Table of Contents
- Dow: 25,710
- Nasdaq: 7,631
- Changes Since Last Week’s Update
- Model Portfolio Update
Chipotle Mexican Grill (CMG)
Exact Sciences (EXAS)
Five Below (FIVE)
Planet Fitness (PLNT)
ProShares Ultra S&P 500 (SSO)
- Other Stocks of Interest
- What To Do With Off-The-Bottom Stocks?
- Market Timing
Higher Prices Ahead
It’s mid-March in New England, which means we’re starting to see signs of spring—birds are flocking back, the gang of wild turkeys in our town are flirting and gobbling, the days are getting longer in a hurry and work boats are busy moving and adding buoys in the harbor.
And yet, when we stepped outside today, what did we see (besides the annoying turkeys in our driveway)? Temps in the upper 30s, most of the ground still covered in snow and not a flower or leaf to be seen on the trees. This time of year, we Northerners know that better weather is ahead … but we’re not sure if there’s one more cold stretch or (gasp!) snowstorm before winter melts away.
That essentially parallels our thoughts on the market right now, too. The two-week pullback that took the major indexes down 3% to 6% and hit many growth stocks has given way to a nice snapback this week. But while the big-cap indexes have pushed to new recovery highs, a lot of indexes and stocks haven’t, at least not yet. The number of Nasdaq stocks hitting new highs, for instance, has been far fewer this week compared to mid-February, even as that index has stretched to its highest level since October. (See chart.)
Translation: The short term is bit of a coin flip. This week’s action is certainly a positive, and it wouldn’t shock us if the market simply kited higher from here, with the top growth stocks leading the way. But these mini-divergences and the prior nine-week run could easily lead to another wobble or two, serving to shake out some late buyers and raise the fear level.
Longer term, though, we remain very confident higher prices are ahead. Whether it’s our trend-following indicators (still bullish), the 2-to-1 (in January) and 90% (in February) Blastoff Indicators that flashed green, normal action among leading stocks (few if any breakdowns) or the fact that there’s still plenty of skepticism ($27 billion has been yanked out of equity funds this year, despite the rally), just about all of the evidence continues to point to the fact we’re in a new, sustained bull move.
Model Portfolio Update
It’s been a volatile past three weeks for the Model Portfolio, but through it all, our market timing indicators have remained positive and none of our stocks have broken intermediate-term support. As always, though, we’re open to anything—if the market has another leg down, it’s possible a leader or two could crack. We placed four stocks on hold during the past couple of weeks, and as always, we’ll move on if we feel something has truly lost sponsorship.
Right now, though, our stocks are acting normally and the Model Portfolio remains heavily invested. Thus, we’re hanging on to our positions, as well as our small remaining cash position—there are no changes tonight.
BUY—Chipotle Mexican Grill (CMG 642)—CMG has been mostly quiet on the news front since reporting earnings back in January, though we were intrigued to see the company recently expand its Lifestyle Bowl options—the Keto, Whole60 and Paleo bowls launched earlier this year to good success, and now Chipotle is offering plant-based vegan and vegetarian bowls, confirmation that demand is strong. Of course, the story isn’t about the minutiae of the menu but about the firm’s turnaround; analysts see earnings surging nearly 40% this year, but that could prove conservative as the company has easily topped expectations in recent quarters. The stock is acting great, pausing tightly around 600 for about a month before popping to new highs this week. A dip of a few percent wouldn’t shock us, especially if the market pulls in again, but the buyers are in control—we’re OK picking up shares here if you don’t own any.
HOLD—Ciena (CIEN 39)—We’ve had a stretch of bad luck on earnings this season, and Ciena was an example—sales (up 20%) and earnings (up 120%) both topped expectations, and the current quarter outlook also was higher than Wall Street was looking for. But talk about a slowdown in webscale business (from 60%-plus growth last quarter), worries about margins and a weak market caused the sellers to pile on last week. Now that the smoke has cleared, here’s what we see: The three days of big-volume selling have our antennae up, hence our move to a hold rating last week; a close dip below 37-ish would probably be enough for us to say goodbye. That said, to this point, CIEN has found support where it “should” (near its 50-day line and prior support), so the uptrend is intact, and with business still in great shape (earnings estimates have actually perked up since the report, now looking for 38% growth this year), we’re sticking with our position, albeit with a close eye on the stock’s action.
BUY—Exact Sciences (EXAS 96)—Growth stocks rarely make it easy, with lots of sharp pullbacks that serve to shake out investors. EXAS has certainly done its best, with two quick, painful retreats (one 10%, the other 15%) during the past month. However, the stock held support near 80 (and, like most leading stocks, its 50-day line as well) and is now rushing back toward its highs. Fundamentally, the quarterly report and conference call only reaffirmed the huge potential here; after completing 934,000 tests last year, management is thinking big, with total capacity set to ramp to seven million tests by year end. Analysts see revenues up 60% this year, 45% in 2020 and more beyond that, thanks in part to Pfizer’s sales force flexing its muscle. (Exact’s long-term goal of the colorectal cancer testing market is still 40%, up from just 4.1% at year end.) Of course, none of those estimates guarantee anything, but it’s clear big investors think the firm is going to become much larger in the years ahead. We’ll stay on Buy.
HOLD—Five Below (FIVE 118)—FIVE has been a great stock for us, as we’ve taken good-sized partial profits a couple of times and our remaining shares are sitting with a triple-digit profit. And, as we’ve written many times, the fundamental story remains as good as it gets in retail—15% to 20% store growth, a best-in-class new store economics model (payback in less than a year) and consistent gains in same-store sales are likely for years to come. With that said, stocks move on perception, so we’re open to the idea that, after breaking out at 55 in October 2017 and running to 136 in September of last year, FIVE might need a very long rest; indeed, the stock’s action of the past month has been sluggish even as most leading stocks are peppy. Long story short, the upcoming quarterly report (due out March 27) will probably tell the tale—a poor reaction that sends the stock back toward its lows would raise the odds that FIVE’s major uptrend is failing, while a positive reaction could portend a fresh breakout to all-time highs. If you own some with a good profit, we advise sitting tight; if you’re not in, though, there are other names to consider on the buy side.
HOLD A HALF—Okta (OKTA 83)—OKTA wobbled after its earnings report but quickly found buyers and has bounced well in recent days. The reason for the selloff was the company’s forecast of larger-than-expected losses (partially due to a couple of recent acquisitions), but there’s no doubt business itself remains fantastic. In Q4, subscription revenue was up 53%, billings rose 52%, the firm now has 6,100 clients (up 40% from a year ago!), the number of clients that pay six figures annually lifted 50%, including many big names (Tyson Foods, Hitachi, etc.). And we love the fact that same-customer growth chimed in at 20%, meaning customers are expanding their usage. Thus, the pieces remain in place for another leg up—but the key will be how OKTA handles itself in the next couple of weeks. We only own a half-sized position (around 5% of the portfolio), so we’re willing to give our position some rope, but a dip back into the lower 70s would likely have us moving on. That said, we remain optimistic given the stock’s early leadership clues (it was one of the first to move out to new highs in January) and the firm’s big story. For now, we advise simply sitting tight with the half position.
BUY—Planet Fitness (PLNT 68)—PLNT is another example of a stock that tries its best to knock you out. In this case, shares meandered for nearly two months while the market was surging and failed repeatedly at resistance near 60, only to follow that with a straight-up move to new price and relative performance (RP) highs during the past couple of weeks. PLNT is usually more of a steady Eddie, so we don’t expect this race higher to continue, but near-term movements aside, we’re very bullish on the firm’s prospects—management (which usually lowballs its forecast) is looking for sales and cash flow growth of 15% and 20% (respectively) this year, and the long-term goal is for 4,000 locations and 40,000 members (compared to 1,800-ish and 12.5 million now). Even if Planet falls shy of those longer-term figures, you’re still looking at years of growth on the way. Hold on if you own some, and if you don’t, try to buy on dips of a couple of points.
BUY—ProShares Ultra S&P 500 Fund (SSO 116)—As we wrote on page 1, nothing has changed when it comes to our intermediate- to longer-term thoughts on this market, so we’re big proponents of owning a leveraged long fund like SSO to ride the uptrend. We did a quick study this week to look at the biggest losses faced if you bought the S&P 500 following every 90% Blastoff signal going back to 1970. Of the 11 signals, the biggest dip was 4.8%, and that came because of the two-day Brexit plunge in the summer of 2016, which was quickly recouped; no other signal saw a maximum loss of more than 2.2%. Given that this year’s 90% Blastoff came in late February (about 1% lower than today), history tells us not to expect a ton of weakness from here when it comes to the S&P 500. (Individual stocks, of course, can be another matter.) It’s not going to be something you brag about at cocktail parties, but we think buying SSO here or on minor dips will pay off in the months ahead. We’ll stay on Buy.
BUY—Twilio (TWLO 130)—TWLO has suffered two short, sharp declines in recent weeks, first after earnings in mid February and then again last Monday. But both drops found support near the 25-day line (better than many leading stocks), and shares have spurted to new highs in recent days. There’s been nothing new from the company since the earnings report, though a couple of analysts have said positive things about the stock since then, which has helped the cause. To us, Twilio has the feel of an emerging blue chip, with a communications platform that isn’t just attracting new customers by the truckload (up 31% in Q4), but current customers are greatly expanding their usage, too (same-customer revenues up 47% in Q4, one of the highest figures in that metric we remember seeing). We’ll stay on Buy, but as with many stocks that have run higher, try to buy after a down day or two.
HOLD—Workday (WDAY 187)—WDAY had its share of wobbles after reporting earnings at the end of February, but like many stocks it held up where it had to (around its 50-day line) and, while not completely out of the woods, has rebounded well. If you’re looking for a reason for the decline, you could zero in on management’s expectation that revenue growth will slow as the year goes on. But really, we think it was mostly about timing as anything, with the market and growth stocks ready for a shakeout. We’re remaining vigilant, and a dip below the mid 170s would be a red flag. But until proven otherwise, we consider WDAY a liquid leader of the bull move; we’re holding our shares here, and will look to go back to Buy if we see a bit more strength.
Coupa Software (COUP 95): COUP released another solid quarterly report Monday evening (revenues up 39%, earnings of 5 cents up 150%) and, at Tuesday’s Analyst Day, had many good things to say about its business. The stock wobbled a bit during the past two weeks but came to life today. Our only hesitation is that we don’t want to get too software-heavy in the portfolio.
Cronos Group (CRON 21): Daily moves of 5% aren’t unusual, but we’re impressed with CRON’s consolidation of the past five weeks (19 to 24) after its monstrous January run (10 to 24!). With the backing of Altria, it’s acting like the top marijuana stock out there, though earnings (due out March 26) will be key.
LendingTree (TREE 335): TREE has consolidated a bit above 300 for the past two weeks after a nice upmove to start the year. We think the growth story has a very long runway. See page 6 for more.
Shopify (SHOP 208): After making no progress for 15 months, SHOP is acting like a leader again with a persistent advance since the market bottom. The firm’s e-commerce platform continues to attract more and bigger merchants, and earnings are beginning to ramp up, too.
Xilinx (XLNX 122): XLNX remains a leader in the market, though there’s probably some overlap with CIEN fundamentally. Earnings projections are so-so, but the firm’s history of trashing numbers is more important to us.
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.
DocuSign (DOCU 59)—Institutions are always interested in companies that are growing fast, have a long runway of expansion ahead of them and (importantly) offer some consistency and predictability in their results—and DocuSign fills the bill on all fronts. The company was the pioneer and remains the leader in e-signatures, which are part of what the firm calls its electronic contracting platform. Whether it’s sales orders, loan documents, offer letters, invoices, applications, policy approvals or much more, DocuSign’s platform (which is integrated into many of the leading software services out there like Salesforce, Oracle and Workday) allows clients to save huge amounts of time and money when approving a deal. (The firm says 50% of transactions are done in less than 10 minutes, compared to days or weeks with paper-based approvals; on average its enterprise customers save $36 on every deal.) DocuSign thinks the market potential for this alone could be worth $25 billion, and it’s broadening its reach, too, with an acquisition last year that gets it into digital document generation and contract lifecycle management. The company has seen growing adoption (454,000 total customers), while current customers are sticking around (average contract length of 19 months) and using the platform more (same-customer revenues up 14% in Q3), all of which has helped revenues to grow between 33% and 37% for seven straight quarters and earnings to move into the black. The stock collapsed in the second half of the year, but has been advancing persistently since the market bottom. We’re watching to see how DOCU reacts to earnings, which are due out tonight (March 14). A positive reaction could pave the way toward a buyable set-up.
LendingTree (TREE 335)—We’ve gone back and forth on TREE a few times in recent weeks. On the positive side, we think the firm’s position as the leading online lending marketplace will result in years of rapid growth as more of that gigantic market moves online; LendingTree has just 7% of its target market, which itself is growing nicely. We also like the firm’s diversification—six years ago, mortgage-related revenue was 89% of the total, but that figure is now just 23% and falling as other products like insurance, credit cards and personal, auto and small business loans grow rapidly (up 67% in Q4). Indeed, despite expectations for a double-digit decline in mortgage revenue this year, total revenue is expected to rise around 35% as these newer businesses ramp up. So what’s the hesitation? First, as we just wrote, mortgages are still a big part of the business, and growth projections or not, TREE can often be pushed and pulled by perception of the housing market. Second is the stock—while it’s liquid enough (about $60 million per day), there are times when the stock can trade very thinly, which can lead to very jumpy action. At the end of the day, LendingTree’s growth numbers and potential are hard to ignore, its leading position should be easily defensible and the stock, which got a 55% haircut last year, has turned the corner in 2019. TREE is on our Watch List.
Yeti (YETI 28)—We’re always interested in recent new issues that have a unique retail story that—if management makes the right moves—could take it far. Yeti started with niche, high-end coolers and tumblers, often for hunters; indeed, in 2015, 69% of customers were hunters and just 9% were women. But now Yeti is more of an all-around outdoor brand, with an increasing array of wine tumblers, mugs, jugs, different-sized coolers and more that have proven a hit by keeping your supplies, beer or cocktail ice-cold for long stretches. (Today just 38% of customers are hunters, while a third of all customers are women.) There’s competition, but the company’s brand name, new products and expanding distribution channels (including a couple of its own retail stores it’s testing out this year) have all kept business humming. In Q4, total sales grew a solid 19%, led by e-commerce revenue (up 45%) and gains in drinkware (up 24%) products, and much of that growth is falling right to the bottom line—earnings of $0.38 per share nearly quintupled from the year-ago quarter, while EBITDA (a measure of cash flow) surged 58%. Management’s outlook for 2019 was more modest (sales up 12%, EBITDA up 15%), but Wall Street apparently thinks those figures are low—YETI gapped out of its post-IPO base to new highs following earnings and has extended those gains since. We think YETI should do well as big investors build positions.
What To Do With Off-The-Bottom Stocks?
A few weeks ago on this page, we wrote about a better way to “buy low,” looking for growth stocks that had long slides and bottoming processes (usually months long, not just a few weeks) and have turned the corner. Incyte (INCY) and LendingTree (TREE—see above) were two examples, and they’ve generally participated in the market’s advance.
However, a trickier situation is one we’re seeing more and more during the past month: What (if anything) to do with some of last year’s shooting stars that got crushed in the fourth quarter and initially bounced unimpressively, but have now spurted ahead on earnings or other news and look like they want to head higher?
There are no hard-and-fast rules, but we’ve seen this type of action many times in the past, and here are some pointers:
First, if you are interested in buying, make sure the stock is north of its 200-day moving average. This is a simple trend filter that will keep you out of a lot of trouble.
Second, realize that stocks that fall 50% or more in just a couple of months and then rebound have a strong chance of building a new, shallower launching pad over a few weeks (at least) before hitting a new high.
Third, when these off-the-bottom names work, they usually see outstanding volume on the way up, and that volume offers support if/when the stock eventually hits a round of profit taking.
For an example, let’s look at Carvana (CVNA), which is well on its way to revolutionizing the used car buying process, with a full-featured website, quick deliveries, huge inventory, low prices and even a seven-day grace period that is attracting hoard of buyers. After a heady run last year, the stock fell apart after mid September, falling by 60% during the market implosion. And it was still hovering near its lows six weeks after the bottom.
However, the stock has changed character since, basically doubling during the past month, and on huge volume to boot—though the stock is still shy of last year’s highs and is close to resistance in the high 50s to mid 60s area.
If you’re interested in this type of name, our advice is to start small (maybe with a half-sized position) and aim for pullbacks toward what we call “volume support”—a recent level where massive buying volume appeared, so if a stock dips back toward that level, it’s likely big investors will add to their positions. In CVNA’s case, there’s been a ton of big volume on the upside, so some sort of shakeout back to the low 50s would likely bring in support.
But what if CVNA doesn’t pull back and just keeps motoring? Well, that’s what makes these off-the-bottom situations so tricky. Sure, you could always just jump in, but buying a stock after it’s more than doubled in the past few weeks (but is still below its old peak) isn’t a high-odds play.
Long story short, after a brutal fourth quarter for the market and many glamour stocks, we’re seeing many of them show renewed signs of life. Getting in can be tricky, but if you can sharp-shoot a lower-risk entry—preferably on shakeouts—you can get in what could be a leading glamour name.
A New Bull Market? Looks Like It
We saw a lot of headlines this week heralding the 10th anniversary of the bull market. But, while we’re not into labels, we think these headlines are misleading—in fact, instead of an old, tired bull, we think the odds favor that a new bull move has just begun!
I’m going to get into more of this on my free webinar next week (you can listen live or via recording by signing up here), but the fact is that the vast majority of bear phases don’t involve 50% declines in the major indexes; most are garden variety 20% to 25% downmoves over a few months, or consist of a year or two of tedious sideways action. Combined with massive pessimism at the lows, it appears that the fourth quarter of last year qualifies as a bear.
What does that mean? The same thing we’ve been writing for weeks—that the odds favor a good-sized sustainable advance in the months ahead, and that lots of new leadership is likely to carry the baton as we move higher, which is what we’ve seen so far this year.
Whatever your preferred starting point of a bull market, though, our point is to not let the 10-year bull talk dissuade you—more than likely last year’s waterfall decline offered a refresh of the major uptrend, and most of the evidence continues to point higher.
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
Our Cabot Trend Lines remain bullish, though this week’s close will be key—both the S&P 500 (by 0.2%) and Nasdaq (by 0.4%) closed a smidge below their 35-week lines last week, and another close below those lines would negate the recent bullish signal. Still, we never anticipate signals, and the rally thus far this week is a good sign. Altogether, the odds still favor nicely meaningfully higher prices in the months ahead.
Cabot Tides: Bullish
Our Cabot Tides are also still bullish as, despite the hesitation and pullback of the prior two weeks, all five the indexes we track (including the S&P 400 MidCap, shown here) held above their lower (50-day) moving average and have rallied since. Thus, the intermediate-term is pointed up, which, along with the positive Cabot Trend Lines, tells us to stay optimistic.
Cabot Real Money Index: Neutral
Our Real Money Index is still meandering in neutral territory, not giving us any clues as to the market’s shorter-term (next month or so) future. Even so, we remain “impressed” with how unexcited investors are about the rally—$7 billion flowed out of equity funds and ETFs last week alone, and the five-week tally (shown here) has been stuck below zero (indicating outflows) for weeks. It’s a small plus from a contrary point of view.