Table of Contents
- Dow: 25,828
- Nasdaq: 7,911
- Changes Since Last Week’s Update
- Model Portfolio Update
Chipotle Mexican Grill (CMG)
Five Below (FIVE)
Planet Fitness (PLNT)
ProShares Ultra S&P 500 (SSO)
- Other Stocks of Interest
- Chart School: Double Skyscrapers are Rare and Buyable
- Market Timing
In last week’s update, we wrote, “We are seeing some short-term things to keep an eye on … earnings season has [shown] plenty of poor reactions and few solid gaps higher … sentiment has turned complacent … upside momentum has been waning … and the market hasn’t had a pullback of any substance all year, which raises the odds of a retreat.”
Into that tricky environment was thrown this week’s tariff grenade, which appears set to go off tomorrow morning. We’ll let others figure out the economic impact and guess what comes next, but what counts to us is the reaction to the news—right now, stocks are teetering, with our Cabot Tides a smidge away from their first sell signal of 2019.
At this point, we have three main thoughts. First, while news and rumors are coming at you all day, be sure to stick with the system—don’t be complacent or panicky, and instead follow the market’s evidence, be it on the sell (breakdown) or buy (powerful rebound) side.
Second, when it comes to your portfolio, follow the usual plan—focus on your weakest stocks (losers or those that haven’t made any progress in a couple of months) and keep tight stops in place on them. If they (and/or the Tides) crack, throw them overboard and hold the cash. Happily, most of our stocks are still holding pretty well, but we have one or two that are suffering indigestion.
Third, don’t forget the big picture: While a multi-week retreat could unfold (well deserved after four months of no pullbacks!), the longer-term outlook is still bullish. And a couple recent studies of the market’s action back that up.
The S&P recently hit a new all-time high after at least six months without doing so; of the 18 prior instances this has happened since 1950, 17 of them saw the market higher a year later, by an average of 13%. And after the market gains in each of the first four months of the year (like this year), the rest of the year saw gains averaging 9.6%.
In other words, this is still a bull market, but the question is whether a “real” correction is unfolding here—the answer should come in the days ahead.
Model Portfolio Update
After four months of relative calm, the trade war shenanigans this week have caused volatility and sellers to come out of the woodwork, with just about every index, sector and stock taking a hit. Except for a modest trimming of our Twilio position after earnings last week, we have mostly stood pat in the portfolio during the past month and came into the week with 20% on the sideline.
We’re not necessarily craving more cash, but as we wrote on page 1, we’re going to bend with the market’s wind going forward. If this ends up being another short, sharp shakeout that brings in the buyers, we’re happy to hold onto our positions and even put some cash to work, as there are a decent amount of potentially buyable patterns we see. But should our Cabot Tides (now on the fence) turn negative, we’ll hold off new buying and possibly prune further. Stay tuned.
HOLD A HALF—Carvana (CVNA 75)—CVNA reported a fantastic quarter last night. Sales lifted 110%, which was well above expectations, as automobiles sold grew 99% to 36,766. Encouragingly, gross profit per vehicle sold totaled $2,429 in Q1, up 31% from a year ago. The loss was larger than expected, which might provide an excuse for near-term selling, though some of that was due to the firm’s quicker-than-forecast expansion into new markets (24 new markets in the first three months, with another 15 opened so far in Q2)—all told the firm expects to be in at least 145 markets by year-end, up from 85 in January, which should drive the top line up 82% or so this year. Very big picture, the company is looking down the road to selling two million-plus cars annually (by comparison, they are looking at sales of 170,000 units this year), so, while heavy investment will be necessary, the upside potential is obvious. As for the stock, it’s had a great run before and after our initial buy, which makes it vulnerable to further declines in a market correction. That said, to this point CVNA is acting amazingly well, finding support at its 25-day line this morning and closing up on the day. We’ll stay on Hold for the moment, but if the market stabilizes we could look to fill out our position.
BUY—Chipotle Mexican Grill (CMG 705)—We’re sure a lot is going to depend on the market going forward, but so far, CMG is acting just as we’d hoped since its one-day, post-earnings dip to its 50-day line—shares rallied six days in a row off that support level and kissed its old high near 720 before backing off this week. Based on both the fundamentals (accelerating revenue and same-store sales growth, buoyant margins, a steady store expansion plan and beefy earnings estimates) and chart (the lack of any pullback at all from January through early April), we continue to view the stock’s big run off the market bottom as an initial kickoff to a longer advance as the company’s turnaround story plays out. The trick, as with so many stocks, is the near term, and whether a deeper correction and consolidation is due. Should the Tides turn negative and/or CMG slice its recent low, we’ll probably switch to a Hold rating, but barring some hugely abnormal action, we’re aiming to give the stock some room to maneuver. If you own some, we advise sitting tight; if you want in, we’re OK grabbing shares around here or on dips.
HOLD—Five Below (FIVE 137)—FIVE has been hit fairly hard this week, which isn’t overly surprising given its reliance on cheap imports from China for much of its goods. On the Q1 conference call, while the firm’s guidance included the effects from tariffs totaling 10%, CEO Joel Anderson said this about a possible future hike to 25%: “I think what we should take away is, we may not be able to mitigate it immediately. But we will mitigate it up to and including making price changes if we have to for areas that we can’t mitigate. But, in addition to China, we source product from Honduras, from India, from South America, and many other countries. So, our overall reliance on China is not exclusive. And, over time, if it goes to 25%, we’ll certainly look at shifting even more product to other countries.” Obviously, there’s risk if higher tariffs are put in place for a long period of time, but (a) that’s not a sure thing and (b) it sounds like management is willing to mitigate the impact short term (higher prices) and shift production around over time. Whatever comes, we don’t think it changes Five Below’s underlying story, but we’re not complacent—given the stock’s sharp pullback and the uncertainties, we moved FIVE to Hold on Tuesday’s special bulletin. In the near term, we’ll be watching to see if the stock finds support.
BUY—Okta (OKTA 106)—While many technology growth stocks still aren’t much higher than they were in early March, OKTA is one of the few that has decisively broken out on the upside, and likely because it shook out many weak hands in March and early April, it’s been able to avoid most of the market-induced selling pressure this week. Fundamentally, the next big update will come on May 30, when quarterly results will be released; analysts see revenues up 40%, but just as important will be same-customer sales growth and tidbits about the uptake of Okta’s products. As cybersecurity evolves, some newer fields have popped up, and the big idea here is that the company is the hands-down leader in one of them (identity services)—one analyst recently said the firm’s competitive advantage remains years ahead of the competition. Back to the stock, pullbacks are certainly possible (the 50-day line is near 90), but OKTA is one of the strongest stocks in the market; we’re holding on to our position, and are OK buying some on dips.
BUY—Planet Fitness (PLNT 78)—Planet Fitness released a fine first-quarter report last week, with revenues up 23%, same-store sales up 10.2% (well ahead of estimates) and cash flow and earnings both up 30%. The firm also opened 65 new gyms and operated 1,806 at quarter’s end (up 3.7% sequentially). Like many stocks this earnings season, the stock sold off anyway, supposedly because revenues came in a bit light and management didn’t boost the yearly outlook (sales up 15%, earnings up 25%) for the year. Really, though, we think it was a matter of the overall environment (most growth stock earnings reports have been met with selling) and the stock’s excellent run during the prior couple of months. A drop below the 68 area (which was the low of the earnings day and is a bit below the 50-day line) would be a red flag, especially if it coincided with a Cabot Tides sell signal. But there’s no sign of that here—in fact, PLNT has shaken off its post-earnings dip and ripped back to new highs this week! (No China-related exposure to this business has helped.) If you own some, hang on, and if you don’t, we’re OK picking up a few shares around here.
BUY—ProShares Ultra S&P 500 Fund (SSO 121)—As we’ve written recently, what normally happens in blastoff environments is that (a) the first pullback comes between months three and six of the advance (we’re in month five now) and (b) that correction usually lasts a few weeks (not days) but doesn’t lead to a monstrous decline (4% to 7% for the S&P on average, though usually more for the Nasdaq). To be clear, the market can do whatever it wants; we’ll just take things day by day, but history can often provide some useful guidelines. Of course, at this point, we’re not even in the “correction” camp yet, as our Cabot Tides haven’t produced a sell signal—we’re staying on Buy because of that and because of the still-bullish longer-term evidence (Cabot Trend Lines, blastoff indicators and some of the studies mentioned on page 1). A Tides sell signal would have us moving to Hold and possibly taking some partial profits in SSO, but the game plan is to hold most or all of our shares through any correction that comes, thinking higher prices are likely down the road. Right here, we’re sitting tight, and if you’re not yet in, we’re OK grabbing a small position on this dip.
HOLD—Twilio (TWLO 133)—Our thoughts on Twilio are a lot like our thoughts on the overall market: Big picture, we’re optimistic the stock has further to run, but in the short term, we still think it (and some other stocks that have had big runs) is vulnerable to further declines (or at least choppy action), especially if the market’s wobbles continue. Fundamentally, though, the recent quarterly report only reinforced our view that this company is going to get much bigger over time. As the need to communicate with customers, partners and employees via a variety of channels (text, email, video, etc.) grows, Twilio is a sure bet to attain more clients and to have current clients dramatically increase their usage of its platform (same-customer revenue growth up a crazy 46% in Q1), especially with the SendGrid’s best-in-class email capabilities being integrated. We sold one-third of our position last week after the stock’s post-earnings decline, but are aiming to give our remaining shares plenty of rope to consolidate if need be.
HOLD—Workday (WDAY 200)—WDAY is probably the stock that’s closest to the chopping block for us—it doesn’t act horribly, but at this point, shares are no higher than they were in late February and the recent breakout attempt fell flat even before this week’s China-induced selloff. Moreover, even within the cloud software sector, there are other names that look like stronger leaders. That said, right now, the stock has held support and the overall trend is up, so we’re not in a hurry to throw our position overboard, especially with the company’s buoyant growth prospects. (Earnings are due out May 28.) But given the lack of progress, we are keeping a close eye on the action—a drop into the high 180s might be enough for us to move on to greener pastures. For now, though, we’re hanging on.
DocuSign (DOCU 54): DOCU has pulled in again this week, but it remains within its eight-week range (51 to 59 or so), which itself comes after 10 weeks up in a row (a great sign) and is part of a larger post-IPO base. We’re still high on the story, though we’d like to see some decisive strength before entering.
Qualcomm (QCOM 84): We think QCOM has morphed into a liquid leader after the Apple settlement—not only will that deal significantly boost earnings and cash flow, but it should make it easier to achieve other settlements and puts the firm in position to be a leading 5G beneficiary. See more on page 6.
Roku (ROKU 83): ROKU is the most direct way to play the boom in cord-cutting and connected TV, with a booming platform (revenues up 79% in Q1, 29.1 million accounts, surging revenues per user and streaming usage) that, today, drove the stock to new highs on big volume. It’s very volatile, but could be a top glamour name.
Shopify (SHOP 261): We have some stock envy with Shopify, which we’ve been watching for a few weeks but never pulled the trigger on—and now the stock’s gone vertical after earnings. Still, we think the run is in the early stages so we’ll look for a more advantageous entry point. See more on page 6.
Tandem Diabetes (TNDM 64): We thought TNDM was done for after breaking down in mid April, and again after a big negative reversal on earnings last week. But the stock has bounced on news that sales of its t:slim x2 insulin pump are growing like mad (up 142% in Q1!), which led to a huge bump in revenue guidance. It’s volatile but the potential is big.
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.
Amazon.com (AMZN 1,900)—Don’t worry, we’re not transforming into a publication of well-followed mega-cap stocks; Qualcomm looks like the exception to the rule, and frankly, most of the popular stocks from the last couple of years don’t excite us much. But Amazon is probably the best looking of the old guard, and for good reason: Growth, while slowing a bit, remains very solid (up 17% in Q1), and the company is beginning to churn out massive earnings (up 117%) and cash flow growth (up 89% over the past 12 months) as the firm’s core e-retail, video streaming, proprietary devices (Alexa, Fire Stick, etc.) and cloud services continue to plow ahead. And the firm isn’t sitting on its hands, either, with some new initiatives (one-day shipping for Prime members) likely to lead to more purchases from its best customers. (Analysts see earnings up 35% for 2019 as a whole, with 40% penned in for next year.) Equally impressive, though, is the chart—the decline late last year was sharp but reasonable (35% or so) and after a strong initial bounce and consolidation, AMZN rallied eight weeks in a row, and the pullback this week has found support near the 25-day line. Of course, the stock is unlikely to be the big mover it was a few years ago, partly because of its size and also because it’s already so well known. We’re unlikely to go after AMZN in the Model Portfolio for those reasons, but that doesn’t mean the stock can’t be a steady leader of this bull phase if it breaks out above 2,000 (ideally after a couple weeks of rest) going forward.
Inphi (IPHI 51)—Most companies in the chip or networking field have “ice cream headache” stories, with hard-to-understand products and confusing end markets. Inphi certainly has its share of that (listed on its product page are transimpedance amplifiers, coherent digital signal processors and more), but the overall story is something everyone can get behind: Inphi is the leader in gadgets that help move data faster within and between data centers, including long-haul, metro and edge products. Long term, there’s no question demand for these products is on the rise (one estimate says the market should double from 2018 to 2023), though year-to-year, it’s a tougher proposition, as spending from giant cloud operators (think Amazon and Google) can affect things. The good news is that, after a soft 2018, it appears that everything is set to kick into gear, including upgraded data center-related products (Inphi seems to have the best 400G stuff on the market, with Amazon likely to boost purchases meaningfully going forward) and with 5G helping demand from telecom outfits. In the first quarter, revenues leapt 37% from a year ago, while earnings of $0.33 per share topped expectations by five cents. More importantly, the future outlook was great, which had analysts hiking their earnings estimates (looking for 94% growth this year and 34% in 2020). It’s a bit thinly traded ($35 million of volume per day), but IPHI popped to two-year highs and hasn’t given up an inch this week.
Shopify (SHOP 261)—After a straight-up market advance, most investors are likely to have stock envy surrounding a name or two that you’ve been watching but haven’t pulled the trigger—even as the stock has kited higher. Right now, we’re envious of Shopify, a stock that looks like it “reset” itself last year, with a tedious multi-month correction that wore or shook out most of the weak hands. If you’re new to the story, the company’s claim to fame is its e-commerce platform that allows everyone from tiny merchants (starting at $29 per month) to giant corporations ($2,000-plus per month) better manage all aspects of their online businesses, including front-end, back-end, payments, social media marketing and access to capital. (It even launched a Studio service to appeal to TV and film content developers this past quarter.) It appears to be the best out there, attracting tens of thousands of merchants, allowing Shopify to make big money through subscription fees (monthly recurring revenue was $44 million in March, up 36% from a year ago), transaction-related revenue (gross merchandise volume sold through its platform totaled $11.9 billion in Q1, up 50%, while payment volume using its system rose 38%) and via lending, where its Capital segment issued $88 million in merchant advances, up 45% from last year’s Q1. Big picture, the sky’s the limit—if Shopify remains the gold standard in the industry, there’s no telling how many clients and commerce it can capture in the U.S. and overseas. Back to the stock, it’s gone vertical since the recent earnings report, and we’re not willing to chase it here, but we’re viewing the entire run-up this year more as a kick-off of another big upleg as opposed to a run that’s nearing its end. SHOP remains on our watch list as we look for a few weeks of tight trading or a good-sized pullback/shakeout.
Patience is Key for Hot IPOs
When we started learning about charts way back when, we gobbled up all the ins and outs of the popular chart patterns—head and shoulders, double and triple tops, wedges, cup-with-handles, triangles, flags and much more, all of which were supposed to “forecast” a stock’s next major move.
There’s probably some value in those patterns, and we know about them. (If you don’t, pick up a technical analysis book and throw it in your beach bag.) But as we get older and more experienced, we look at charts not as forecasting tools but simply as a straightforward way to measure supply and demand—price, volume, trends and a couple of moving averages are enough for us.
That said, there are some happenings on a chart that we always make note of. Huge, powerful earnings gaps are one; tracking those helps you uncover new leadership over time. Another thing we like to see is many (at least six, preferably more) weeks up in a row, a sign of persistent buying that usually leads to higher prices down the road.
Another one we love to see, but is relatively rare, is what we call Double Skyscrapers, which can be seen on the weekly chart. Simply, it’s when a stock goes ballistic for two straight weeks, both of which come on gigantic volume. (The huge volume bars at the bottom of the chart look like skyscrapers—hence the name.)
Of course, one or two big days of buying isn’t unusual, especially during earnings season, and you might even see a few stocks stage four or five big-volume up days in a row, which is a bullish sign. But two massive weeks is very rare, especially when you’re talking about institutional-quality growth stocks—it’s a indication that a stock’s character has changed and big investors are piling in hand over fist. In a sense, it’s similar to the market timing blastoff indicators, with a sudden change in perception often leading to much higher prices.
Take a look at Yahoo! (YHOO) from back in October 2002, after the huge bear market in Internet stocks. As shares fell into September, the stock soon launched two straight weeks (up 43% one week and 12% the next) on volume that was double its average (and the highest in 21 months) on both weeks. Not only did the stock do well from there, notice how it didn’t pull back at all, either, immediately rallying further.
Back in 2013, Facebook (FB) launched its entire advice with a Double Skyscraper signal after reporting earnings in July—the stock catapulted 31% and 12% during those two weeks, with its two biggest volume weeks ever up to that point, both well over twice the weekly average.
All of this leads us to Qualcomm (QCOM), the well-known mega-cap stock that was actually the top leader in the market way back in 2000. While it’s a fine, highly profitable company, sales and earnings have been slowly slipping in recent years as its mobile and telecom chipsets and big royalty business stagnated, and as costly lawsuits took up time and money.
But now, with the recent Apple settlement paving the way for its use of Qualcomm’s mobile modems in new 5G smartphones (Apple basically threw in the towel), Qualcomm looks like a totally different company—not only is the deal bringing in $4 billion or so in upfront payments, but it should lead to $2.5 billion-ish of annual royalties from Apple. Plus, it should make it easier to strike a good deal with Huawei, the big Chinese outfit that is also battling Qualcomm in court, and it puts Qualcomm in excellent position to benefit from the boom in 5G.
You can see the result on the chart—QCOM scored a Double Skyscraper, with gains of 40% and 8.5%, while volume came in more than three times average the first week, and 80% above average the second week. And the stock itself lifted above multi-year resistance in the process, too.
To be fair, this situation is a bit different than the first two—Yahoo and Facebook were younger outfits that were still early in their growth phases as companies, whereas Qualcomm looks more like a special situation. So a multi-year, many-fold advance might not be in the cards.
But we do think this Double Skyscraper signal is for real, especially when you consider the firm’s drastically higher earnings estimates (should be up 37% next year, which is likely conservative) and upside potential as 5G takes off. Mega-caps aren’t usually our thing, obviously, but we think QCOM has big potential as a “new” liquid leader of this advance.
Cabot Market Timing Indicators
Big picture, we’re still in a bull market, but the evidence has worsened recently, with the selling of the past few days putting the intermediate-term trend on the fence. We’re still heavily invested, but the next few days should be telling.
Cabot Trend Lines: Bullish
Despite this week’s stumbles, our Cabot Trend Lines remain solidly bullish, with plenty of room to correct and consolidate without damaging the longer-term trend. As of last Friday, the S&P 500 (by 6.8%) and Nasdaq (by a big 9.6%) were well above their respective 35-week moving averages. The near-term is uncertain and news-driven, but the overall bull market is very much intact.
Cabot Tides: On the Fence
Our Cabot Tides are on the fence, as most of the indexes we track are either at or a smidge above their lower (50-day moving averages)—the S&P 400 MidCap (shown here) is a good example. A decisive breakdown by at least three of the five indexes would produce the first sell signal of the year for the Tides, but as always, we won’t anticipate—at this point, the intermediate-term trend is mostly neutral.
Cabot Real Money Index: Neutral
The Real Money Index is still meandering in neutral territory, but we do have two points to make. First, the five-week average of fund flows (shown in the chart) has been south of zero (outflows) all year, despite the rally—a healthy sign of skepticism. Second, we’re interested in seeing if tonight’s (Thursday’s) update reflects any trade war-induced panic. Right now, though, there’s still no short-term edge.