Mike Cintolo, Chief AnalystNo. 1422, June 20, 2019


Clear

Still Going According to Script

Back on January 31, we wrote that the market was basically following a perfect Hollywood-type script for a major market bottom—you had a three-month bear phase that produced huge oversold readings and massive pessimism near the low, followed by a turn higher, with blastoff indicators flashing green, the trends quickly turning up and stocks taking off from there.

And today, nearly five months later, the market is still going according to script. A persistent advance following our buy signals and the blastoff indicators earlier this year? Check. A tedious (but normal) market downturn sometime between months four and six of the advance that turns most investors bearish? Check. Buyers returning despite a bunch of bad news, turning the intermediate-term trend back up (our Cabot Tides turned positive yesterday) and propelling leading stocks to new highs? Check!

The point is that the market is doing everything it “should” be doing if it began a new growth stock-led bull phase earlier this year. That’s a big reason we’ve kept a generally positive outlook in recent months despite all the bad news and uncertainties, and why (along with the Tides) we stepped further into the market today.

That said, we don’t want to give the impression that’s it’s definitely up, up and away from here. While the five-week market correction certainly did a great job of shaking out many weak hands, we’re unlikely to see a repeat of the straight-up rally of January through April; in fact, history shows post-blastoff environments feature a somewhat choppy uptrend after the initial surge and correction. Plus, we’re still in a fairly news-driven environment, with rumors and reports about trade relations, interest rates and other factors causing certain sectors to gyrate.

Those are good reasons to keep your feet on the ground, remembering to stick with leading stocks and to look for halfway decent entry points. But bigger picture, our message today is simple: Given the bullish evidence, we remain very optimistic this bull market has much farther to run in the months ahead.

WHAT TO DO NOW: Put some more money to work. Our Cabot Tides turned positive yesterday, and on a special bulletin this morning, we added a full position in Blackstone (BX) and a half position in Zillow (Z), which has left us with around 23% in cash. We’re also restoring our buy rating on ProShares Ultra S&P 500 (SSO) and Twilio (TWLO). Details inside.

Model Portfolio Update

The initial rally that was kicking off when we published our last issue held firm after that and is now following through on the upside. This week, our Cabot Tides turned positive, giving us the green light to put some money back to work.

Of course, we have some extra money to deploy after our sale of Array following its buyout by Pfizer; we technically came into today with 38% on the sideline. But we put a chunk of that back to work this morning, buying a full-sized position (10% of the portfolio) in Blackstone and starting a half-sized position (5%) in Zillow.

That left us with around 23% on the sideline, which is still plenty of buying power. We’re looking to put more of that to work, but as always, we’re aiming to get “pulled” into a more heavily invested position by identifying solid entry points in new leaders. As always, if we have any changes, we’ll let you know.

Current Recommendations

SOLD—Array Biopharma (ARRY 47)—Sometimes, it’s better to be lucky than good (though we’d prefer to be both). Two weeks ago, we bought a half-sized position in ARRY, as medical stocks looked peppy, the stock was acting great and the firm’s growth prospects looked great. And this Monday, we were greeted with good news; The company decided to sell itself to Pfizer for a whopping $48 per share in cash, causing the stock to surge. We’ve gotten plenty of questions about what to do in these buyout situations, and our bottom line is this: We’re not arbitrage players or buyout experts, so we’re not going to risk our capital on whether a competing bid comes (unlikely given the premium paid) or wait around to catch an extra buck of upside. We sold our position via a Special Bulletin Monday morning and are happy with the gift.

 

 

BUY—Blackstone (BX 45)— If you’ve read us for any length of time, you probably know that, in the right environment, we like to hop on board the best bull market stock—a stock of a company that thrives with rising stock prices and asset values, such as asset managers, brokerages, investment houses and exchanges. Interestingly, this group of stocks didn’t do much during the market’s early-year romp higher, but now we’re seeing a few shape up. Our favorite by far is Blackstone Group, which is a giant ($512 billion in assets under management) alternative asset manager with big stakes in real estate and private equity, as well as credit and hedge funds, too. The firm has a crazy record of success (cash flow has grown 19% annually for the past 10 years), which has led to increasing dividend payouts and net asset values. Despite that, though, the stock didn’t do much for the past few years, but that’s now changed, and the big catalyst was the firm’s announcement that it’s switching from a partnership (messy structure, K-1 tax form for investors) to a C-Corp (qualified dividends, 1099 tax form), which should greatly expand its investor base. The market liked the news, with BX surging to multi-year highs above 40 in May, having a quick shakeout with the market a couple of weeks ago and then surging back to new highs on big volume as soon as the market rebounded. It’s unlikely to be a barnburner, but the C-Corp move (which will become official on June 30) should allow the stock to trade more based on the firm’s growth in assets and dividends, and less on complicated tax implications. We bought a full-sized (10% of the portfolio) position today.

BUY—Chipotle Mexican Grill (CMG 739)—Holding CMG wasn’t pleasant during the last part of the market’s downturn, as shares nosedived from 725 to 637 in just a couple of weeks. But it never came close to our mental stop (in the 625 area) and immediately rocketed to new highs! People may attribute the moves to the on/off nature of the Mexican tariff threat, but we think it’s just a matter of the stock needing a good shakeout after a big run-up, and then buyers quickly coming back to the stock as soon as the market got going. Interestingly, despite the positive fundamentals (analysts still see earnings up 47% this year and 28% in 2020), most analysts seem to be behind the curve; as of a few days ago, just 11 of the 33 analysts have the stock rated a Buy or Outperform, with the rest at Hold (which on Wall Street is usually a negative rating) or worse. We take that as a good contrary sign that sentiment toward CMG, which is clearly on the upswing, has lots of room to improve. We’re OK buying some here if you’re not yet in.

BUY A HALF—Coupa Software (COUP 127)—We bought COUP on the same day we added ARRY, and while there are no buyout bids for this stock, we think it’s acting just fine. In fact, shares haven’t pulled back much at all since the giant-volume rebound off the 50-day line, which they tagged at the market low, and they’ve now pushed back toward their spike high of last year. We wouldn’t be surprised to see some further wiggles since the stock is extended to the upside (the 25-day line is down around 116), but we continue to think the firm’s amazing story, consistent growth and big goals (aiming to at least triple revenue in the years ahead) will keep big investors interested. Indeed, the stock’s post-earnings jump two weeks ago came on its heaviest weekly volume ever! We are close to filling out our position (buying another half-sized stake), but we want to see how the stock acts after the market’s big move today. If you own some, simply sit tight. If you don’t, we’re OK buying an initial half-sized position here.

 

HOLD—Five Below (FIVE 130)—FIVE held key support two weeks ago and bounced nicely, which is good, but it’s still stuck in the lower end of its recent range and not that far above its 200-day line (now around 121 and rising). There’s been nothing new from the company since its earnings report, which was just fine; not only is the long-term view (years of 20% growth) intact, but analysts still see the bottom line rising 23% this year and 20% next. Given the stock’s long rest (it hasn’t done much since last September), we think the next upmove could last for a while should management continue to execute, but we’ll simply play it by the book; a dip below 120 or so would tell us the stock’s longer-term position as an outperformer has passed, but right here, we’re happy to hold our small-ish position and give FIVE a chance to get going.

 

BUY—Okta (OKTA 133)—OKTA remains in great shape, refusing to give back any ground after a big run over the past two and a half months. In fact, given the stock’s big move (it broke out of a flat-ish rest in the upper 80s in April and has run about 50% since) and our good-sized position (nearly 13% of the portfolio) we could book some partial profits if we see the sellers show up. But, if anything, the stock’s recent action suggests more buyers want in, with a huge-volume, post-earnings advance early this month telling us that funds are still building positions. Whether we take some chips off the table or not, OKTA’s big picture is as bright as ever, partly thanks to growing confidence that large enterprises are stampeding to its door—the recent quarter saw the number of customers with at least $100,000 in annual contract value leap 53%, with half of that increase coming from completely new clients, meaning more and more huge firms are knocking on Okta’s door. All told, if you own some, sit tight; if you don’t, we’re staying on Buy, but try to buy on dips of a few points.

 

BUY—Planet Fitness (PLNT 78)—PLNT actually climbed out to a minor new high on Tuesday morning before pulling in, so the trend remains solidly up. To be fair, there are some yellow flags—the stock hasn’t seen much accumulation in recent weeks (low volume advances) and hasn’t had much of a shakeout or pullback all year, which opens it up to an out-of-nowhere drop on some supposed bad news. In terms of a game plan, then, we could take partial profits if the intermediate-term uptrend cracks (probably corresponding to a dip below the 74-75 area) and give our remaining shares room to consolidate. But we’re by no means going to anticipate bad things—we’re still very positive on the long-term outlook both fundamentally (cookie-cutter story, unique, high-return business model) and technically (a relative smooth advance like PLNT has enjoyed generally portends good things). Bottom line, we have our eyes open, but right now, the stock’s evidence remains bullish—you can buy some here if you’re not yet in.

BUY—ProShares Ultra S&P 500 Fund (SSO 127)—We’ve restored our Buy rating on SSO now that our Cabot Tides have turned positive. Obviously, there’s nothing that says the market can’t chop around (in fact, we wouldn’t be shocked at all to see the market throw investors a few short-term curveballs), but right now, the intermediate- and longer-term trends are up, sentiment is bearish (a plus from a contrary point of view) and let’s not forget the blastoff indicators from January and February, which have a pristine record of forecasting solid gains when looking out many months. If you enter around here, a stop down in the 114 area makes sense in case this rally fizzles out, but we’re clearly optimistic the next major move is up. You can buy some here if you’re not yet in.

BUY—Twilio (TWLO 146)—TWLO zoomed to new highs on the fifth day off the market’s June 3 low, gave up none of that in the days after (with no big-volume selling) and is now reaching higher again. Combined with the stock’s overall resilient action (higher lows during the prior couple of months) and pristine fundamentals (one analyst came out with positive comments this week, saying Twilio’s new-ish Flex call center solution adds another leg to the growth story), it’s a good sign that this remains a leader that wants to head higher. Last week we wrote that if the stock settled down (it has a bit) and the market turned positive (yup), we’d go back to Buy—so that’s what we’ll do here. If you own some, sit tight, and if you don’t, we’re OK grabbing some shares around here.

 

 

 

BUY A HALF—Zillow (Z 47)—Over the past decade or two, we’ve seen a ton of stocks have multiple runs as they come out with brand new products or services that create another wave of growth. (Netflix and Apple are the two best examples, but there are many.) Zillow could be following in those footsteps. As we wrote last week, the company’s Premier Agent business, where real estate agents advertise for leads, has stabilized and should improve if the housing market (supported by falling mortgage rates) does. But the real excitement surrounds Zillow’s new Offers business, where it’s directly buying homes for sale, fixing them up as required and selling them later on; it had 35,000 requests for sale in Q1 alone, bought 898 and sold 414 for $128 million. Despite just starting this business, Zillow nearly broke even on these purchase and sales and sees big things ahead—the company expects north of $230 million in Q2 from this segment, and is quickly moving into new markets (has moved into Minneapolis and Orlando since the start of May; now in 11 markets total, aiming for 20 by year-end 2020). Long-term, it thinks it can make a 1% to 2% margin on these sales, and that doesn’t include what’s likely to be a big boost to ancillary businesses like title and escrow, moving services, insurance, finding a mortgage, etc. The stock has responded, and while there’s some old overhead from last summer, we think investor perception has changed. We’re starting with a half-sized (5%) position here.

Watch List

Carvana (CVNA 67): CVNA is setting up in a good-looking launching pad following its big rebound earlier this year. See page 7 for more.

Roku (ROKU 105): ROKU remains extended (50-day line down near 80!), so we’ll continue to simply watch it—but a shakeout of a few points, possibly into the mid 90s, could provide a decent opportunity. We still think the story here is outstanding.

Snap (SNAP 15): It’s a bit more of a turnaround, but after a couple of years in the wilderness, user growth has returned and ad tools are boosting monetization. The stock remains under strong accumulation.

Under Armour (UAA 27): We already have a good amount of retail exposure, but Under Armour is an interesting turnaround situation that should see earnings mushroom in the years ahead. See more below.

Universal Display (OLED 186): OLED has pushed back toward its old highs after resting for a couple of months. It’s a down-the-food-chain firm, but if all goes well, the upside is mouthwatering. Details below.

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.

Under Armour (UAA 27)—Under Armour was one of the great retail growth stores of the past few years, with its high-end athletic gear (mostly apparel, but also footwear and accessories) proving a hit, first with hard-core customers, and then the mass market—sales, earnings and the stock saw massive growth from 2010 through 2015. But management missteps and competition caused margins to shrink and growth to slow; not surprisingly the stock disintegrated, falling around 80% as investors bailed. Now, though, Under Armour is looking like an intriguing turnaround situation—at last December’s Investor Day, the company laid out some aggressive but reasonable targets, including mid-single digits revenue growth, low CapEx spending, slowing inventory growth and (most important) 40% compounded earnings growth over the next five years as margins re-expand and as some restructuring moves kick in ($200 million of annual savings over the next few years). Turnaround stories come with a lot of “prove it,” but Wall Street is buying in—in Q1, currency-neutral revenue rose 3%, while gross margins expanded a full point, inventory was down 24%, debt was down 36% while earnings of five cents topped expectations. Analysts see the bottom line rising 30% this year and 40%-plus in 2020, and the stock is acting great, lifting off from a big 11-month structure since the market bottom. We’re intrigued.

Universal Display (OLED 186)—We wrote about Universal Display back in March, and the stock did well for another few weeks before it entered a normal correction during the market’s downturn. But now it’s perking up again, and the firm continues to have a very big-potential growth story. The company is the hands-down leader in organic light emitting diodes (OLEDs), which are booming in usage as smartphones, TVs, tablets, wearable devices (smartwatches, etc.) adopt them for their displays. Universal has the best-in-class IP, which leads to both material sales and licensing to some big players in the market, including Samsung, Sharp, LG and many, many others—management believes the OLED CapEx cycle is in the midst of a multi-year growth phase. (Year-end OLED production in square feet should be 50% higher than it was two years ago.) The risk here, as we discussed before, is that Universal is at the mercy of its huge customers; as we saw last year, a dip in demand means the company’s sales and earnings (and its stock) can get nailed. But having come through the wringer, Universal’s sales (up 101% in Q1) and earnings (up 400%!) have begun to rebound sharply, with analysts seeing the bottom line nearly doubling this year and rising another 50% in 2020. Meanwhile, the stock has consolidated for a couple of months despite the market and trade tensions. A little more rest followed by a resumption of the rally would be a great sign.

Wayfair (W 154)—When we flip through a few hundred charts over the weekend, one thing we like to look for are changes in character. Many times such a change is obvious (a big-volume surge of some sort after a rest period), but other times it’s not. We think Wayfair is an example of the latter, and we say that because of its recent consolidation—since March, the stock has corrected a maximum of 22% despite a sharp market correction, which is a far cry from the stock’s prior three downturns (35%, 40% and 50%!) that occurred in 2017 and 2018. That’s a good sign that big investors, which have been piling in (749 funds owned shares at the end of March, up from 490 six months prior), are supporting the stock. Of course, that doesn’t mean anything without a strong fundamental story, but Wayfair has that—it’s becoming a dominant furniture and home goods operation as the industry moves online, which has led to rapid and consistent growth in revenues (38% in Q1) and other key metrics (39% gain in active customers, up 39%; repeat customers make up two-thirds of all orders). Heavy investment in distribution and a push overseas has left the bottom line deep in the red, but the company thinks it will eventually get EBITDA margins up toward double digits (from -5% last year). With the stock in a relatively tight 13-week consolidation, with solid expected growth and with many funds buying in, W is worth keeping an eye on.

Chart School: Deep Bases Lead to Shallower Bases
Carvana (CVNA)

One chart lesson we discovered years ago is coming into play with many stocks in the current environment: After a very deep correction (usually at least 40% for individual stocks) and rebound, a stock will often build a shallower, more proper base after approaching its old highs.

The reason: After such a big and usually long comeback, a stock tends to (a) hit some resistance near the prior high and (b) much of the near-term buying pressures have been exhausted after the rebound. That leads to a correction, but if all goes well, that correction leads to a firmer launching pad that can lead to excellent buying opportunities. Thus, if you owned it and got knocked out, keep your eyes open—the stock could provide a better entry point in the not-too-distant future.

What’s interesting is that we’re seeing this pattern play out with the market as a whole right now. Take the S&P 500, for instance—it fell 20% in the fourth quarter of last year (an extreme downmove for a major index) and then marched all the way back to its prior peaks by April of this year. Now it’s nearing the top of a shallower (7.5%), less extreme seven-week consolidation.

Not surprisingly, many stocks are following the index’s lead. One that we got out around breakeven but are still watching is Carvana (CVNA)—you can see it had a devastating decline in Q4 of last year (about 60%!) before coming all the way back by the end of April. You can never be sure about what comes next, so we took a half position on the way up before the stock began to pull in. (We got out a smidge north of breakeven in early May.)

There was some selling in CVNA during that month, but the correction from high to low (27%) was pretty reasonable, and now the stock is perking back up—like the market, it’s setting up a nice-looking seven-week launching pad.

Not much has changed with the story over the past few weeks. Carvana has had a good-sized secondary offering, but that seems to have been absorbed. And the firm has opened up shop in eight more markets (now in 133) and opened up another car vending machine (which has been shown to boost sales in a particular market) in Kansas City.

Back to the stock, there’s still some overhead to chew through in the low 70s, so we wouldn’t be surprised if CVNA needs more time to round out on the chart. But we’re putting the stock back on our Watch List and will be watching to see if it can decisively get going down the road. WATCH.

Simpler is Usually Better

Every year tends to have a lot of dramatic headlines, but 2019 might take the cake for that honor—whether it’s economic worries, Fed ponderings, political uncertainties, trade wars with various countries and now tensions overseas, it seems like every few weeks gives investors another thing to become laser focused on.

However, the irony of the market is that the less you dive into the minutiae, the better you usually do. Or, said another way, the more you stay focused on the big picture, the better your portfolio does. That is the whole point of our Cabot Trend Lines, and it’s a big reason why it’s our most reliable indicator.

In fact, since October 2000, if you were to have theoretically bought the Nasdaq every time the Trend Lines gave a buy signal and went to cash on sell signals, you’d be up about 250%, compared to around 140% if you simply bought and held the Nasdaq all the way through.
But the real value of the Trend Lines isn’t as an index trading system (though we do occasionally use it when investing in leveraged long funds, like our current ProShares S&P 500 position). Instead, it’s in staying on the right side of the market’s major moves, both avoiding rough environments for growth stocks (even if it’s just for a few months) and staying positive when things get tedious.

The moral of the story is simply that getting caught up in the day-to-day news often causes stress and confusion. It’s good to be aware of what the market is focusing on, but when it comes to action, keep it simple and take your cues from the trend of the major indexes and leading stocks.

Cabot Market Timing Indicators

The May correction was a tough one, but now the bulls are back—our Cabot Tides have returned to positive territory, telling us the path of least resistance is up. While we don’t advise jumping in with both feet, we put some money back to work today and advise taking a more constructive stance given the evidence.

Cabot Trend Lines: Bullish

The Cabot Trend Lines kissed key levels two weeks ago and have rebounded impressively since, keeping the indicator in the bull camp. At the end of last week, the S&P 500 (by 4.9%) and Nasdaq (by 5.0%) were solidly above their respective 35-week lines and remain so today. Simply put, the odds continue to favor the market’s next big move being up.

 

Cabot Tides: Bullish

Our Cabot Tides have flipped back to positive this week, as all five of the major indexes (including the Nasdaq—daily chart is shown here) are back above their lower (25-day), rising moving averages. That doesn’t mean it’ll be up, up and away from here, but it’s a good sign the May correction is over and that the overall bull move that began in January is back in gear.

 

 Cabot Real Money Index: Positive

When it comes to what they’re doing with their own money, investors remain very skittish, which is usually a good thing for stocks. Our Real Money Index remains well into positive territory, as last week’s modest inflow ($4 billion or so) was dwarfed by the outflows in prior weeks. It’s a secondary indicator, but the Index is telling us most weak hands have bailed out.

 

 

 

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 July 3, 2019

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