February 27, 2019

Following a bear market such as we saw end on Dec. 24, the best opportunities are found in the first batch of growth stocks out of the gate. This means buying the first breakouts and the first set of cheater entrances. It also assumes that growth stocks are leading the way higher, and not value or defensive sectors.

We are now nine weeks into what is believed to be a new bull market. The initial wave of breakouts has largely occurred. Premium subscribers will notice that these names remain on the Watch List. This is to prepare us for secondary entry points forming, a number of which are expected to be breakouts from flat base patterns.

This week a number of growth names “turned the corner” and began to make progress up the right side of their bases. A couple of examples are Farfetch (FTCH) and Pivotal Software (PVTL).

While these latecomers to the party have considerable work to do before being considered actionable, their better behavior underscores a key observation: A fair amount of newer, fresher merchandise is being bought up. Instead of the liquid glamours leading the charge, as was the case in recent years, more-speculative glamours like Stoneco (STNE) and Guardant Health (GH) are at the forefront.

This says much about the speculative sentiment.

Otherwise, as noted in recent reports, the number of pattern setups in the growth sector is not what it was several weeks ago. This is normal and to be expected nine weeks into an intermediate- or long-term advance. Aggressive-growth players should remain disciplined to only take those setups that meet their plan (whether it is less-aggressive, aggressive, or very aggressive) and the patience to wait for them.

It is important to let the market come to us and not the other way around.

Among the names, Avalara (AVLR) is a recent new issue, coming public in June and soaring as much as 147% on its opening day. (IPOs that advance 50% or more in their first two months are of particular interest as potential future market leaders.)

The cloud software provider shows a 50-cent-a-share loss for ’19 followed by a 14-cent loss for ’20. Sales have increased 26% and 33% in the two recent quarters. A 96 RS stock in a 94 RS group with an A- acc/dist rating.

Two weeks ago, earnings came out and price surged 16.5% on +697% volume. After four days of selling, a major accumulation day kicked in last Thursday. Price is closing in on the handle high of its eight-month, cup-with-handle pattern. The stock can be taken above the 53.88 handle high.

Since the Christmas Eve low, AVLR is +81% vs. the Nasdaq’s +22%. This is raw relative strength.

(I have previously mentioned that 10%-12% deep handles, or less, are preferred. Above 15% would be considered excessive. Sometimes it is difficult to see exactly how deep a handle is without doing the calculation. In AVLR’s case, it is 11.4% deep.)

Caredx (CDNA) has been talked about in these reports going back to the service’s inception in early November. It was listed on the Tuesday evening Focus List. Wednesday it finally broke out, up 8.8% on +108% volume. It is 2% past the pivot point, and is still buyable (at 5% past the pivot, a stock is considered extended and represents excessive risk unless a smaller position size is used).

A 99 RS stock with an A- acc/dist rating. Earnings expected Mar. 6.

Cronos Group (CRON) was mentioned in Sunday’s report (“With another day of handle formation, the stock could be taken above the 25.10 high of this pullback. That would be an aggressive entry for sure”).

Since Sunday’s comment, price has pulled back and is three days into a handle for this three-and-a-half week pattern. The stock can be taken above the 22.96 handle high. This is considered aggressive, as price has not completed a five-week base. Earnings expected Mar. 12.

Evolus (EOLS) is a development-stage drug developer. As such, without revenue and earnings, it is highly speculative. From the Feb. 17 report: “The intriguing element here is the double in two weeks and the triple in seven. For very aggressive operators only, EOLS could be taken above the handle high of 30.25.”

The stock staged a wash-and-rinse day Friday (open and close were both near the top of the day’s range, which tends to flush out weaker holders), a positive. Price then rose 7.6% Wednesday on +28% volume.

The comment of Feb. 17 above stands. For very aggressive players only. Earnings expected Mar. 28.

Godaddy (GDDY) has beefy earnings estimates of 76%/73% for ‘19/’20, though revenue growth was a more-subdued 17% and 16% in the recent two quarters.

The Website host is a latecomer to the party. It holds an 86 RS rank and only a B acc/dist rating. Institutions only began to show sustained interest four weeks ago.

When it released earnings last week, price rose 4.8% on +164% volume. While quite respectable, these figures pale in comparison to some of the other glamours on our Watch List. It is quite possible this is due to the mid-teen revenue growth. This suggests the bottom line is expected to grow from cost-cutting and not unit volume growth.

Technically, price has held its gap move of last week well. It has formed a cup-with-very-low-handle and sits 10% from its record high. It can be taken above the handle high of 77.40, with a possible stop placed below the 74.29 low. This equates to about 4% risk, or 2% de facto risk if a junior starter position is deployed. Because the handle is about 10% from the pattern high, this entry is considered aggressive as it is shorter than the five-week length of a base.

Mimecast (MIME) was discussed in the Feb. 13 report (“There is nothing to do at present but allow the stock some time to pull back, form a handle, or drift sideways. This may present a better-probability entry than taking it at current levels”).

The stock has formed a 9%-deep two-week ledge. An aggressive player would consider this above the pattern high of 51.66. A less-aggressive speculator would allow this to form a longer consolidation of up to five weeks, or the minimum length to be considered a flat base. A positive is the overwhelming power shown on the earnings-related breakout, +13.7% on +649% volume. Another plus is the support found at the top of its prior consolidation. The risk is that this is a ledge of two weeks and not a five-week flat base.

Proofpoint (PFPT) shows earnings estimates of 12%/36% for ‘19/’20. Sales grew a healthy 37% and 35% in the two recent quarters. An 87 RS stock in a 93 RS group with an A- acc/dist rating.

On Feb. 1, price leaped 12% on +305% volume. Since then, the stock is higher and has paused to form a five-day handle to go with its multi-month cup. An aggressive entry would be on a takeout of the handle high of 121.72. A less-aggressive entry would require waiting for a longer handle to be built, albeit with the risk that price moves out in the interim.

In sum, the post-Christmas Eve advance led by speculative growth stock glamours shows no chinks in its armor. Players should remain disciplined and patient in order to allow the market and its pattern setups to come to them.

Subscriber questions

Q: The nightly videos you are presenting are excellent.  I was wondering if there is a theme you have to decide which stocks to present in the videos?  Is there a particular rationale that would help us understand "why" these particular stocks are highlighted.  Are they focus list stocks, favorites, watch list, etc.? With so many stocks reviewed(they all look good), I am having a difficult time narrowing down the choices for my 5-8 core stocks for my portfolio. Any suggestions/comments on how to structure a portfolio for maximum gain?  Thanks.

A: Thank you for your email. The decision to expand videos from once weekly to four times a week has been popular with subscribers. I think your decision to hold 5-8 stocks is a good one.

There will only be so many names from the Watch List that are considered "actionable," meaning there is an entry point that might be crossed in the next few days. These are placed on the Focus List along with their potential entry. So the Focus List names are the ones you should be focused on in terms of then determining which ones make the most sense to you. You would then set alerts for these in your trading software.

We are all wired differently in terms of our makeup, and thus some Focus List issues might appeal more to you than others. Currently, the Watch List is 65 names and the Focus List is eight names. So you would focus on those eight because the rest of the Watch List is not actionable.

As for the videos, I mainly cover Focus List names, but also cover some recent additions to the Watch List. This should answer your question re the rationale behind what is covered in the videos. My hope is to reduce the video length to under 10 minutes since time seems to be at a premium in everyone’s lives.

I hope this helps eliminate some of the confusion.

Q:  Kevin, I would appreciate some discussion on how to handle earnings season since it is about to get in full swing. Traditionally, I've sold out of positions 3-5 days prior to announcements – upsides are nice, but downside gaps are killers. $TEAM has been a good stock, but earnings are Thursday. Thanks.

A: What I prefer to do if I am in a stock w/ earnings approaching is to pick a worst-case scenario (I like to use a drop of 25% or 33%) and then choose a max portfolio loss in % that you would be willing to absorb given your worst-case scenario occurring. Then, solve for the position size you can have that in the worst-case scenario would not exceed your max portfolio loss.

Example: My max worst-case scenario is a stock drops 25% on earnings and the max portfolio loss that I am willing to sustain is 3%. Thus, I can have a 12% position in the stock and if it has a 25% downside move (it would have to be on a gap because you would be stopped out at a reasonable loss if price declined in a somewhat orderly manner) my portfolio loss is limited to 3%.

One can look at the type of stock one is dealing with in order to calibrate the worst-case price drop. In other words, a company in a higher-risk industry might be exposed to more earnings risk than one which is in a steady-eddy business. I think of 33% because in 2007 a big-cap name (CROX) gapped down 28%, and using 33% provides a more conservative figure. In practice, I might use 25% because that is more realistic.

There is also the matter of what unrealized gain one has in the stock going into the earnings announcement. If one is up 10% on a position, then that provides a buffer in the event of a surprise vs. not having a gain at all. This might be factored into your calculation as shown above. I hope this is helpful.

Kevin Marder

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Unless otherwise noted, charts created using TradeStation. ©TradeStation Technologies, 2001-2019. All rights reserved.

The views contained herein represent those of Marder Investment Advisors Corp. At the time of this writing, of the stocks mentioned in this report, Marder Investment Advisors Corp., Kevin Marder, or an affiliate thereof held no positions, though positions are subject to change at any time and without notice. Estimate data provided by Thomson Reuters. Expected earnings release dates provided by EarningsWhispers.