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Cabot Growth Investor 1444

Our Cabot Tides buy signal earlier this week has prompted us to put some cash back to work; we now own seven stocks, though we still have a good-sized cash position of around 46%. As always, we’ll just take it as it comes, but so far leading growth stocks and the major indexes remain in good shape.

In tonight’s issue, we review a little about how we run our ship, as well as dig deeper into Cabot’s Aggression Index, which can also provide some clues for the overall market. And, of course, we dive into all of our stocks and some fresh ideas should the buying pressures grow.

Cabot Growth Investor 1444

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So Far, So Good
It was exactly one month ago that the S&P hit its crash lows, down more than 35% from its highs five weeks prior. Given the selling extremes, it was normal to expect a bounce, which began right away. But during the past couple of weeks, the rally has begun to look abnormal … in a good way.

The most important “abnormally good” piece of evidence is our own Cabot Tides, which flipped to a buy signal earlier this week, telling us the intermediate-term trend has turned up. We also like the fact that the S&P 500 (57%) and Nasdaq (64%) have recouped more of their crash declines than other “normal” bounces, a sign of strength.

And of course, we love the action in growth stocks, many of which held up relatively well during the crash (holding 200-day lines, etc.) and have spiked back toward, or in some cases out to, new high ground. (The Model Portfolio remains solidly in the black for the year; it’s always good to be in a strong position during uncertain times.) Throw in still-sour investor sentiment by many measures and there’s no question the evidence has improved enough to put some money to work—which we did in Monday’s special bulletin.

Obviously, the upmove of the past month doesn’t mean the world is all peaches and cream. Our longer-term Cabot Trend Lines, while recovering lots of ground, are still negative, and most stocks are in a similar same boat; coming into today, about 72% of all stocks were below their 50-day lines and 81% were south of their 200-day lines. That means there remain many potential sellers (who want to get out even) on the way up, which combined with a market that’s still news-driven (earnings reports, stimulus packages, virus tallies), suggests any upmove is likely to have some potholes.

Thus, while market timing signals are obviously important, it’s what you do with them that counts most—both in terms of what you buy (stock selection) and how much you buy (portfolio management). In this case, we put 20% of the Model Portfolio to work in three potential leaders, but are still holding a sizable cash position.

Going forward, one of our main “tasks” is to simply follow the system—which means staying laser focused on the market and avoiding the news. Earlier this week, headlines of negative oil prices (!) could have had you shorting everything in sight, while news of states reopening their economies may have had you buying with both fists. Let everyone else (over)react to each piece of news and market wiggle—you’ll get better results sticking with the evidence, especially the market’s trend and the action of leading growth stocks.
What To Do Now
As always, if things change, then we’ll change along with it, but the Tides buy signal and other positives prompted us to add a full position in Okta (OKTA) and half positions in both Cloudflare (NET) and Chewy (CHWY) earlier this week. That leaves us with a cash position of 46%.

Model Portfolio Update
After mostly hiding in the bunker for the past few weeks, our Cabot Tides buy signal prompted us to put some of our huge cash position (hovering near 70% in recent weeks) to work. As we wrote in the last issue, we were targeting putting 15% to 25% of the portfolio back to work on a buy signal, and we split the difference on Monday’s special bulletin, putting 20% into three new stocks.

As always, we’ll just take our cues from the market going forward—should the rally gain steam, we’ll extend our line through new purchases and/or averaging up in our two half positions. (By the way, see our writeup later in this issue about how we run our portfolio, the definition of “normal” and “half” position sizes and more.) Should the rally peter out, we’ll hold off new buying and make sure nothing gets away from us on the downside.

However, within the context of the extreme volatility out there, “gaining steam” and “petering out” doesn’t involve just a day or two of good/bad action among the market and stocks—we’ll need to see something a bit more substantial to either pare back or floor the accelerator. Right here, though, we’ll stick with our seven positions and see what comes.

Current Recommendations

StockNo. of SharesPortfolio WeightingsPrice BoughtDate BoughtPrice on 4/23/20ProfitRating
Chewy (CHWY)1,5955%454/20/2043-3%Buy a Half
Cloudflare (NET)2,7155%264/20/2024-10%Buy a Half
Dexcom (DXCM)3869%21611/15/1932249%Buy
DocuSign (DOCU)1,31010%659/13/1910257%Buy
Okta (OKTA)94710%1504/20/201521%Buy
Teladoc (TDOC)6318%7811/01/19188140%Hold
Vertex Pharmaceuticals (VRTX)4148%19911/8/1926834%Buy
CASH$661,27446%

Chewy (CHWY 43)—We never thought we’d be recommending a pet food and supplies stock in the Model Portfolio, but Chewy’s story presents a great mix of steady, reliable long-term growth, as well as defensive characteristics. On the growth side of the equation, Chewy looks to be the Amazon of the giant pet supplies industry ($100 billion of sales in 2020!)—it has 13.5 million active customers (up 27% from a year ago) that are buying more than ever (average purchase up 10%), thanks to greater brand recognition and new products (including pharmacy offerings). And the reliability of that growth should be hard to match—70% of the firm’s revenues are from auto-shipped products (much of them staples that are needed every month or two), and overall, pet supply sales are recession resistant (they grew throughout 2008-2009). Similar to, say, a Bookings.com (formerly Priceline) many years ago, Chewy looks to be the main beneficiary as a gigantic industry sees sales shift from in-store to online. There’s no reason the firm’s top line can’t expand 15% to 25% for many years (analysts see it rising 32% in 2020), and while earnings are in the red, free cash flow hit breakeven last year and is likely to rise going forward. The stock is both new (public last June) and powerful (new highs on big volume), acting like a fresh leader. If you haven’t bought in, you can start with a half-sized position (5% of the portfolio) here or on any weakness. We’ll be using an initial loss limit in the 36 area (nearly 20% below our cost). BUY A HALF.

CHWY-20200422

Cloudflare (NET 24)—Cloudflare won’t be a household name, and if you dive into its product offerings and language, you’re bound to throw up your hands in confusion (unless you’re a network engineer). But the bottom line is this: Big, global companies need top-notch performance, security and reliability for their customer-facing products (websites, apps, etc.), but instead of all of them trying to build out their own network to provide that, they’re increasingly relying on Cloudflare’s, which offers the reach (200 cities around the world), speed (99% of the world’s internet population is within 100 milliseconds), control (can re-route traffic how they see fit) and security (including a client’s entire network, not just websites and apps) that IT teams want and need. The firm has 82,000 paying customers (including 13% of the Fortune 1000), and sales are expected to grow north of 30% both this year and next. As for the stock, NET is very squirrelly and relatively low-priced, and we’ve already experienced some of its volatility. But the action has been normal and we’re fine buying a half-sized position here if you’re not yet in—the portfolio’s loss limit will be around 21 or so, which is below its 50-day line. Earnings are due out May 7. BUY A HALF.

NET-20200422

Dexcom (DXCM 322)—DXCM continues to act like an institutional leading stock, including its breakout above 280 last week and strong push higher since. Bigger picture, we continue to think the stock has plenty of gas left in the tank, both chart-wise (the original breakout was back in November, so the advance is far from overripe) and fundamentally (less than 40% of Type 1 and 15% of Type 2 diabetics in the U.S. are using any type of continuous glucose monitor—and penetration is far lower overseas). That said, the immediate future will likely be determined by next week’s (April 28) quarterly report—analysts are looking for revenues of $359 million and earnings of 14 cents per share, but with the virus, small misses or beats in Q1 likely aren’t as important as management’s outlook for the rest of the year. Given the Tides buy signal and DXCM’s strength, we’ll restore our Buy rating, but realizing that earnings are right around the corner, you should keep any new positions small. If you’re already in, just sit tight. BUY.

DXCM-20200422

DocuSign (DOCU 102)—DOCU was just above 90 when the market crash began, so the fact that it’s about 10 points above that today tells you all you need to know about the stock’s strength. Of course, the software sector as a whole has been wobbly from time to time (DOCU’s three-day, 20-point decline at the start of April was an example of that), and with the stock’s 50-day line down around 87, another pothole wouldn’t be surprising. But nothing has changed with the overall story here—DocuSign’s combination of rapid, reliable growth is unique, especially in this economic environment, and that should keep big investors interested. Like many peers, the company doesn’t have another quarterly report out until early June, which eliminates some near-term event risk. All in all, we’ll go back to Buy, though as always, try to get in after a little weakness. BUY.

DOCU-20200422

Okta (OKTA 152)—We made solid money with Okta last year, and we’re going back to the well after the stock took nine-plus months to consolidate. The firm remains our favorite cybersecurity story: Okta’s identity solutions are becoming must-haves in today’s cloud-centric world, both for corporate use (allowing employees to access a firm’s data or apps from any device, anywhere—but not see things they’re not supposed to) and consumer use (getting the right offers and information after logging in). Growth is likely to slow a bit from the recent 45%-plus range, but at its Investor Day earlier this month, management said it’s targeting 30% to 35% annual top-line growth through 2023, with free cash flow (which is already solidly in the black) growing 10-fold over that time. Obviously, four-year projections can quickly go up in smoke, so that’s nothing to hang your hat on, but it’s that kind of rapid and reliable growth that big investors (859 funds now own shares) gravitate toward. We added a “full” position (10% of the portfolio) earlier this week. On the downside, our initial loss limit will be in the upper 120s (around 15% off our entry point, give or take). BUY.

OKTA-20200422

Teladoc (TDOC 188)—TDOC has been one of the top performers in the market all year, thanks at first to great business momentum (on-boarding millions of members from UnitedHealth, etc.) and M&A (acquiring InTouch made Teladoc dominant both in and outside of hospitals), and since February, because of the expectation that the virus would make 2020 the breakout year for virtual care. On the latter point, that certainly appears to be the case, with Teladoc already guiding Q1 revenues and cash flow above expectations and saying it’s routinely providing north of 20,000 virtual doctor’s visits per day in the U.S. alone, double that of early March. The next big update comes next Wednesday (April 29), when the firm will report full Q1 results and share its outlook going forward. The stock remains very strong, hitting new highs today, though it’s extended above its 25-day (near 159) and 50-day lines (near 142). We’re not dead set against a small position (preferably on some sort of shakeout) ahead of earnings if you don’t own any, but officially, we’ll stay on Hold given the stock’s big run already this year and the upcoming report. A post-earnings pullback or quiet period could offer a more solid entry point. HOLD.

TDOC-20200422

Vertex Pharmaceuticals (VRTX 268)—Vertex has been quiet on the news front this month, but in this case, no news is good news—the firm’s early- and late-March updates both said that its supply chain was in good shape and that there was no change to its bullish 2020 financial guidance. And that’s been good enough for big investors, who drove the stock to new highs earlier this month and have kept clicking the buy button since. VRTX is the third of our stocks that will report Q1 results next week (Wednesday, April 29), and while a little post-earnings selling is always a possibility, the odds favor that dips will be supported given the solid earnings outlook. We’ll go back to Buy, but similar to Dexcom, we advise keeping any new positions small given the upcoming report. BUY.

VRTX-20200422

Watch List

  • Inphi (IPHI 97): IPHI remains very strong, bolstered by a positive Q1 pre-announcement earlier this week. (It even withstood a dilutive convertible bond offering, too.) A shakeout or rest period could mark a solid entry point, though earnings are likely out in early May.
  • Netflix (NFLX 427): Netflix reported another fine quarter Tuesday night (sales up 28%, earnings up 107%), and while the stock wobbled a bit, it’s holding its recent breakout just fine.
  • Smartsheet (SMAR 49): Cloud software stocks have been choppy, but some are hanging out near all-time highs, including SMAR, which wasn’t as “hot” as some others (not as overplayed) last year but has fantastic fundamentals.
  • Wingstop (WING 109): After a huge drop with the market’s crash, WING has stormed back to new highs. We think this cookie-cutter story has years of growth ahead of it. See more below.
  • Zoom Video (ZM 169): ZM has had its ups and downs lately due to security and competitive concerns, but it kissed fresh highs today and every indication is that business is in great shape.

Other Stocks of Interest
Wingstop (WING 109)—We’re always up for a good cookie-cutter story (a retail operation with a successful concept that can grow partly just by opening more stores), mostly because they provide the solid, reliable growth that entices big investors to build big positions. Wingstop is probably our favorite cookie-cutter outfit these days, with a simple, straightforward story that should lead to many years of great growth. The company operates 1,413 small format (~1,700 square feet) restaurants all over the U.S., offering wings (of course) in a variety of flavors, plus the usual sides (fries, shakes, dips and sauces) and drinks. Even before the virus shut-in, about 80% of the firm’s sales were takeout or delivery (and 40% of orders came digitally), so the company has been able to transition seamlessly to the new reality; in fact, two weeks ago, the company said same-store sales remained strong throughout the first quarter and actually picked up steam a bit toward the end of March. Beyond the virus’ impact, though, this is a very big longer-term story. Management is aiming to make Wingstop a top 10 global restaurant brand, seeing the potential to more than quadruple the number of locations (more than 3,000 in the U.S., plus another 3,000-plus overseas) over time; last year, it expanded its restaurant count by around 10%, and even in the first quarter, it opened 28 new locations. Analysts have fairly tame estimates for the next few quarters (low- to mid-teens sales and earnings growth), though given the strong pace of restaurant openings and same-store sales growth (in the 9% range for Q1 after a 12% bump for all of 2019), that could prove conservative. As for the stock, it went over the falls during the panic but hsa staged a jaw-dropping recovery to new highs. WING is on our watch list, though we’d prefer to see some pullback or tightness. Earnings are due out May 6.

WING-20200422

Livongo (LVGO 41)—We already have two pure-play medical firms in the Model Portfolio (DXCM and VRTX) and another (TDOC) that’s at least somewhat linked, so we’re not likely to pile into another one. But if we were, Livongo might be the one we’d buy, as it looks like a new fresh, new leader with a differentiated product offering. The story revolves around the 140 million adults in the U.S. who suffer from chronic ailments (40% of whom have two or more), yet there hasn’t been a service that continually helps those in need. Enter Livongo, which offers technology-enabled teaching and support services to those with diabetes (the first market it entered; it uses Dexcom’s CGMs by the way), weight management, behavioral health and hypertension, giving customers data but most importantly frequent updates and actionable alerts (triggered using its proprietary programming) and 24/7 monitoring and support. The product is popular because it works, resulting in healthier outcomes for patients (and cost savings for health plans and employers, too); 30% of the Fortune 500 are already clients, as are CVS and Express Scripts. The growth numbers have been excellent, with rapid, triple-digit revenue growth (up 137% in Q4) and strong retention rates (94%), and while growth should slow a bit, the firm continues to top expectations—on April 7, the top brass said Q1 sales would beat estimates (up 104% from a year ago) and that client launches and member enrollment were also running strong. The stock came public last July and went through the wringer for the next few months, but it’s completely changed character since the market bottom, soaring higher on big volume both before and after the pre-announcement. (Full Q1 results are coming on May 6.) Pullbacks of two or three points would be tempting if you want in.

LVGO-20200422

Newmont (NEM 62)—We’ve never been (and never will be) gold bugs, but the setup in the precious metals sector has caught our eye for a few reasons. First, of course, with the world turned upside down, demand for safe havens like gold has increased, which has kept prices elevated. Second, the group has been out of favor for a very long time; the Gold Miners fund (GDX, chart not shown) is still 50% off its 2011 peak and hasn’t gone anywhere for four years. And third, that lack of investor love has forced most players in the industry to focus less on speculative growth and more on consolidation (M&A) and cold, hard cash flow. Newmont is the biggest gold producer in the world, thanks in part to its buyout of Goldcorp last year, and while production growth isn’t likely to be anything to write home about (annual gold output should hover just above six million ounces for many years, though higher output of some other metals should help over time), the firm looks set to crank out tons of cash in the years ahead; if gold averages its current $1,600 per ounce, Newmont is likely to produce a whopping $2.6 billion of cash annually over the next five years, which is more than enough to support its solid dividend ($1 per share annually, yield of 1.7%), expansion plans, debt reduction, share buybacks and even some further M&A if opportunities arise. Of course, multi-year forecasts of gold prices are next to worthless, but the point is that Newmont is one of the most levered companies to gold (every $100 up or down changes cash flow by $400 million per year, on average), so if the yellow metal enjoys a sustained upmove, Newmont could be up to its gills in cash. As it stands today, analysts see earnings up 60% this year and another 35% next. Looking at the stock, NEM actually broke out of a multi-year base in February, and while it briefly got hammered during the crash, it’s rocketed back to higher highs, showing no signs of any selling. Like most tennis ball charts, it’s near-term extended, but if you’re looking for something outside of traditional growth, NEM is one to consider.

NEM-20200422

Cabot’s Aggression Index Can Provide Clues to the Market, Too
The more we study the relative strength of the Nasdaq (dominated by internet, software, consumer electronics and chip stocks—all growth-oriented) compared to the Consumer Staples Fund (XLP, which owns defensive stalwarts like Proctor & Gamble, Coca-Cola, Walmart, Altria and Costco), the more optimistic we are it can become an integral part of our market timing system.

We call it the relationship between the two Cabot’s Aggression Index because it gives us a quick and dirty view of what big investors are doing with their money. If the Nasdaq is outperforming in a sustained way (holding above the lower of the 10-week and 40-week moving averages), institutions aren’t shying away from fast-moving growth stocks. But if the stodgy XLP is leading the way (if the Index is below the lower moving average), the message is that mutual, pension and hedge fund managers are playing it relatively safe. In that way, the indicator provides value in telling us when to step on the gas, vs. when to play it a bit safer during uptrends.

However, we’re also seeing value in it being a leading indicator for the market as a whole as we flip through the past 20 years of action.

For instance, look at the action near the tail end of the past two gigantic bear markets. Back in the 2000-2003 bear, the market formed three lows in July 2002, October 2002 and finally March 2003 before taking off on the upside. What’s interesting is the way the Aggression Index actually bottomed in September 2002, turned positive in October and remained positive right through the market’s aMarch blastoff.

Aggression Index 2004

Fast forward to 2009 and it was a similar situation. The Aggression Index actually bottomed in November 2008, turned positive in January and (notwithstanding one little wiggle in late February) remained bullish right through the March bottom. (Interestingly, the Index’s prior signal was a sell back in June 2008, a full three months before Lehman blew up. Not bad.)

Aggression Index 2009

It’s occasionally worked in the other direction, too. Back in 2011, for instance, the Index topped in February and officially turned negative at the start of May; two months later, the market imploded nearly 20% in a matter of days.

Now, to be clear, the Aggression Index doesn’t usually lead the market; more often than not it moves in concert with it. That’s what we’ve seen so far during the virus crash and recovery, with it peaking in February and bottoming with the major indexes in late March. The Index is effectively neutral here—above its moving averages, but those moving averages are flat or down.

Aggression Index 2020

As we wrote above, we’re optimistic about the Aggression Index—it could even earn a place on our market timing page. For now, we’ll be looking to see if it offers any clues for growth stocks (and the overall market), especially as stocks encounter another round of bad news.

How We Run Our Ship
Seeing as how we put some money to work earlier this week, we’ve gotten a bunch of questions on how we run our ship—what exactly does a “full” position mean, or a half for that matter? What about stops or price targets? All good questions, so we’ll address them here.

First, in the Model Portfolio, our “full” position size is 10% of the account—so if we had a $100,000 account, we’d buy $10,000 of a new stock. Ideally, in a perfect world, the portfolio will have 10 positions when fully invested … though things are rarely perfect. We don’t have a strict maximum number of stocks, but it almost never gets north of 12; we like to stay relatively concentrated.

Second, sometimes, due to the market environment or the volatility of the stock, we might start with a “half” position (5% of the portfolio’s total value), which allows us to give the position more room to wiggle around if necessary. The idea is to buy the second half down the road if we develop a profit. (If we do, we list our average price of the two buys in the Model Portfolio table.)

Third, for stops, we usually favor mental stops (as opposed to in-the-market stops) and we usually use areas of a point or two (instead of to-the-penny limits), both of which give us a little leeway when a stock is close to the edge. We almost always will write about the area we’re watching if a stock is beginning to act funky.

However, it’s worth noting that our selling criteria don’t just revolve around stops. Frequently we will take some partial profits on the way up, as well as taking into consideration a stock’s position size (if something has had a huge run and makes up 20% of our portfolio, we’re more apt to trim), the overall portfolio’s positioning (are we craving more cash?) and what’s going on in the market (growth in favor? market timing indicators?). We don’t use price targets, as the goal is to develop some bigger winners.

Most important, whether it’s buy, sell or hold, we’ll let you know what to do and when to do it. And if you have any questions, don’t hesitate to email me directly at mike@cabotwealth.com.

Cabot Market Timing Indicators
The market’s recovery has been strong enough to flip our Cabot Tides to positive, which, along with some solid action among growth stocks, prompted us to put some money to work. We’re open to extending our line, but that will be based on the action of the market (and our indicators) and growth stocks going ahead.

Cabot Trend Lines: Bearish
Our Cabot Trend Lines have made up a lot of ground during the past two weeks—as of last Friday’s close, the S&P was 5.1% below its 35-week line, though the Nasdaq was actually 2% above its trend line. For a fresh buy signal, we need to see both indexes close two straight weeks north of their respective trend lines. Until that happens, the longer-term trend is iffy, which is a reason to go slow on the buy side.

Cabot Trendlines

Cabot Tides: Bullish
Our Cabot Tides have returned to positive territory for the first time since late February, with all five of the indexes we track (including the Nasdaq, which is the strongest of the indexes; daily chart shown here) above their lower (25-day) moving averages, and those moving averages are now advancing. There’s some breathing room, as the market could withstand a 4%-ish drop without cracking the new intermediate-term uptrend. All in all, the Tides green light tells us to become more constructive.

NasdaqTides

Cabot Real Money Index: Positive
The Real Money Index has moved higher as investors have put a modest amount of money to work in equity funds and ETFs each of the past three weeks, which isn’t surprising. The more telling action was the panic seen near the market lows, when the five-week sum of outflows reached their greatest levels since December 2018—a sign that many weak hands bailed out.

Real Money Index

Charts courtesy of StockCharts.com


The next Cabot Growth Investor issue will be published on May 7, 2020.

Cabot Wealth Network
Publishing independent investment advice since 1970.

CEO & Chief Investment Strategist: Timothy Lutts
President & Publisher: Ed Coburn
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Copyright © 2020. All rights reserved. Copying or electronic transmission of this information is a violation of copyright law. For the protection of our subscribers, copyright violations will result in immediate termination of all subscriptions without refund. No Conflicts: Cabot Wealth Network exists to serve you, our readers. We derive 100% of our revenue, or close to it, from selling subscriptions to its publications. Neither Cabot Wealth Network nor our employees are compensated in any way by the companies whose stocks we recommend or providers of associated financial services. Disclaimer: Sources of information are believed to be reliable but they are not guaranteed to be complete or error-free. Recommendations, opinions or suggestions are given with the understanding that subscribers acting on information assume all risks involved. Buy/Sell Recommendations: All recommendations are made in regular issues or email alerts or updates and posted on the private subscriber web page. Performance: The performance of this portfolio is determined using the midpoint of the high and low on the day following the recommendation. Cabot’s policy is to sell any stock that shows a loss of 20% in a bull market or 15% in a bear market from the original purchase price, calculated using the current closing price. Subscribers should apply loss limits based on their own personal purchase prices.

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