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Cabot Growth Investor 1414

The market has slowed down just a touch in recent days, with the major indexes hesitating near some resistance. But the trends remain strongly up (our Cabot Trend Lines has joined the bull camp) and individual stocks are acting well, including many reacting well to earnings. Of course, pullbacks are definitely possible, so now’s not a time to jump in with both feet. But we continue to be bullish and to put money steadily to work.
In tonight’s issue, we discuss all our stocks, and take a peek at one of the market’s leading themes, which looks like it could go far as the bull market picks up speed.

Cabot Growth Investor 1414

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Clear

The Evidence is Clear

There are many times—we’d even say most times—when the market’s evidence is at least somewhat mixed. Some major indexes might look good, for instance, but others are lagging. Growth stocks may be acting well, but the broad market is iffy. Or, conversely, we might have the market heading lower but secondary evidence (sentiment, broad market divergences) is showing green shoots.

But today is not one of those times! In fact, we can’t really remember when all of the evidence was lined up on the bull side like it is today—the intermediate-term trend has been positive for weeks, more and more growth stocks are pushing higher and reacting well to earnings, and as of last Friday, our Cabot Trend Lines (longer-term trend) returned to the bullish camp.

As for the secondary measures, the number of stocks hitting new lows on the NYSE (our Two-Second Indicator) has been fewer than 40 each of the past 38 trading days, confirming the broad market’s strength. Sentiment remains mostly muted, with little money coming into the market despite the big run. And we’ve now seen a handful of blastoff indicators flash green, the latest being that 90% of NYSE stocks closed above their 50-day line a week ago—a rare show of breadth that has historically led to double-digit market gains over the next six months.

Of course, all of this evidence pertains to the action in the market itself (as well as investors’ reaction to it). As we wrote in the last issue, what we don’t follow is the news, which remains mixed at best; just this week housing starts hit a two-year low and the U.S.-North Korea summit went a bit sideways, though today’s Q4 GDP report came in above expectations. Whatever the news, the market continues to look ahead to better days.

Now, before we start high-fiving each other, let’s be clear: After nine-plus weeks without any hesitation, the market could easily take a breather; we’ve actually seen some hesitation of late, and a sharp shakeout in many leading stocks or a multi-week consolidation are both possible. Thus, now’s not the time to plunge, and finding reasonable entry points is part of the process.

But our system (and indicators) focus on the intermediate- to longer-term, and in that timeframe, the odds strongly favor meaningfully higher prices.

[highlight_box]WHAT TO DO NOW: Remain bullish and continue to step into the market. Tonight, we’re averaging up in ProShares Ultra S&P 500 Fund (SSO) and buying a full-sized position in Chipotle Mexican Grill (CMG), though we’re placing Planet Fitness (PLNT) on hold. Our cash position will now be around 10%..[/highlight_box]

Model Portfolio Update

The major indexes have begun to slow down a bit during the past two weeks—still in solid uptrends, of course, but with more than a few quiet days and, recently, some stallling out. But, thanks mostly to earnings season, the action among leading stocks has been anything but sleepy, with most reacting well to their numbers and (most importantly) relatively few real crashes out there.

Of course, a pullback is possible, but to us it’s more about looking for decent setups in what should be real market leaders. In the Model Portfolio, we’ve been steadily putting money to work since early January, and in tonight’s issue we’re putting another chunk of cash to work—we’re averaging up in SSO again, and adding a full position in CMG.

Current Recommendations

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BUY—Chipotle Mexican Grill (CMG 608)—We’re always interested in what we think are the real institutional-quality leading stocks of any advance; while they won’t grab the headlines or make the biggest moves every day, these stocks tend to enjoy relatively persistent buying during a bull move as funds build positions. CMG looks like an institutional leader once again as its combination of excellent growth and dependability has returned after a few years of rebuilding brand loyalty and innovating on the menu—the company’s new lifestyle salad and protein bowls (launched just this year) have been a hit, appealing to those on specific popular diets (keto, whole30, paleo, etc.). Of course, growth won’t be as fantastic as it was a few years ago, but revenue growth is slowly accelerating (up 7%, 8%, 9% and 10% during the past four quarters), bolstered by rising same-store sales growth (up 6.1% in Q4, the best in many years) and a surge in digital sales (up 66% in Q4, making up 13% of all sales). Throw in a still-solid store expansion plan (store count should rise 6% or so this year) and cost controls and the bottom line is likely to continue leaping (analysts see earnings up 36% this year and 26% next). As with everything, pullbacks are possible after CMG’s big pre- and post-earnings run, but the stock has shown no inclination to decline over the past couple of weeks as its 25-day line (now nearing 570) catches up. We realize stocks trading at 600 aren’t the most popular out there, but the institutions that are trafficking in CMG don’t care about that, so neither should you—if you buy, pretend the stock is 60 and simply buy one-tenth as many shares. We’re adding a normal-sized (10% of the portfolio) position tomorrow.

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BUY—Ciena (CIEN 43)—After resting for a couple of weeks following a late-January downgrade, CIEN has performed excellently in February, notching 11 days up in a row at one point before slipping a bit. As we write on page 7, it certainly looks like the market is sniffing out a networking boom, as the whole networking/5G/data center connectivity theme is boosting more and more stocks. Obviously, CIEN is our pick of the litter, with best-in-class products for most of these hot networking areas leading to market share gains and accelerating growth. We’re optimistic that CIEN will remain in favor, but we’ll see what earnings (due out next Tuesday, March 5) bring—analysts see revenues rising 17% and earnings up 100% ($0.30 per share), with the outlook for the year as a whole also key. A break all the way back into the 35 to 36 area would be abnormal, but right now, we’ll stay on buy—but, as usual, keep any new buying on the small side with earnings right around the corner.

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BUY—Exact Sciences (EXAS 91)—Exact Sciences reported another terrific quarter last week, confirming that the Cologuard growth story is very much intact. Fourth-quarter revenues leapt 64%, and while the bottom line remains in the red, the key sub-metrics (cost per test fell 4%, 292,000 tests were ordered and 15,000 healthcare providers ordered their first Cologuard test during Q4) were impressive. Management also boosted its 2019 outlook, expecting revenue to grow another 58% (which most analysts believe is somewhat conservative) with the help of Pfizer’s sales team. Moreover, the top brass reiterated its hugely bullish long-term forecast: Cologuard ended the year with 4.1% of the colorectal cancer screening market, but Exact believes it can eventually garner a 40% share, and that’s not just pie-in-the-sky talk, as the company is rapidly expanding its production capacity to meet anticipated demand. As for the stock, it sold off ahead of its report, but the buyers drove the stock to new highs on excellent volume before a sharp dip today. We’re OK buying some here or on dips of a couple of points if you’re not yet in.

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BUY—Five Below (FIVE 120)—A week or two ago we thought FIVE could rest a bit, but we admit that the recent weakness has been more severe than anticipated—following a downgrade last Friday from a well-respected retail analyst (citing mostly valuation, but also seeing less potential upside earnings surprises as the firm invests in distribution and logistics), shares slid on above-average volume for a few days. It’s not ideal, but taking a step back, the recent retreat has brought the stock down to an area of support, FIVE is still above its 50-day line, and the 14-point pullback (133 to 119) is reasonable compared to the prior 43-point rebound (90 to 133). Of course, we’re aware of the fact that FIVE had a big run last year, so despite the stellar fundamentals, it’s possible the stock won’t be a leader this go-round. But we have to go with the evidence in front of us, and so far, the stock is acting normally. Earnings (likely out in mid March; no set date yet) will be key, but right now, we’ll stay on Buy.

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BUY A HALF—Okta (OKTA 85)—OKTA has been hovering in the mid 80s during the past couple of weeks, which included a brief shake down to its 25-day line (now around 82.5), all of which is normal (probably healthy) after the stock’s solid advance. We’re seeing many cybersecurity stocks act well (including Palo Alto Networks this week, which is something of a granddaddy of the group), and nothing’s changed our view that Okta is likely to be a leader going ahead. We bought a half-sized position two weeks ago, and we’re fine picking up that size position here—but we’ll be waiting for earnings (due out next Thursday, March 7) before we consider adding more shares.

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HOLD—Planet Fitness (PLNT 59)—Planet Fitness is a great company, as Tuesday’s quarterly report revealed—revenues rose 30% from a year ago, while same-store sales lifted 10%, EBITDA (a measure of cash flow) rose 22% and management hiked its 2019 outlook, too. However, the stock has repeatedly run into resistance since early January—we count five attempts by the stock to break out to the upside (including after earnings on Wednesday), with each attempt bringing in the sellers, which tells us funds are paring positions into strength. It’s definitely possible PLNT simply needs a bit more time to absorb the supply hitting the market; the stock’s major trend is certainly still up, and as we just wrote, business looks great. But there’s been enough wobbly action, especially considering the market’s strong uptrend, that we’re going to switch our rating to Hold and use a relatively tight mental stop in the mid 50s.

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BUY—ProShares Ultra S&P 500 Fund (SSO 114)—Given all of the evidence of the past few months, including the handful of blastoff indicators that have flashed green and our Cabot Trend Lines doing the same last week, our greatest conviction is that the market is likely to enjoy a meaningful advance going forward. The Model Portfolio will never be focused on index funds, but in a unique situation that presents such positive evidence, we’re not against riding a leveraged long fund higher. We bought an initial position in SSO back in mid January, filled out the position in late January, and tonight, we’re going to add another 4% position (4% of the portfolio’s value) to our stake. What about a pullback in the general market? It’s certainly possible, though historically, dips in the major indexes following blastoffs tend to be relatively muted in the first few months (typically 3% to 5% for the S&P, though that’s a rough guide); more likely is some sort of rotation where the indexes churn but individual stocks get hit. Short-term stuff aside, we think SSO is a great way to play what looks like a new bull move.

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BUY—Twilio (TWLO 122)—TWLO had a brief shakeout after earnings, but it would be unusual for a true market leader to up and die so soon in a new market advance, and indeed, the stock has pushed back to new highs since. Fundamentally, we’ve mentioned before that we like the pervasiveness of the firm’s communications platform, which works for voice, messaging and now email; just about any size organization is a potential customer. But that doesn’t mean big enterprises aren’t beating a path to the firm’s door—one Fortune 100 retailer said that it sees a future where Twilio is the foundation of their customer engagement platform across all channels, and we’re sure others are thinking the same. Analysts see revenues up 66% this year, and even that figure could prove conservative if management makes the right moves. Back to the stock, it’s a bit extended to the upside like many names (the 25-day line is around 111), so dips are possible, but the path of least resistance is up.

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BUY—Workday (WDAY 198)—WDAY is set to report quarterly results after the close today (February 28), with analysts looking for revenues to rise 34% with earnings of $0.32 per share (up 14%), though operating cash flow, order flow and the outlook will be closely watched. (We’ll also be looking for any color on a couple of recent reports on some huge customer deals, including one with Accenture.) Our feeling heading into the firm’s report is similar to what we were thinking with TWLO—a near-term dip could occur after Workday’s strong advance in recent weeks, but it would be unusual for an institutional leading stock (which we believe WDAY is) to top out so soon in a new market advance. Of course, we’ll take whatever comes, but given the stock’s performance, we’ll stay on Buy.

Watch List

Coupa Software (COUP 94): COUP is probably the stock we don’t own that we want to most badly—the story, numbers and chart all point toward it doing very well going forward. After a good run (and with earnings out March 12), we’re looking for some sort of shakeout to enter.

LendingTree (TREE 319): TREE wobbled a bit on earnings this week, but found support near its 25-day line and the underlying growth story is very much intact—management actually hiked expectations for this year, looking for sales and cash flow growth north of 30% despite a tepid mortgage-related business.

LPL Financial (LPLA 75): LPLA is the nation’s largest independent broker-dealer, as well as one of the largest advisors to the retail market (more than 16,000 advisors). It’s our favorite Bull Market stock, with earnings expected to rise 36% this year.

Xilinx (XLNX 125): XLNX (mentioned on page 7) is definitely a leader of this advance, with accelerating sales and earnings growth thanks to its position in some fast-growth communications markets.

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 mike@cabotwealth.com.

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Chart Industries (GTLS 88)—Chart Industries is loosely tied to the energy sector (maybe the worst-performing group in the entire market), offering gas-to-liquid systems, heat exchangers, cold boxes and some distribution and storage stuff for energy and chemical customers. That doesn’t sound exciting—so why is business surging and the stock so strong? Much of it comes from prospects for liquefied natural gas (LNG), one of the few booming areas in energy. Specifically, management went out of its way to say it believes it could score some giant orders for infrastructure and equipment for LNG liquefaction terminals this year, possibly $400 million or more, and that compares to $1.1 billion of orders last year for the company as a whole! Here’s the best part—even without any orders on that front, Chart’s business is strong, with LNG fueling stations in Europe, industrial gas systems in the U.S. and even grow houses and CO2 extraction products for the marijuana industry (the top brass sees big potential in cannabis over time) likely to boost revenues (19%) and earnings (36%) meaningfully this year. And if those LNG liquefaction orders come through, Chart’s bottom line could go much higher in 2020 and beyond. Obviously, this is a bit of a down-the-food-chain story—if big customers put off plans, Chart’s orders can go poof. But we like the fact that it has both real business momentum today, and it could prove to be one of the best ways to play the surge in LNG usage worldwide. As for the stock, it reacted well to its quarterly report and has been holding those gains. It’s an intriguing story.

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Tandem Diabetes (TNDM 66)—We wrote about TNDM in our first issue of the year (January 3), as the firm’s insulin pump (dubbed the t:slim X2) was taking the industry by storm, grabbing major market share thanks to its size (smaller and lighter than competing pumps) and many advanced bells and whistles (predictive low glucose technology, remote update capability, touchscreen, etc.). But this isn’t just a market share story—the demand for insulin pumps as a whole should grow nicely for years as more people move away from multiple daily injections. Indeed, Tandem believes it has a total potential market of three million users in the U.S. and another three million overseas (it just launched t:slim internationally in the second half of last year), compared to just 85,000 using the device today. Revenues began to rip higher early last year, and this week’s Q4 report showed business is still accelerating—revenues soared 89% in the quarter, pump shipments boomed 133% and management estimated that 2019 will bring $262 million of sales (up 44% or so), which was miles above expectations for $219 million. There’s good reason to think even that forecast is conservative, too, as Tandem has regularly topped estimates. After a huge, huge run into September of last year, TNDM formed a deep (but reasonable) 23-week base before blasting off on earnings this week.

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Universal Display (OLED 149)—Universal Display is a former holding that went through the wringer (down 62% from its peak!) but now, after months of bottom building, is back on the upswing. The company remains one of the key suppliers of materials and technology for organic light emitting diode (OLED) displays, and after years of investments, the future appeared to be here back in 2017 before slowing sales from Apple and others caused business to plunge—sales dropped 24% last year while earnings were basically cut in half. But Universal continued to make fundamental progress (new long-term deals with Samsung Display and Visionox, an expanded evaluation agreement with Sharp), and Wall Street is now sniffing out a resumption of the growth seen two years ago as a ton of new OLED production capacity comes online; management sees OLED square meter capacity up 50% this year when compared to year-end 2017 thanks to smartwatches, smartphones, TVs and automotive applications. All told, analysts see sales up 35% this year and earnings bouncing back 76%. Obviously, the bad memories from the early-2018 fall are not to be ignored, as slowing production from a big customer can crimp demand, but it certainly looks like a turnaround is in effect. Chart-wise, OLED remains a wild mover, but we like the big washout, the double bottom near 80 last year and the powerful earnings gap last week.

A New Networking Boom?

Back in Issue #1409 (dated December 19, right near the market bottom), we wrote about “A New Theme to Watch” on this page, highlighting the potential for a new networking boom, led by the buildout of 5G infrastructure, as well as faster data center connectivity and webscale infrastructure. Given the resilience of many names involved in the space, it certainly looked like a leading area for the next advance.

And that’s proven to be the case—along with cloud enterprise software, select networking stock have been the leading theme of this new bull move. Happily, we ended up buying one of the two stocks we wrote about back then (Ciena, which is off to a good start for us), though the other name (Xilinx) looks just as good if not better.

From a market standpoint, these networking booms tend to come and go every two or three market cycles—it takes time for big telcos and data center operators to revamp, replace and expand their “older” (usually from a decade ago) infrastructure, which often leads to a great growth wave for companies that supply the chips, multiplexers and other widgets for a year or two (sometimes longer). Eventually, of course, demand dries up and, the leading networking stocks go back into a slumber, but not before making big moves.

Both CIEN and XLNX look like real leaders, both fundamentally and chart-wise. But as you’d expect from a developing big theme, there are a couple of other names riding this trend that have emerged.

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The first is Acacia Communications (ACIA), a supplier of optical communications equipment for a variety of areas (long-haul, metro, data center interconnections, etc.). The stock was a former hot IPO before a slowdown in the industry and troubles with its largest customer (ZTE, the Chinese firm that suffered a trade ban) caused sales and earnings to sink during the past two years. But despite some trade worries, Wall Street is sniffing a big turnaround—Q4 results showed solid growth (sales up 24%, earnings up 52%), analysts see more of that coming in 2019 (sales up 26%, earnings up 76%) and the stock galloped ahead on huge volume after earnings last week.

Another is KeySight Technologies (KEYS), a good-sized outfit ($4 billion in revenue) that was spun off from Agilent back in November 2014, and it’s the #1 player in a bunch of broad fields like electronic industrial solutions, defense communications, measurement testing and more. But the main attraction now is its communications group, which is driving growth thanks in large part thanks to 5G test gear and data center demand. Sales were up 20% in Q4, but the communications group saw revenues lift 41%, and the company’s bottom line boomed 82%. The stock has been very strong and persistent since the start of the year.

For our part, we like to focus on the leaders, and given their resilience during the fourth quarter of last year and their solid performance in recent weeks, CIEN and XLNX look like the best ways to play the trend. But whether it’s one of those two, ACIA, KEYS or some others that emerge, we advise having exposure to what looks like the new networking boom.
Try to Develop Some Bigger Winners

When you add up all the evidence of the past three months—from the fourth-quarter plunge to the numerous upside blastoff signals we’ve received to, last week, our longer-term Cabot Trend Lines flipping back to bullish—the odds certainly favor higher (possibly much higher) prices in the months ahead. So what should you be doing? Hoping for bigger gains!

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That doesn’t mean you should hang on to poor performers if, for instance, they crack on earnings, or that some stocks that get off to good starts can’t fall flat in the weeks ahead. But the big money comes in the big swing, so if you have what looks to be a leading stock and have developed a modest profit, give it a chance to become a big winner.

When we recommended Shopify (SHOP) back in early 2017, we were obviously optimistic, and happily, within six weeks, the stock had shot ahead around 30% and was extended above its moving averages. Of course, taking a profit there is fine, but when you catch a tiger by the tail early in a new market advance, you’re usually better off hanging on. Thankfully we did, and SHOP shot up another 60% in the next four months!

SHOP was clearly an outlier; most stocks won’t motor ahead like that. But all it takes is a couple of big winners to make a big difference in your portfolio.

Cabot Market Timing Indicators

The evidence continues to improve, with the longer-term trend finally turning up last week. Shorter-term, some wiggles and potholes are obviously possible given the strong nine-week run, but the odds strongly favor higher prices in the months down the road.

Cabot Trend Lines: Bullish

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Our Cabot Trend Lines turned positive last Friday, as both the S&P 500 and Nasdaq closed above their respective 35-week lines for the second straight week. Of course, the Trend Lines aren’t a precise timing indicator (nothing that uses long-term moving averages is), but it’s been a very reliable background indicator. This Buy signal goes along with the numerous blastoff measures, portending higher prices in the months ahead.


Cabot Tides: Bullish

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Our Cabot Tides remain clearly bullish, as all five of the indexes we track (including the S&P 500, the daily chart of which is shown here) remain well above their lower (50-day) moving averages, which themselves are beginning to turn up. Pullbacks are certainly possible, but given the recent run and strong intermediate- and now longer-term uptrends, any weakness is likely to be temporary.

Cabot Real Money Index: Neutral

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Our Real Money Index is still stuck in neutral, with little in the way of inflows or outflows during the past five weeks. As we wrote in the last issue, the lack of inflows despite the big rally tells us most investors aren’t embracing the rally—an anecdotal plus. Still, officially, there’s no short-term edge from money flows right now.

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Send questions or comments to mike@cabotwealth.com.
Cabot Growth Investor • 176 North Street, Post Office Box 2049, Salem, MA 01970 • www.cabotwealth.com

All Cabot Growth Investor’s buy and sell recommendations are made in issues or updates and posted on the Cabot subscribers’ website. Sell recommendations may also be sent to subscribers as special bulletins via email and the recorded telephone hotline. To calculate the performance of the portfolio, Cabot “buys” and “sells” at the midpoint of the high and low prices of the stock on the day following the recommendation. Cabot’s policy is to sell any stock that shows a loss of 20% in a bull market (15% in a bear market) from our original buy price, calculated using the current closing (not intra-day) price. Subscribers should apply loss limits based on their own personal purchase prices.
Charts show both the stock’s recent trading history and its relative performance (RP) line, which shows you how the stock is performing relative to the S&P 500, a broad-based index. In the ideal case, the stock and its RP line advance in unison. Both tools are key in determining whether to hold or sell.

THE NEXT CABOT GROWTH INVESTOR WILL BE PUBLISHED MARCH 14, 2019

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