that are using Enhaze in concert with specific drugs, including some huge sellers like Darzalex ($3.9 billion in annual revenue; for multiple myeloma) and Perjeta ($4.1 billion of annual revenue; for types of breast cancer). All in, nine trials should begin this year and others are moving along nicely.

Halozyme gets upfront and future milestone payments from these partnerships, and that makes up most of the top line today; it believes it will collect $280 million or more of one-time payments during the next two years. And, of course, once products hit the market (Darzalex already has), Halozyme earns mid-single-digit royalties. In Q3, royalty revenue was $24 million (up 44% from a year ago), but if all goes well, management thinks it could earn $1 billion annually just from royalties!

Of course, we would never invest based on seven-year projections, but the fact is Halozyme is growing fast today (revenues up 30% this year, with a 57% expected rise in 2021) and is very profitable already (84 cents per share this year and $1.74 expected next) as milestone payments gush in near-term with royalties accelerating down the road.

The stock is also growing up, lifting out of a multi-year base this year and really getting going this month as big investors (477 funds own shares, up from 356 a year ago) jump onboard. It’s a bit thinly traded, but we’d be tempted to start a position on any shakeout. WATCH.

Cabot Market Timing Indicators
The major indexes remain in good shape, and some rare shows of strength two weeks ago portend higher prices in the months ahead. Sentiment is a bit bubbly, and growth stocks have been tricky, but we’ve seen some firming up there as well. We’re OK buying but we advise going slow and staying alert.

Cabot Trend Lines: Bullish
Our Cabot Trend Lines remain clearly positive, with the S&P 500 (by 14%) and the Nasdaq Composite (by 17%) closing last week miles above their respective 35-week moving averages. The fact that the big-cap indexes are extended to the upside (along with so-so action among growth stocks) could bring in some short-term profit taking, but there’s no doubt the big-picture outlook is still favorable.

Cabot Tides: Bullish
Our Cabot Tides are also clearly positive, as all five indexes we track (including the S&P 600 SmallCap, shown here) are clearly above their lower (50-day), rising moving averages. In a role reversal, small- and mid-cap indexes are now stronger than their big-cap peers, but all of them are in gear, telling us the intermediate-term trend is pointed up.

Cabot Real Money Index: Negative
Our Real Money Index has finally spoken up, and it’s telling us investors are getting a bit giddy. Last week saw nearly $24 billion of money flow into equity funds and ETFs; that was the largest weekly figure since late 2017 (!) and pushing the five-week sum back toward multi-month highs. It’s not a death knell but is another reason to go slow and keep your eyes open.

Charts courtesy of StockCharts.com

The next Cabot Growth Investor issue will be published on December 3, 2020.

Cabot Wealth Network
Publishing independent investment advice since 1970.

CEO & Chief Investment Strategist: Timothy Lutts
President & Publisher: Ed Coburn
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