Table of Contents
- Dow: 25,027
- Nasdaq: 7,158
- Changes Since Last Week’s Update
Exact Sciences (EXAS) New Buy
Twilio (TWLO) New Buy
- Model Portfolio Update
Exact Sciences (EXAS)
Five Below (FIVE)
- Other Stocks of Interest
Elastic N.V. (ESTC)
- Is It Time to Get Back into the Prior Leaders?
- Market Timing
Sellers Still Lurking
The first three and a half weeks of October were brutal, with the S&P 500 (down 11%) and Nasdaq (down 14%) cascading significantly, turning both our Cabot Tides and Cabot Trend Lines bearish as we raised a boatload of cash. But since those late October lows, the market’s done a decent job of attempting to etch a durable bottom.
First, of course, the market stopped going down in late October. Then came a retest of those lows in most indexes in mid November, along with some OK-looking positive broad market divergences. And late last week, our Cabot Tides turned positive, signaling the intermediate-term trend was starting to turn up.
But then came Tuesday! Yesterday was another horrid day—the S&P 500 and Nasdaq each gave up around half of their recent off-the-bottom rallies in a single day, small-cap indexes nearly tagged new closing lows while most resilient stocks took it on the chin. It was enough to put our Cabot Tides back on the fence.
What’s our take? First, taking a step back, yesterday is a good reminder to take things slowly when coming out of a deep correction. We understand the excitement when the market rebounds sharply, but with our Cabot Trend Lines still negative and with growth-y areas still underperforming defensive stocks (see the chart here of the S&P 600 vs. consumer staples stocks), piling in isn’t a high-odds play.
Back to the market, yesterday’s action is a clear sign that sellers are still lurking and that, until proven otherwise, a generally defensive stance is still appropriate. That said, we’re not throwing in the towel on this rally attempt—the major indexes are still well above their October–November lows, and the choppy action in recent weeks means the intermediate-term trend is neutral. Plus we’re still seeing a bunch of potential leading growth stocks that, while very volatile, are holding up well.
All told, we think the next few days will be telling—if yesterday was a final shakeout on obvious worries (yield curve, trade war, etc.), we should see stocks pick up steam from here, which would pull us into more new names. If not, we’ll continue to hold plenty of cash while waiting for the bulls to truly take control.
Model Portfolio Update
With our Tides turning positive last week and many resilient growth stocks pushing toward (or out to) new highs, we began putting money back to work with the purchase of two new names. But, as we said last week when we bought, the market will be our guide going forward—and while there were a few nice days, Tuesday’s huge decline has put our Cabot Tides back on the fence.
That selloff isn’t necessarily the end of the world—after such a large off-the-bottom advance, some shaking and baking wasn’t out of the question (and could prove healthy if it’s contained). And given that we’re still in a very defensive stance (a bit more than 70% in cash), we’re standing pat for now, though we could tighten some mental stops if the Tides officially go negative in the days ahead. So far, the pullbacks are reasonable, but we’ll be watching things closely.
If we are near the start of a sustained uptrend, we want to quickly review how we run our ship. The Model Portfolio will generally carry no more than 10 to 12 stocks when fully invested; our “normal” initial position size is about 10% of the overall portfolio, though that can vary a touch based on how much cash we have remaining, and how many stocks we already own. Still, 10% is a good rule of thumb.
(As a heads up, if we write something like “keeping new positions small,” whether it’s because of an upcoming earnings report or because the stock has had a good run, then “small” is usually based off that 10% figure—if you normally buy 10%, in this case maybe you’d only buy 5% or 6%, that sort of thing.)
Also of note, our official buy and sell prices will be the average of the day’s high and low for the stock, which gives a good representation of what price the average subscriber gets. If our advice is given before the open, the official price will be the high and low for that day; if it’s after the close, it will be the average of the high/low for the following trading day. And if we send a mid-day update, we’ll use the average price for the remainder of the day.
BUY—Exact Sciences (EXAS 76)—On page 6, we write about how, when dealing with stocks that have had huge runs, we usually avoid those that have had devastating declines, preferring names that have spent many months correcting and consolidating, slowly wearing out the weak hands and setting up a new move. That’s effectively what EXAS has done since November 2017, with some huge corrections and exciting rallies, but overall, no net progress for a full year. But now the stock looks ready for a rally thanks to the increasing popularity of its Cologuard screening system for colorectal cancer, and, of course, the three-year deal with Pfizer, which should increase penetration and revenues as Pfizer’s sales force knocks on doors. Exact’s management has said it has sold to less than 40% of its targeted primary care physicians, nurse practitioners and physician assistants, and that’s where Pfizer’s reach will help. (Indeed, guidance implies 60% revenue gains in 2019.) Longer-term, the top brass continues to expect big things—total Cologuard tests should number around 910,000 this year, but the firm is upping its annual production capacity to three million by the end of this month and to five million by the end of 2019. There’s clearly risk if the market rally fails, but EXAS held up well during the correction and was one of the first growth stocks to tag new-high ground before getting yanked lower yesterday. Expect continued volatility, but we’re OK buying some here; on the downside, we’ll likely give the stock room to hold above the upper 60s, though we could change our mind depending on the market.
BUY—Five Below (FIVE 105)—After months of dancing to its own drummer, FIVE finally succumbed to trade (and retail-related) worries in mid November, plunging to the century mark. The bounce in recent days was solid, but another sour earnings report from peer Dollar General on Tuesday again brought some selling pressure. Regardless of the recent wiggles, the stock’s intermediate-term outlook is likely to come down to earnings, which are due out tonight (conference call is tomorrow before the open)—Wall Street is looking for sales of $304 million (up 18%) and earnings of 19 cents per share (up just 6%), but far more attention will be paid to the outlook for the fourth quarter (when the majority of the company’s earnings for the year are made) and, of course, any commentary on tariffs and how they might affect the bottom line as we head into 2019. As always, we’ll take our cue from the stock—a decisive drop below its 200-day line (now at 96.5 and rising) would likely cause us to sell our remaining shares (we’ve taken partial profits a couple of times on the way up during the past year), but above that level, we’re inclined to give the stock a chance considering its fantastic longer-term growth story. We’ll stay on Buy, but will be on the horn with any changes in advance if we have them.
BUY—Twilio (TWLO 90)—Our favorite stocks to buy are those that we term “emerging blue chips,” meaning a company with a proven product that has a sustainable advantage and serves a huge market; rapid (often accelerating) sales and earnings growth with huge estimates going forward; and a strong and well-traded stock that big investors feel comfortable accumulating. We think Twilio has all of these characteristics, as its easy-to-use communications platform is becoming as key to many firm’s operations as, say, Amazon’s cloud platform—companies can automate responses, call routing, email and much more (including payments, contact center services, etc.) to customers or employees, paying Twilio on a usage basis. Shopify, Trulia, Airbnb, Uber, Lyft, Nordstrom, Salesforce, Zendesk, Hulu, eHarmony are all customers, but the service is very pervasive; in Q3, total active customer accounts rose to over 61,000 (up 32%). All told, Twilio thinks it’s playing in a multi-billion-dollar market, and it’s certainly taking advantage of that opportunity—sales growth (up 41%, 48%, 54% and 68% during the past four quarters) is accelerating, earnings are in the black (though should remain mostly near breakeven as Twilio invests in growth) and all the sub-metrics (customer acquisition costs, revenue per user, upsells, etc.) look great. After a long post-IPO slumber, TWLO came alive in February of this year, rallying strongly through September. The 35% correction that followed was sharp, but normal, and after some big ups (after earnings) and downs (mid November), TWLO has stormed back above its September high. Tuesday’s decline wasn’t fun, but wasn’t abnormal—we’re staying on Buy, with a relatively loose stop in the upper 70s as the current game plan.
Canada Goose (GOOS 68): GOOS has actually been setting up nicely since gapping up on earnings in mid November, holding above its prior (June) highs and remaining in a relatively tight range. Another week or two of this and a still-healthy market would present a tasty entry point.
Ciena (CIEN 31): CIEN has been tossed around a bit during the past two weeks, but it’s still in good shape. This is one way to play the 5G buildout, which we think could be a leading theme of the next market advance.
Etsy (ETSY 55): ETSY has been extremely impressive on a relative performance front—not only did the stock gap up to new highs on earnings in early November, but after a quick 14-point pullback (56 to 42), it immediately stormed back to new highs at 58! We’re watching for a lower-risk entry point due to that strength and the potential of its online marketplace for homemade goods.
MongoDB (MDB 84): MDB is another name that hasn’t settled down at all but has moved to new highs, a positive sign. Earnings, released last night, looked great (sales up 57%, well ahead of estimates), but we’ll see how the stock reacts to the news in the days ahead.
PayPal (PYPL 84): Like most stocks, PYPL still has some work to do on its chart, but it showed outstanding support and accumulation after earnings in October and has basically held firm since. It remains the straightforward way to play the mega-trend in e-payments and money transfers.
ProShares Ultra S&P 500 Fund (SSO 109): Given the damage to the major indexes and most stocks, the next sustained advance could go far, which means a leveraged long index fund should do well. That said, we’d probably want to see the long-term Cabot Trend Lines return to the bull camp before pulling the trigger on SSO or one of its peers like QLD and UWM.
Shopify (SHOP 150): Shopify still has great numbers, a great story and impressive institutional sponsorship, while the stock has been base building for months. See more on page 7.
Tesla (TSLA 360): TSLA was actually up a bit during Tuesday’s market meltdown and remains near multi-month highs, a positive sign. We also like the fact the stock shook off reports that the electric car tax credit could go away in 2020 or 2021. See page 6 for more.
Workday (WDAY 165): WDAY has always been a high-quality, blue chip cloud software firm, yet the stock hasn’t really been a big leader. But that could change going forward, with the stock showing extreme power. See more on page 6.
Xilinx (XLNX 91): Very few investors are gabbing about XLNX, which we think is a good sign. The firm’s emphasis on some newer markets (data center and communications, including 5G gadgets) should result in faster-than-expected growth for many quarters to come.
Other Stocks of Interest
The stocks below may not be followed in Cabot Growth Investor on a regular basis. They’re intended to present you with ideas for additional investment beyond the Model Portfolio. For our current ratings on these stocks, see Updates on Other Stocks of Interest on the subscriber website or email firstname.lastname@example.org.
Elastic (ESTC 73) — Big Data is a big deal, and Elastic’s software—Elastic Stack—can take in and store data from any source, in any format and perform searches, analysis, monitoring and visualization in seconds. The company offers its basic software for free, but gets its money from subscribers who want additional features and support. The company booked 81% revenue growth during the year that ended in April, and has kept that pace in subsequent quarters. ESTC has only been publicly traded since early October, but after two months of trading in a wide range, it staged a breakout to new highs before Tuesday’s market-side pullback. Elastic reported its latest quarterly earnings after the close on Tuesday, and the 72% growth in revenue kept sales momentum high. We will have to wait for tomorrow to see how investors react, but overall, this looks like a high-potential new issue.
Pinduoduo (PDD 23) — Pinduoduo is a young Chinese company that’s combining online bargain shopping with social interaction. The company has modeled its platform into a “virtual bazaar” where shoppers can browse value-for-money merchandise. (Some commentators say that the goods on offer are low-priced ripoffs, but the sales figures don’t lie.) Incorporated just in 2015, Pinduoduo enjoyed 266% revenue growth in 2017 and the growth through the first three quarters of 2018 is even faster. Analysts see 120% projected revenue growth and the company turning profitable in 2019. PDD’s chart looks like two bowl-shaped corrections and recoveries with highs in the high 20s and support around 17. With emerging market stocks showing signs of regaining their strength, PDD looks like an interesting speculative play if it can break out above 30.
Tesla (TSLA 360) — Since its last big run from 183 in December 2016 to 387 in June 2017, TSLA has been a soap opera of surges and slumps, finally forming a double bottom in April and October of 2018, with both instances leading to massive-volume accumulation from institutions. TSLA has now rebounded over 350, and while it hasn’t actually hit all-time highs, it looks like there has been a real shift in perception about the stock. Maybe it was the return to positive earnings in the company’s Q3 earnings report or the recent news that the company had produced 1,000 Model 3 cars in one day. But whatever it is, the stock’s late-October surge (and the calm consolidation through November) has put TSLA near the top of our watch list. Tesla will likely remain controversial and its stock will be volatile as long as Elon Musk is at the helm, but it looks like big investors are ready to treat his company like the real deal. If the company continues to execute, we think the stock will do very well.
Workday (WDAY 165) — Workday is a big (market cap is $36 billion) provider of cloud-based applications that are used by companies worldwide to optimize their finances—including accounting, payroll, procurement, accounts payable and receivable and expenses—and their human resource functions, like compensation, benefits, talent management and development. It’s always been a good company, but never really a leading stock. But WDAY showed flashes earlier this year (the summer rally) and with the pressure briefly off the market, it blasted off on heavy volume on November 30. Analysts see a growing global appetite for enterprise software like Workday’s, and estimates for earnings growth in 2019 and 2020 are at 21% and 29%, respectively. The stock even held up well to Tuesday’s market hissy fit.
Is it Time to Get Back into the Prior Leaders?
With the market off its lows, we’ve already gotten a handful of questions concerning some of the popular leaders of the past year or two—names like Netflix (NFLX), Nvidia (NVDA), Align Technologies (ALGN) and others. After all, these are still good companies, and the stocks are 30% to 50% off their highs. Why shouldn’t they be strong buys?
The problem with this line of thinking (at least when talking about the intermediate- to longer-term outlook) is that, as we often write, the company is not the stock; the stock moves on the perception of institutional investors and usually needs time to repair the damage from a big decline as some investors get out of their positions
Look at Nvidia, for example. After a historic advance that took the stock from 33 at the start of 2016 to 292 two months ago, the stock has completely imploded, falling as much as 54% and today remains miles below its 50-day and 200-day moving averages even after the recent bounce. When you see this type of action—a huge, multi-year run followed by a clear, convincing breakdown—the odds are that the stock needs a lot of time before it can mount a sustained advance.
(If you remember, this was our logic for selling our long-time holding of Facebook (FB) earlier this year. Shares did make one more run to new highs but have since trended down and still sit 35% off their highs.)
That said, we are open to buying prior big winners that haven’t gone over the falls, but have spent many months correcting and consolidating and are now showing some near-term relative strength. In these cases, the investors that wanted out have likely gotten out, and if the company continues to execute, new buyers can push the stock higher.
One of our favorite examples today is Shopify (SHOP), which delivered great profits to us last year and early this year thanks to its increasingly popular e-commerce platform. But we sold the last of our shares in April as the stock had turned very choppy—indeed, since September of last year, SHOP has suffered corrections of 28%, 27%, 20%, 25% and 28%, all of which broke the 50-day line, with the last plunge piercing the 200-day line, too. Net-net, the stock made no progress for 13 months.
However, despite repeated warnings from some short sellers, SHOP’s business has remained healthy; sales growth has slowed a bit but still came in at 58% in Q3, while earnings have been in the black for five straight quarters, with analysts seeing the bottom line rising to 69 cents per share next year, up 120%. Institutions are believers, too, with 778 funds owning shares at the end of Q3 (including a bunch of top performing funds), up from 570 at the start of the year.
And now the stock is beginning to round out as well—it successfully retested its low in November, has retaken its moving averages and is pushing toward resistance in the 170 area. Like many stocks, SHOP might need more time to shape up, but this is the type of slow, wear-you-out pattern that often serves as a solid springboard. SHOP is back on our watch list. WATCH.
Focus on What Counts
During the past two weeks, it’s been nearly impossible to read an article about the market without the words “Federal Reserve” or “U.S.-China trade” included in them; just about all forecasts and interpretations from pundits involve their view of how these two factors are likely to play out. (Yesterday, “yield curve” joined the vernacular, too.)
But we’d urge you not to play that game. Yes, the Fed’s actions and any deal/no deal on the trade front are important. But you always have to remember that (a) the market is looking ahead, frequently by six to nine months, and (b) the market can also do what it wants to over a month or two, if not longer, as perceptions change back and forth.
We did a simple study this week, going back to look at annual U.S. GDP growth vs. S&P 500 returns. Going back to 2000, there have been five years when the S&P’s return was in the red, and the average U.S. economic growth during those years was 1.9%. Conversely, the five best years for the S&P 500 saw economic growth averaging just 1.3%!
Obviously, this is an overly simplistic study, but our point is that you should focus where it counts—on the action of the major indexes and leading growth stocks. They (not news and rumors of rates and trade negotiations) will be your best indicators as to which direction the market is heading.
Cabot Market Timing Indicators
Last week’s Cabot Tides green light was a sign to begin putting money back to work. That said, with the longer-term trend in doubt, it’s not surprising to see the market face plenty of headwinds as it tries to get its act together. We’re OK with a little buying, but are still holding lots of cash, too.
Cabot Trend Lines: Bearish
It was a solid week and half for the market, but the longer-term trend has yet to flip—at the end of last week, both the S&P 500 (by 0.4%) and Nasdaq (by 3.0%) sat beneath their 35-week moving averages, keeping our Cabot Trend Lines on the negative side of the fence. While the evidence has improved, this important indicator is telling us to go relatively slow as the market battles with overhead resistance.
Cabot Tides: On the Fence
Our Cabot Tides flashed a new buy signal late last week, as all five of the major indexes we track (including the Nasdaq, daily chart shown here) held above their lower (25-day) moving averages, and those averages have begun to turn up. That said, the whopping decline on Tuesday has this intermediate-term indicator back on the fence; the next few days will probably tell us whether this rally will hold up.
Cabot Real Money Index: Neutral
Our Real Money Index is on the lower end of its neutral range, with investors gradually pulling money out of equity mutual funds and ETFs, though not at a blistering, panicky pace. Overall, this fits with what we’re seeing from most sentiment measures—investors have become worried over the past two months, though few are at panic-selling levels.