Mike Cintolo, Chief Analyst

No. 1427, August 29, 2019


Lots of Drama, But the Evidence is Unchanged

August is winding to a close, and we say good riddance—this month has packed in as many dramatic market-moving headlines as any we can remember due to developments in the U.S.-China trade battle, speeches from the Federal Reserve and a near-obsession over the newly inverted Treasury yield curve.

All of that news led to some dizzying movements. In fact, in 13 of the past 20 trading sessions, the Nasdaq has closed up or down at least 1%, including three separate 3%-plus declines! For the month so far, that index has averaged a daily move of around 135 points (vs. 85 or so in July).

Rising along with the levels of drama and volatility are the number of dramatic predictions—from an imminent bottom to (more frequently) projections of another big decline like we saw last December, not to mention a full-fledged economic downturn for good measure.

However, despite all the moves, headlines and outlier predictions, nothing much has changed with the evidence. The intermediate-term trend is down (or sideways-to-down if you prefer) for the major indexes and most stocks, and thus we continue to advise playing some defense, including holding a fair amount of cash and keeping new buys on the small side.

However, the majority of the longer-term evidence is still pointed in the right direction—the trend is up and the action of leading stocks remains mostly solid—while sentiment is as poor as we can remember it for a time when the big-cap indexes are only a few percent off all-time highs. So we’re still giving our resilient names a chance to hang in there and eventually get going.

Overall, then, it still walks and quacks like a bull market, which means another lucrative leg up is likely somewhere in the future. And if today’s action is any indication, that leg up could start sooner rather than later. But for the here and now, we’re keeping an open mind; if the bulls return, there will be plenty of enticing names to jump on, but we’re patiently waiting for a decisive green light before doing much buying.

WHAT TO DO NOW: For now, we think we’re in a proper stance, holding some cash and being choosy on the buy side. Since the last issue, we sold the rest of our shares in Planet Fitness, and last week, we added a half position in Carvana (CVNA). Tonight, we’re going to trim one-third of our remaining Okta (OKTA) position, bringing our cash position to around 36%.

Model Portfolio Update

Sometimes there’s a lot to do in the market, and other times, like recently, there’s not. After raising some cash when the Tides turned negative near the start of August, the Model Portfolio has been relatively quiet, selling our half position in Planet Fitness, buying a half position in Carvana, and tonight, selling another piece of Okta.

Overall, we remain in a cautious stance (about 36% of the portfolio will now be in cash) but are willing to move in either direction going forward. If the Cabot Trend Lines turn negative (see page 6) and/or some of our current holdings crack, we’ll raise more cash and possibly become outright defensive.

However, there remain a bunch of resilient growth stocks, the major indexes are continuing to find support at logical levels and pessimism is so thick you can cut it with a knife. Thus, we’re ready to do some buying if the bulls truly take control—but tonight, we’re sticking with the “less is more” theme.

Current Recommendations

BUY—Blackstone (BX 50)—Despite the market’s gyrations, BX continues to show resilience, etching higher lows (43.5, 45 and 48.5) during the market’s three selloffs, with the stock perched near new highs. Interestingly, while energy stocks look horrible, Blackstone is buying cheap—it’s looking to buy Tallgrass Energy (TGE), a highly profitable operator of a few key natural gas and oil pipelines in the Dakota and Colorado areas for around $3 billion. (Blackstone already owns 44% of the firm.) Bigger picture, we’re not complacent to the fact that, should the market head lower, asset value-sensitive stocks like BX could come under the knife; a drop into the 43 to 44 area could have us pulling the plug. But at this point, the stock’s resilience in the face of a declining market, combined with the bullish fundamentals (the C-Corp switch should continue to attract big investors that can now purchase shares), is very encouraging. Hang on if you own some, and if you don’t, we’re fine starting a position here or (preferably) on dips of a point or two.

BUY A HALF—Carvana (CVNA 82)—We took a nibble on Carvana late last week as the stock is holding up well following its huge-volume rally after earnings. Obviously, the market is likely to toss the stock around in the near term, but (a) the stock is acting very well, holding all of its earnings gains during the past three weeks, and (b) we’re more focused on the bigger picture, both the fundamentals (we think Carvana could effectively become an online CarMax) and technicals (shares are breaking out of a big 11-month consolidation, and upside volume has been dramatic). A drop into the upper 60s would be a sign this move was a head fake, which would cause us to cut our loss. But we see the odds favoring a sustained advance from here once the market gets out of its own way. If you don’t own any, you can buy a half-sized position here (for us, that meant a 5% stake in the Model Portfolio).


BUY—Chipotle Mexican Grill (CMG 844)—CMG continues to act just fine, benefitting from a handful of analyst upgrades, which reflect more acceptance of the firm’s turnaround story. To be honest, we’ve thought about booking partial profits in the stock, not because of any chart action but simply because, after a good-sized run, a weak market environment could result in a wave of profit taking, especially if money flows into some of the beaten-down areas (oils, transports, etc.). If we see a more sustained rotation and/or a deeper market retreat, we could sell a portion of our shares. But one thing we try not to do is think too much—as one famous investor said, there are always good reasons to get out of a winning trade, but it’s usually better to simply sit tight. We’re always keeping our eyes open, but with Chipotle’s business picking up steam and the stock showing no signs of weakness, we’ll stay on Buy—though, if you buy, we advise looking for dips toward the 25-day line (now at 810 and rising).


HOLD—Coupa Software (COUP 142)—COUP tried to hit new highs earlier this week, which is good, but it was rejected and quickly fell back in to the middle of its consolidation that began in mid July (basically 128 to 148), partly due to a poor reaction from fellow cloud software leader Anaplan (PLAN). Overall, we still think the stock is fairly well positioned (it remains north of its 50-day line, which is becoming a rarity), and we remain uber-bullish on the longer-term prospects for its business; there’s a decent chance Coupa becomes one of the core “must-have” software products for businesses as they improve the efficiency and automation of their spending. That said, the stock’s intermediate-term future is likely to come down to earnings, which are due out next Tuesday (September 3); Wall Street is looking for revenues to grow 39% and a loss of $0.10 per share, but billings growth and the outlook will be just as important. All told, we’re sticking with our game plan—a drop toward our cost near 123 would be our uncle point, but above there, we’re content to hang on and give shares a chance to resume their overall advance.


SELL ONE-THIRD, HOLD THE REST—Okta (OKTA 127)—OKTA released an excellent quarterly report last night with a bevy of strong numbers—sales rose 49%, subscription revenue was up 51% and billings leapt 42% thanks mostly to a surge in business among bigger customers (the number that are paying it at least $100k per year rose 46%). But the company is not the stock, and despite opening up a bit, OKTA fell sharply today as the sellers came out of the woodwork. We already booked partial profits (selling one-third of our shares) in late July near 133, and if you wanted to book the rest of your profit here, you could. That said, we’re not convinced the overall uptrend for the stock (or for new-age cybersecurity names) is over, and this week’s rotation out of growth and into some beaten-down names probably exacerbated the move. Taking it all into consideration, we’re going to sell one-third of what we have left, which will leave us with a bit less than half of our initial shares. And we’ll be using a stop in the mid 110s for the rest.


SOLD—Planet Fitness (PLNT 72)—We sold our remaining shares of PLNT soon after our last issue as the stock fell through our mental stop. It’s bounced a bit since then (rebounding from its 200-day line), but there’s a mountain of resistance above here. We’re not necessarily predicting a major decline for the stock, but simply feel upside is likely limited and there will be better opportunities during the next leg up. Overall, our gain on PLNT was just shy of 2% of the portfolio—not a home run, but a solid base hit.


HOLD—ProShares Ultra S&P 500 Fund (SSO 124)—We continue to hold a decent-sized position in SSO, which is a leveraged long fund that moves twice the S&P 500 (up or down) on a daily basis. Obviously, in a tough, choppy market correction, such a position doesn’t do us any good, and we did sell a chunk of shares when the Tides turned down. But right now, most of the longer-term evidence is still positive, so we’re determined to give the position some rope, thinking the next major move for the S&P is likely up. (The rotation seen for part of this week is also a plus.) As we write on page 6, a Cabot Trend Lines sell signal would change our thinking, but we don’t anticipate that sort of thing. If you own some SSO, we advise sitting tight.


HOLD—Snap (SNAP 16)—SNAP isn’t a horror show, but we’re placing the stock on Hold as the firm’s powerful earnings move late last month has faded, with the stock dipping a bit below its 50-day line on Tuesday. That’s not a sin given the market environment, especially as the decline has been relatively gradual (i.e., no massive selling spree). And nothing has changed with the fundamental story; there were reports of a new Instagram service in testing that allows users to share more info with a small group of users (like location and speed), which brought out the sellers. But we don’t see that affecting Snapchat at all. If anything, we think business is gaining momentum due to management’s various moves and new products. A drop down to 14 or so (the prior low) would have us cutting the loss, but at this point we’re giving SNAP a chance to find support and, eventually, resume its advance.


Watch List

Guardant Health (GH 94): GH has wobbled post-earnings, but given the market, the action is acceptable. We still think this story—potentially becoming a new standard in biopsies, diagnosing cancers via bloodwork instead of tissue samples—is about as big as it gets.

HubSpot (HUBS 202): HUBS wasn’t a leader in the software space for much of this year, but now that’s a good thing—with the weak hands out, HUBS’ sterling growth record and Q2 report has catapulted the stock to new highs.

Inphi (IPHI 61): After breaking out of a 28-month consolidation and rallying 13 weeks in a row, IPHI is pulling back on low volume to its 50-day line. It looks like a good setup—if the market can find its footing.

MasTec (MTZ 63): If the recent rotation seen in the market continues, we think MasTec could benefit—it’s a top infrastructure provider for energy, power generation and communications markets, so it’s benefitting from the pipeline, alternative energy and 5G buildouts. Better yet, the stock recently broke out of a 15-month base.

Novocure (NVCR 92): NVCR raced higher nine weeks in a row, decisively ramping to new all-time highs on the back of its potentially revolutionary Optune cancer treatment system. It’s finally begun to pull back a bit, though we’re looking for dips into the mid 80s before pulling the trigger.

Zoom Video (ZM 91): As we write on page 6, ZM has great fundamentals, and the stock is in its 10th week of consolidation after a strong post-IPO advance. Earnings, which are coming on September 5, could provide an upside catalyst.

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.

Floor & Décor (FND 48)—Investing in anything that’s directly tied to the housing sector during the past year has been an uphill battle, but the plunge in mortgage rates and a healthy U.S. consumer have breathed new life into the sector. Floor & Décor has long been a favorite fundamental story of ours: The firm has 106 warehouse-style stores (75,000 square feet) that feature everything needed for hard surface flooring, be it tile (27% of sales), decorative accessories (19%), laminate/vinyl (18%), installation materials and tools (16%), wood (12%) or stone (7%). All told, about 60% of customers are professionals, while 40% are do-it-yourselfers. The firm has a bunch of advantages over competitors, which offer smaller floor formats, fewer types of flooring products and less selection overall. Throw in the fact that hard surfaces are gaining share (less carpet, more hardwood floors, etc.) and Floor & Décor has been growing nicely and has a bright future. Same-store sales growth has slowed a bit (it was north of 10% many years in a row), but is still cranking out at 3% to 6% rates, while management is keeping up its rapid store expansion plan—the top brass is aiming to boost its warehouses by 20% this year, and long term, believes there’s room for 400 stores in the U.S. Despite the housing slowdown, the company posted solid numbers in Q2 (sales up 20%, earnings up 26%, cash flow up 31%) and raised estimates for the rest of the year—Wall Street now sees earnings up 14% this year, but that figure accelerating to 21% in 2020. As for the stock it fell off a cliff during the second half of last year, rebounded well through April and then spent three months correcting and consolidating. But now perception may be changing, as FND gapped up on earnings at the start of August and has continued higher as rates have plunged. It’s an intriguing, growth-oriented retailer whose sector is coming back into favor.

Grocery Outlet (GO 42)—There aren’t many grocery stores that make it onto our screens, but recent IPO Grocery Outlet is one. The company is an “extreme value” grocer of name-brand consumables, offering a treasure hunt-type of experience for consumers that, according to the company, save 40% on items compared to conventional grocers and a 20% savings compared to discounters. (Grocery Outlet requires no membership fees or bulk purchases, either.) Stores are relatively small, feature wide aisles and have a “WOW” wall where all the best deals of the day are found. Interestingly, each store is operated by an independent, local operator that usually favors local goods; that said, the company as a whole gets merchandise at a significant discount, targeting manufacturer overruns, approaching “sell by” dates and packaging changes. As for the store count, the firm currently operates 330 stores in just six states—but it believes it can double its store base just in those states (!), with an additional 1,600 possible in neighboring states. The firm’s growth won’t blow your doors off but it’s very steady—sales have risen between 10% and 12% each of the past five quarters (thanks in part of healthy same-store sales, which were up 5.8% in Q2), and earnings look set to grow decently from here ($0.71 per share this year, then rising 17% in 2020). The valuation isn’t cheap (59 times earnings estimates), but the bet is that the company can crank out years of mid-teens growth. As for the stock, frankly, it’s way too thin for us right now, but the trading since the IPO (including GO’s earnings pop a couple of weeks ago) is encouraging. We’re OK nibbling around here with a loose stop, though we’re more interested in keeping an eye on it and seeing if the stock can “grow up” (gain liquidity and attract more big investors) going forward. It certainly has the fundamental story to enjoy a sustained run.

Zoom Video (ZM 91)—We’re always looking at the strongest stocks in the market (or, in today’s environment, the most resilient), but we also like to keep an eye on stocks in major uptrends that are in the midst of building new launching pads—oftentimes they’re playing possum for their next move up. One that fits in that category today is Zoom Video, which has developed a better mousetrap when it comes to video and web conferencing, an industry that needed it badly (despite all the advances in technology, 94% of virtual meetings are still audio only!). Zoom’s solution is built from the ground up for cloud and video (including a proprietary multimedia router optimized for the cloud that can deliver a quality experience even if 40% of packets are lost or delayed), as opposed to competitors, who built videoconferencing solutions on top of those that were made to handle voice or chat. Simply put, Zoom’s various solutions (including new-age phone offerings for the mobile workforce) just works better, and that’s led to a torrent of companies signing up. In Q1, revenues grew 103%, while the number of larger accounts (six figures in contract value) gained 120% and the same-customer growth rate was north of 30% for the fourth consecutive quarter, which is extremely impressive. The bottom line is already in the black, too! All told, it’s a $40 billion opportunity, so Zoom is just scratching the surface of its potential. Back to the stock, it had a great post IPO run from around 60 when it opened for trading to 107 in June, and has since had a 10-week rest. Earnings are due out September 5—a powerful earnings gap could be buyable depending on what the market’s like. ZM is on our watch list.

Keeping a Close Eye on Cabot Trend Lines

When it comes to the market’s longer-term outlook, we are optimistic for a variety of reasons: Many leading stocks are holding up well or pulling back normally, numerous studies of market action suggest the bull market will see higher prices down the road; investor sentiment remains skeptical at best; and, of course, our own Cabot Trend Lines are still positive, telling us the long-term trend is still pointed up.

If any of those factors change, it could affect our view. But right now, we’re keying most off the Cabot Trend Lines, which are our most dependable market timing indicator. Granted, the Trend Lines don’t give advice on the news of the day, predict how the trade war will play out or tell us when the next recession will be—and that’s a good thing! What the Trend Lines do very well is keep us on the right side of the market’s longer-term position.

(In fact, if you bought the Nasdaq on every buy signal and went to cash on every sell signal, you’d have outperformed the index by 2.2% annually for the past 19 years—and that says nothing about the performance of leading growth stocks.)

Anyway, the answer to the question of what would probably change us from cautious to outright defensive would likely be a sell signal from the Trend Lines, which is triggered when both major indexes (S&P 500 and Nasdaq) close two straight weeks below their respective 35-week moving averages. Last week came close (both closed less than a percent above those lines), but they were still above.

We were in a similar situation late last year. There weren’t many serious indications of a huge downdraft coming, but the market began tanking October 1, our Trend Lines turned negative in short order (on October 19) and by the middle of the next week we had a cash position of 71%! The market, of course, had a horrid two months after that, with the S&P (down 15% to its low) and Nasdaq (down 17%) falling off a cliff from the sell signal.

Obviously, that’s just one example; a sell signal doesn’t guarantee a harrowing plunge and won’t necessarily force us to build 70%-plus cash. And this week’s rally gives the indicator a bit more breathing room. But looking ahead, the next tipping point would likely be the Trend Lines. We’re watching them closely.

The Upside of a Down Market

Nobody loves market corrections (except crotchety bears), but they’re a fact of life, and the best thing to do (once you prune your worst performers) is to use them to find out which stocks are holding up best, and way we like to do that is using relative strength.

For instance, look at the Nasdaq daily chart here; you’ll see three sharp dips to the 7,700 range since the start of August. Technically, those lows have been a bit higher each time, but in ballpark terms, we’ve seen three selling waves down to the same area.

So what can you do? When evaluating stocks with great fundamental stories and growth, as well as generally uptrending charts, take a look at their recent action. Are they forming much higher lows, indicating strength, or tumbling downhill, underperforming the market? It’s a simple concept, but it’s a great way to focus on names that look ready to go higher— if the market gets its act together.

For instance, look at CyberArk (CYBR), which was a leading cybersecurity name for the first half of the year. But, while the long-term trend is up, its recent action isn’t inspiring—the stock plunged to 115 in early August, and has actually etched two slightly lower lows during the Nasdaq’s following two selloffs.

Now look at HubSpot (HUBS), which looks like a fresher leader in the cloud software sector. In early August, the stock plunged into the mid 160s, then gapped up on earnings. The next low was in the low 180s. And during this last pullback, HUBS has only dipped to 198.

With the market not out of the woods, a stock like HUBS can still go bad in a hurry if we get a sustained downleg. But when building your watch list, you want to look for this sort of action, as it’s usually a sign the sellers are out and big investors are accumulating on dips.


Cabot Market Timing Indicators

The major indexes remain all over the place, with another dramatic move today. But overall, not much has changed—with our Cabot Tides still negative, we’re remaining cautious, though the positive Trend Lines and Real Money Index tell us not to get overly defensive.

Cabot Trend Lines: Bullish

The Cabot Trend Lines were extended a month ago, but the correction since then has changed that—at the close of last week, both the S&P 500 (by 0.6%) and Nasdaq (by 0.7%) barely closed above their 35-week lines. As we write on page 6, we’re watching the Trend Lines closely—a sell signal would have us getting overall defensive, but the indicator is still bullish and this week’s rally has helped the cause.



Cabot Tides: Bearish

Our Cabot Tides remains negative, as all five of the indexes we track (including the S&P 400 Midcap, shown here) below key moving averages. Today’s rally pushed many back toward the top of their August trading ranges, so some upside follow-through would be interesting. But just going with the evidence, the intermediate-term trend isn’t positive, so we continue to advise playing some defense.


 Cabot Real Money Index: Positive

Our Real Money Index is a secondary indicator, telling us how investors are acting with their own dollars by measuring the flow of cash into or out of all equity funds and ETFs during the past five weeks. And as the market has faded, we’re seeing a wave of redemptions: During the past five weeks, $38 billion has whooshed out of these funds, including huge withdrawals two of the past three weeks. Once the market bottoms, there should be plenty of cash on the sideline to drive a meaningful rally.




Send questions or comments to mike@cabotwealth.com.
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