WHAT TO DO NOW: Continue to lean bullish. The market’s bounce off support last week was encouraging, and while we remain in a news-driven, choppy environment, our current cash level is too high given the mostly positive evidence. Thus, tonight, we’re adding two new stocks: Ligand Pharmaceuticals (LGND) and Teladoc (TDOC), leaving us with a cash position of 20%.
Current Market Environment
The market slipped today after trade fears revved up overnight. At day’s end, the Dow was down 219 points and the Nasdaq had lost 43 points.
The trade war tango continues, with news last night of another round of tariffs (this time on $200 billion of Chinese goods, at a 10% rate, possibly taking effect at the end of August) taking a bite out of the market today. Still, the move, while sharp, didn’t change the market’s overall stance.
Our indicators, for instance, are unchanged. Both our Cabot Trend Lines (longer-term) and Cabot Tides (intermediate-term) are still positive (you can call the Cabot Tides neutral-to-positive if you prefer), while the Two-Second Indicator is unhealthy.
Today’s drop simply took away a small portion of last week’s snapback—the S&P 500 has been hovering between 2,700 and 2,800 for the past few weeks, and after testing the top end of that range yesterday, fell back today. It’s a similar story with the other major indexes—i.e., nothing definitive.
We don’t advise buying hand-over-fist in this environment, which remains news driven and choppy for most growth stocks, especially considering that earnings season (due to rev up soon) will only add to the volatility.
However, the market’s recent hold of support and bounce is encouraging, and our 40% cash position is too high given the evidence. Thus, tonight, we’re adding two new stocks to the Model Portfolio—Ligand Pharmaceuticals (LGND) and Teladoc (TDOC). Even after these buys, we’ll be holding 20% in cash as both cushion (should the sellers re-emerge) and buying power (if earnings season goes well).
Model Portfolio
We’ll start with our two new additions. Ligand Pharmaceuticals (LGND 216) is a stock we’ve written about often in the past. The company’s business model is unique, as it conducts early-stage research on potential drugs and then licenses those ideas to others who pay for trials and, if the drug hits the market, pays royalties. Ligand also has a couple of popular research platforms that generate milestone payments (including $47 million from Wuxi Pharmaceuticals a couple of weeks ago) and, eventually, royalties as any treatments developed hit the market. Quarter-to-quarter numbers can be lumpy, but the overall growth trend is solid and the stock is strong. Please note that Ligand, while higher priced, trades just 330,000 shares per day, so try not to put in overnight orders to buy (which isn’t the best practice with any purchase). BUY.
Our second new addition is Teladoc (TDOC 63), which is the hands-down leader in the new field of virtual care, where a patient can get in touch (by phone or video call) with a doctor associated with Teladoc, get advice, prescriptions and much more. The company has dramatically broadened its scope in recent quarters via acquisition, offering everything from behavioral health to dermatology to normal colds or flus, and is seeing more companies sign up for its services and more employees use it—in Q1, total “visits” rose 57% to 606,000. Revenues come mostly from subscription fees (recurring income), and it gets a per-visit fee on certain types of visits, too. The stock broke out in early May and had a fantastic run, and after a sharp shakeout last month, has pushed back to new highs. It’s a bit extended to the upside, and earnings are due out on August 1, so if you want to start with a smaller-than-normal position, we’re OK with that. But we’ll just keep it simple and buy a “regular sized” stake tomorrow. BUY.
Five Below (FIVE 100) tends to be susceptible to trade war fears, as tariffs on goods made in China could easily raise the firm’s costs. Still, the stock’s overall pattern remains tight following its huge upmove before and after earnings in early June. We’re not ruling out a shakeout below the recent lows (near 95) if the market has another bout of weakness, but overall, we think the path of least resistance is up, so we’ll stay on Buy. BUY.
Grubhub (GRUB 109) reminds us a bit of Shopify back in the middle of last year—after a big run, the stock built a two-month base and broke out nicely, only to quickly sink right back. Of course, SHOP ended up going a lot higher from there, and we think GRUB will, too. Recently, the stock has done a decent job crawling up from its June lows, though the intermediate-term trend is basically sideways. We’ll stay on Hold for now. Earnings are likely out in early August. HOLD.
Nutanix (NTNX 55) has been quietly creeping higher since it sank to 50 during the June growth stock selloff. That said, it’s bumping up against its 50-day line from below, so we can’t conclude the buyers are back in control quite yet. Fundamentally, the company is pushing its Beam cloud offering, which allows firms to manage regulatory compliance, security and spending across nearly any cloud platform. New products like Beam should help Nutanix reach its goal of quadrupling its bookings by 2021. HOLD.
Okta’s (OKTA 51) bounce during the past two weeks hasn’t been all that impressive, but then again, the stock is still hanging around its 50-day line, so we’re not judging it too harshly. The company has been quiet on the news front. We’ll continue to follow our plan, holding above our mental stop in the upper-40s. HOLD.
PayPal (PYPL 86) looks like a tennis ball, having snapped right back to its highs in recent days as the market bounced. In the last issue, we wrote about three of PayPal’s recent acquisitions (including the $2 billion-plus iZettle deal), and it looks like that will be a theme going forward, as the CEO recently said it’s willing to spend up to $3 billion annually on M&A to bolster its position in the payments and money transfer sector. Big picture, we continue to see PayPal as the major beneficiary of the online payment boom. We’ll stay on Buy. Earnings are due out July 25. BUY.
Proofpoint (PFPT 122) is another one of our stocks that took an ugly-looking hit in late June, but has steadied itself and is now showing some life—shares perked up above their 50-day line today. It’s not out of the woods, but the action is encouraging. Fundamentally, the company released a security solution targeted at Office 365 users, helping prevent login credential theft that’s used to log in as an imposter and do all sorts of nefarious stuff. More importantly, PFPT is set to release earnings on July 26, which will be key—a decisive upside breakout will make the past few months look like a great launching pad, but a poor report could see sellers take control. We’ll be watching. HOLD.
We’re not huge fans of persistent downmoves like the one Shake Shack (SHAK 64) has seen during the past three weeks. That said, the stock hasn’t done anything wrong, especially given its big run in recent months—in fact, with the 50-day fast approaching (now at 61.7 and rising), we’re OK picking up shares here if you’re not yet in. A break of the 50-day line could have us moving to Hold, but we still view SHAK as a new, early-stage leading growth stock. We’ll stay on Buy but will be watching to see if/when support appears. BUY.
Watch List
Carvana (CVNA 44): CVNA has a gigantic, mass market story, triple-digit revenue growth and a very strong and resilient stock that just got going from a huge base in early June. It’s extremely volatile, so maybe a smaller-than-normal position is appropriate, but it’s a very intriguing situation. Earnings are likely out in early August.
Spotify (SPOT 182): SPOT had a quick shakeout during the market’s late-June dip but has snapped right back to its highs—tennis ball action. Earnings are due out July 26.
Wayfair (W 117): Wayfair took a hit today (possibly on trade war fears) but remains in a firm uptrend. The stock’s persistent uptrend during the past few weeks is a bullish sign.
Vertex Pharmaceuticals (VRTX 175): VRTX has a big base, big earnings estimates and a big recent bullish volume clue after a competitor’s cystic fibrosis (CF) drug fell flat. It could be ready for a sustained run. Earnings are likely out in a couple of weeks.
WPX Energy (WPX 19): We’re still keeping an eye on energy stocks, many of which (including WPX) have rested normally for a few weeks and are now beginning to push higher.
That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Tuesday, and, as always, we’ll send a Special Bulletin should we have any changes before then.
