WHAT TO DO NOW: Remain bullish, but continue to take things on a stock-by-stock basis. Some potholes based on earnings, rotation and news flow are certainly possible, but overall, the bull market is in good shape and most leading stocks act well. In the Model Portfolio tonight, we’re making two moves—we’re adding another half position to Snap (SNAP), which looks like a fresh leader, and we’re starting with a half-sized position (5% of the portfolio’s value) in Elastic (ESTC). Our cash position will now be around 9%.
Current Market Environment
Sellers had the upper hand today, with the Dow losing 129 points and the Nasdaq sinking 83 points.
Bigger picture, the market remains in good shape. Both of our trend-following indicators remain positive, while some secondary (sentiment remains mostly tame, especially money flows, though some data is heating up a bit) and longer-term measures (7.5% Rule, etc.) are also encouraging. Looking ahead, the path of least resistance remains up.
Right now, though, we’d probably classify the environment as positive but not powerful—yes, many major indexes hit fresh highs yesterday, but a 2% to 3% downmove would have our Tides on the fence. Moreover, we’re still seeing many leading stocks levitate higher without much power, though as earnings are reported, more of them are making decisive moves one way or the other (mostly up so far).
All told, our thoughts really haven’t changed. Intermediate and longer term, the odds strongly favor this bull market having further to run. Near term, it’s mostly about taking things on a stock-by-stock basis, as the under-the-surface action (due to rotation, as well as earnings season) is dramatic—that means being patient with your winners but also picking your spots for new buying.
In the Model Portfolio tonight, we have two moves—first, we’re going to buy another half of Snap (SNAP), which looks like a new leader, and start a new half-sized position in Elastic (ESTC). Combined, the moves will leave our cash position near 9%.
Model Portfolio
Elastic (ESTC 98) was written about in last week’s issue in “Other Stocks of Interest,” so we won’t repeat the entire story here. Suffice it to say that it has the look of a new leader in the Big Data field, with its search software having multiple applications (online consumer tools, cybersecurity, infrastructure monitoring and forecasting, etc.) that should drive rapid growth for many years. As for numbers, the 60%-plus growth in revenues and billings is always nice to see, but we enthuse about the same-customer growth rate, which has been north of 30% for 10 straight quarters, a major sign that new clients ramp spending as time goes on. The stock has built a four-month base, and starting earlier in July, has soared back to its prior highs (near 100) on huge volume. It could easily dip a few points from here, but we’re going to start with a half-sized position tomorrow (putting 5% of the Model Portfolio’s value in the stock) and look to average up on any decisive breakout. BUY A HALF.
Blackstone (BX 50) wiggled around a bit after earnings late last week, but it’s resumed its uptrend in recent days, pushing to new highs on solid volume. One big draw here is the company’s new emphasis on boosting its fee-based income, which is more dependable than one-time realizations (when it sells out of a big investment, for instance) and, hence, should attract more big investors. Not that those sporadic realizations don’t help—reports that Blackstone is looking to sell its stake (worth nearly $9 billion at current market prices) in Cheniere Energy Partners (CQP) have helped the stock and should boost distributable income going forward if the sale goes through. Bigger picture, we think this Bull Market stock works its way higher over time. Hold on if you own some, and if you don’t, we’re OK buying a little here or aiming for dips of a point or two. BUY.
Chipotle Mexican Grill (CMG 777) reported a terrific second quarter on Tuesday evening, with just about every metric topping expectations. Sales rose 13%, same-store sales lifted 10% (transactions up a healthy 7%, with the rest from higher pricing), digital sales basically doubled and accounted for 18% of all revenue and margins lifted nicely, all resulting in a solid 39% earnings boost. On the conference call, management sounded a bullish note, with some likely menu enhancements on the way (carne asada should soon be launched nationwide, and new ovens will help with quesadilla offerings and possibly, down the road, things like nachos). Analysts now see earnings up 50% this year and another 29% in 2020, and those figures are likely to trickle higher in the days ahead. As for the stock, it popped to new highs following the report, though to be fair, we don’t consider this a monster breakaway gap—just a good day that reasserts CMG’s overall uptrend. We’re fine entering here or on modest dips if you’re not yet in. BUY.
Coupa Software (COUP 143) finally ran into some selling this week, but it all looks normal thus far—the stock remains well above its moving averages and in a firm uptrend. We’re not reading too much into it, but it was also encouraging to see COUP finish higher today even as ServiceNow (NOW), a liquid leader in the cloud software field, took a modest hit on earnings. Back to COUP, some further weakness/digestion wouldn’t be surprising or abnormal, especially with the 50-day line down at 125 (though it’s rising steadily). Sit tight if you own some, and if not, aim for dips of a couple of points to get in. BUY.
Our thoughts regarding Okta (OKTA 137) haven’t changed—it’s definitely a leading stock that we believe can go higher over time, and continues to hover near its highs, so we’re sticking with our Buy rating. But we’re not leaving our brain at the door, either, recognizing that shares have had a big run in recent months and, recently, have stalled out a bit. If you don’t own any, we’re game for a small position here with a stop in the low 120s. If you own some with a good profit, hang on, though we’re still considering booking partial profits if the sellers show up in a major way (maybe on a break of the 50-day line, which is near 125). For now, though, OKTA looks fine. BUY.
Planet Fitness (PLNT 78) remains in the mid 70s as it steadies itself following the heavy-volume selling it saw in the back half of June. Earnings will be released on August 6, which will probably tell the tale—a decisive drop into the mid to upper 60s would damage the longer-term uptrend, but obviously a positive reaction would be welcome. Right here, with the stock moving sideways (no progress since late April), we’ll stay on Hold. HOLD.
ProShares Ultra S&P 500 Fund (SSO 132) has been resting in the 130 area (give or take) as the S&P 500 consolidates its strong June/early July gains. As we’ve written over the past couple of weeks, the short term is a bit of a tossup, and a dip of a few percent in SSO (possibly down toward the 50-day line near 124) wouldn’t shock us. But we’re placing most of our emphasis on the intermediate to long term, where the evidence (including the recent 7.5% Rule signal) bodes well. We added to our position last week, and are fine buying some here if you don’t own any. BUY.
Snap (SNAP 18) had the makings of a new leader when it broke out on the first day off the market’s early-June low, and yesterday’s earnings reaction added to the bullish evidence—Snap’s much-better-than-expected report (revenues up 48%; daily active users of 203 million were 11 million above estimates; significantly higher guidance for Q3) caused a buying frenzy that pushed shares to new highs. As we said when we initially bought in, SNAP might not turn into another Facebook or Google, but with unrivaled appeal to younger users (Snapchat reaches three-quarters of the 13- to 34-year-olds in the U.S.), the company has a unique offering that should drive growth for a long time to come. We bought a half-sized position initially, and similar to CMG, we do think the stock could pull back or consolidate for a bit. But the trend is clearly up, and with earnings out of the way, we’ll buy the second half now—all told, our combined cost basis should be in the low 16s, and we’ll use a loss limit on the overall position in the upper 13s. BUY ANOTHER HALF.
Twilio (TWLO 148) has been rejected by the 150 level a few times since early June, which is something we’re keeping an eye on. But overall, the stock acts fine, hovering just below all-time highs. Like most stocks, the intermediate-term path will probably be determined by earnings, which are out next Wednesday (July 31). We’ll stay on Buy, but if you grab some here, keep it small this close to the report. BUY.
Zillow (Z 49) appeared done for on Tuesday morning, with shares under pressure after news broke that Amazon teamed up with leading real estate firm Realogy (owns Century 21, Coldwell Banker and many others). But, encouragingly, Z tagged its 50-day line and proceeded to roar back on huge volume, and has held most of that rebound since. (The action supports our thought that competitive fears in the gargantuan housing market are overblown.) A drop to 44 or so would look iffy and probably have us cutting bait, but at this point it appears big investors took advantage of the “bad news” to start/add to their positions. Earnings are due out August 7, which will be vital, but given the action, we’re OK buying a half-sized position here. BUY A HALF.
Watch List
Carvana (CVNA 66): CVNA came close to breaking down, but it’s leapt off the lows of its base this week. A strong gap on earnings (due out August 7) would be very tempting.
Inphi (IPHI 62): We’re very encouraged by the action of chip stocks (more on that in next week’s issue), and Inphi looks like one of the leaders. The trick is that earnings are due out next week—a reasonable shakeout could provide an opportunity.
Novocure (NVCR 77): NVCR looks like a leading glamour stock, with what’s basically been a straight-up advance since early May, including today’s pop higher on earnings. A controlled dip for a couple of weeks would probably mark a good entry.
Roku (ROKU 107): We’re still watching ROKU, though with earnings out August 7, we’ll likely hold off and see what comes.
That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, August 1. As always, we’ll send a Special Bulletin should we have any changes before then.
