WHAT TO DO NOW: The market continues to act well following last week’s whipsaw buy signal. There are still obvious resistance levels for the major indexes to deal with, but all three of our market timing indicators are bullish and more stocks are acting well. We’ll stand pat tonight with our eight stocks and 20% cash position in the Model Portfolio, though further strength (especially among individual stocks) would prompt us to put our remaining cash to work.
Current Market Environment
The market finished mostly flat for the second day in a row as the major indexes dealt with overhead resistance. At day’s end the Dow was up two points and the Nasdaq rose four points.
The major indexes are butting up against established resistance levels—the S&P 500’s battle with the 2,100 to 2,130 zone continues, and the Nasdaq is dealing with its own challenges in the 4,950 to 5,000 area. Not surprisingly, stocks have backed off a bit this week, as there are still some traders who want to sell on rallies.
That said, as we wrote in last week’s issue, we remain optimistic because the evidence tells us to. All three of our market timing indicators are bullish, more stocks are acting well, growth indexes are beginning to outperform (the Nasdaq’s RP line vs. the Dow Industrials is looking much better) and sentiment remains extremely tame.
The bottom line is we think the next big move is up, though following the market’s recent straight-up move, some hesitation is certainly possible in the near term.
Either way, we’re ready for whatever the market throws at us. On the upside, a break above the S&P 500’s resistance levels and (more importantly) a few more new highs among growth-oriented stocks will likely have us getting fully invested. On the downside, another Tides reversal (maybe below 2,060 on the S&P and 4,815 on the Nasdaq) would turn the trends basically neutral, and we’d ditch our weakest stock or two and raise some cash.
Tonight, though, we’re standing pat. We have one stock on a tight leash (SABR) and another that’s acting better but reports earnings tomorrow (FIVE). But most of our other stocks are acting well, so there are no changes tonight.
Model Portfolio
Adobe Systems (ADBE 100) continues to act well, registering new price and RP highs this week. The company released Adobe Spark, which will be part of its Creative Cloud software suite, to help users of all stripes create professional-looking online content. It should be a hit among small businesses and entrepreneurs seeking to upgrade their look and exposure. We think ADBE has a long runway of growth as content production booms. Earnings are due on June 21. BUY.
Facebook (FB 119) looks a lot like the general market—relatively strong and ready to break out, but still hesitating below resistance. One interesting report concerning Instagram was released this week; Facebook is exploring revenue sharing models on that platform to encourage even more content production, especially from large users. With FB standing on its 25-day line, and just a couple of points south of new-high ground, we’ll stay on Buy. BUY.
Five Below (FIVE 43) has rebounded excellently in recent days, buoyed in part by a terrific quarterly report by Dollar Tree (the largest dollar store in the country). We like the action and still love the story, but we’re staying on Hold because FIVE’s own quarterly report is due tomorrow after the close. Usually with retail reports, same-store sales growth is key, as is the outlook for the year. A break of the recent lows near 36.5 following earnings would be a sign to cut the loss, but a move to new highs would obviously be bullish. We’ll be watching. HOLD.
ProShares Ultra S&P 500 Fund (SSO 67) has hesitated in recent days as the S&P 500 runs into the 2,100 level again. As we wrote in the first section above, we’re optimistic the next big move is up for the market, so SSO is a good way to put some money to work. BUY.
One of the biggest lessons we’ve (re-) learned in recent years is to practice patience—during the past couple of years, many stocks have gone dead for two or three months before coming back to life. That’s why we’re still holding Sabre (SABR 28), which remains stuck in the mud. We see great potential here, but our plan is simple: A close below 27 will have us selling and moving on, while a big-volume push above 29.5 should kick off a sustained advance. HOLD.
Salesforce.com (CRM 83) made a big move today, buying Demandware for $2.8 billion in cash. Demandware makes software to help design e-commerce websites, and Salesforce is likely to integrate it into a broader commerce offering to customers (and provide Salesforce with lots of cross-sell opportunities to Demandware’s customers). The deal is expected to close by the end of July and cut into earnings a bit this year. Even so, the stock didn’t retreat much on the news, and overall, we think CRM’s path of least resistance is up. BUY.
Ulta Beauty (ULTA 237) reported yet another excellent quarter that topped all expectations—sales rose 24%, earnings jumped 39%, and same-store sales soared 15% (13.9% when excluding e-commerce). Management also hiked guidance for the full year, despite sticking with a big capital spending program that will accelerate the rollout of prestige brand boutiques in hundreds of stores. Shares gapped to new highs on the news and have held those gains. We’ll stay on Buy, but realize ULTA isn’t usually a go-go stock, so keep new buys relatively small or buy on dips of a few points. BUY.
Vulcan Materials (VMC 117) has finally begun to pull back, though the damage has been limited to this point—the stock is still holding above its 25-day line. A deeper dip toward the 50-day line (near 111) is always possible, but the major trend of business and the stock is pointed up, so we see this dip as buyable. BUY.
Watch List
Abiomed (ABMD 102): Following a huge run from October 2014 through August 2015, ABMD has built a big 10-month base (40% deep), and is now set up well to lift to new highs. The company’s revolutionary heart pump is approved for a couple of key “bridge” conditions for high-risk patients; sales are growing rapidly and earnings are set to surge.
Amazon (AMZN 719): AMZN is a liquid leader that continues to act well, hitting new highs on Tuesday.
Ligand Pharmaceuticals (LGND 118): LGND tried to get going on Tuesday but the stock encountered selling. It’s not broken but seems to be building a whole new launching pad in the 115 to 130 range.
Monster Beverage (MNST 151): MNST is trading very tightly following some major volume clues in April and May. A decisive push above 155 or so would be tempting on the buy side.
Nvidia (NVDA 47):
Nvidia remains super-strong, though we’re waiting for a multi-week rest period before buying.
Veeva Systems (VEEV 34): VEEV had a coming out party last week when it catapulted following earnings. The company’s cloud software solutions are targeted mainly to the life sciences industry (though it’s beginning to sell one of its newer products to other industries, too), helping customers manage the marketing, selling and training of their products. Sales growth remains rapid and earnings should perk up soon.
Zillow (Z 28):
Z remains choppy and thinly traded, but we still love the story, and the stock has actually held relatively firm in the 26 to 29 area following its huge-volume earnings rally in early May.
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 | |||
| Adobe (ADBE) | 5/26/16 | 100 | 100 | 0% | Buy | |||
| Facebook (FB) | 8/1/13 | 38 | 119 | 216% | Buy | |||
| Five Below (FIVE) | 4/7/16 | 40 | 43 | 7% | Hold | |||
| ProShares Ultra S&P 500 Fund (SSO) | 5/12/16 | 64 | 67 | 4% | Buy | |||
| Sabre (SABR) | 2/26/16 | 27 | 28 | 3% | Hold | |||
| Salesforce.com (CRM) | 5/26/16 | 84 | 83 | 0% | Buy | |||
| Ulta Beauty (ULTA) | 11/6/14 | 121 | 237 | 96% | Buy | |||
| Vulcan Materials (VMC) | 2/26/16 | 99 | 117 | 18% | Buy |