Cabot Top Ten Trader Issue: April 15, 2024

Getting Heavier

After weeks of churning and choppy action, last week finally brought some “real” negative headlines that kicked the fear level up a few notches—first came inflation, which is looking stickier than many expected a few months ago (leading to a big bump in Treasury rates), while the Middle East tensions also have many discounting some bad scenarios. As always, what’s more important to us is the market’s reaction to the news, and at this point the intermediate-term advance is on the fence, with most indexes testing their 50-day lines and with more and more leaders doing the same. Big picture, it’s hardly a disaster, and we’re not ruling out a snapback if the Middle East worries dissipate quickly, but we continue to be a bit careful here—the fact is there’s been little money made (outside some commodity winners) in recent weeks, so honoring your stops, being selective on the buy side and holding some cash makes sense. We’ll pull down our Market Monitor to a level 6, though once again, it’s mostly about taking things on a stock-by-stock basis, pruning names that crack and holding most of what’s working.

This week’s list has something for everyone, with growth, crypto, commodities and all types of potential setups; as. a note, we have many buy ranges above the current price, thinking a strong resumption in these names could kick off a sustained move. Our Top Pick is TransMedics (TMDX), a smaller outfit with a great story—and it’s one of the few stocks that’s shown big-volume buying in recent days.

Stock 1

ATI (ATI)

Why the Strength
Dallas-based ATI produces high-performance titanium- and nickel-based alloys, stainless steel and specialty components for both the aerospace and defense markets, and it also has exposure to the oil/gas and specialty energy sectors (solar, wind and nuclear). But aerospace commands the lion’s share of ATI’s business and accounts for over 60% of annual revenue, mainly related to commercial jet engine products. Because of the so-called “rebound euphoria” in commercial flying following the Covid years, airlines are ordering record numbers of jets to meet booming travel demand and update fleets with more fuel-efficient aircraft. ATI is reaping the benefits from this trend, recently stating it now has more commercial jet engines on backlog than at any time in its history, adding that the firm is “well positioned” to meet this record demand in its largest end market. The company’s High-Performance Materials and Components (HPMC) segment is where most of the jet engine materials and parts are produced, and in Q4, aerospace and defense demand drove total revenue of $1.1 billion, up 5% year-on-year and its sixth straight quarter above $1 billion, along with earnings of 64 cents that increased 21% (reasons for the stock’s strength). The HPMC segment grew sales 29%, with EBITDA margins “up significantly” and full-year commercial airframe product sales soaring 90% as the ongoing aerospace ramp continued. Additionally, jet engine shipments rose 15% and management expects the growth in this area to continue in 2024. Wall Street has modest expectations this year (sales up 5%, albeit with accelerating growth in the second half of the year), but (a) that’s likely conservative given demand for ATI’s airframe materials is at historic highs, and (b) the top brass believes it’s on track to meet its 2025 (EBITDA up 33% from 2023) and 2027 (up 57%) goals, helping investors look past any brief slowdown. The Q1 report is due out April 30.

Technical Analysis
ATI hit a multi-year high last summer, then nosedived into October during the market-wide correction. The stock gave back 27% during the decline, but it bottomed a couple of points above prior support at 34 and began to repair the damage from there. Shares were still south of 40 in late January, but ATI kicked into gear at that point, with the stock moving to new price highs and it’s been holding up well of late, too. If you want in, aim for dips.

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Stock 2

Axon Enterprises (AXON)

Why the Strength
After a few months of mostly smooth sailing, worries are popping up again with the macro picture, whether it concerns inflation (stickier than expected), Fed policy (the number of rate cuts expected is shrinking) or, of course, geopolitics (fears of a wider war in the Middle East). But Axon Enterprises offers a growth story that should be insulated from all of that—the firm is the go-to provider of all sorts of technology and electrical weapons to law enforcement agencies (mostly in the U.S. but some overseas), including Tasers, all sorts of body and dashboard cameras (Puerto Rico recently ordered the latest and greatest body cameras) as well as back office and dispatch services and a cloud platform (Evidence.com) that allows all that evidence (Axon uploads more video each month than YouTube!) to be stored, shared and dissected; combined, the offerings cut down on the use of deadly force, dramatically boost productivity and boost the quality of evidence, even leading to higher conviction rates. (The firm is also branching out a bit, introducing body cameras for frontline retail workers given the pickup in crime and theft.) Better yet, Axon sells most of these products in bundles and via subscriptions, meaning the one-time, often Taser-heavy orders of yesteryear have been replaced with a booming stream of recurring revenue: In Q4, sales were up 29% and EBITDA was up 38%, but more important was that annualized recurring revenue leapt to $697 million, up 47%, while total future contracted revenue of $7.14 billion rose 54%. To be fair, the valuation is up there (market cap of $23 billion), but there’s little doubt that Axon’s top and bottom lines will grow hugely for years to come.

Technical Analysis
AXON etched a big launching pad from May through November of last year before breaking out—though the stock, while doing OK, didn’t show much power, grinding higher along its 10-week line for another couple of months. The Q4 report, though, brought a huge move higher, and despite the market’s shenanigans, AXON has held up well. To be fair, the stock’s push higher last week was rejected, but we’ll set our buy range up from here, aiming to buy if the bulls step up.

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Stock 3

Chord Energy (CHRD)

Why the Strength
Most of the oil exploration-related focus these days is on Texas (especially the Permian), but Chord Energy has one of the better growth stories in the sector operating out of the Williston Basin in Montana and North Dakota—and, if a proposed merger goes through, the runway of growth should get even better. Right now, the firm has the largest acreage position in the Willston, with very oily output and awesome well economics (10 years of drilling inventory with north of 20% returns even at sub-$60 oil) that’s producing tons of cash (expected to be around $21 of free cash flow per share in 2024 even at $79 oil and $2.50 natural gas)—and with a generous payout program (75% of cash flow returned), that’s led to lots of dividends (nearly $12 per share last year) and modest buybacks, too. All of that is to the good, but the top brass wasn’t set to rest on its laurels: Chord announced in February it intends to merge with Enerplus, another big Williston player that should result in solid synergies ($150 million annually) and be neutral-to-accretive to key per-share metrics while dramatically extending the runway of wells that can be drilled even if oil prices hit the skids. (There’s no official date but the deal could close around mid-year if all goes well.) Of course, a key part of Chord’s story is that oil prices aren’t hitting the skids—they’re rising, with black gold hanging in the mid-$80 range and with Middle East issues possibly supporting higher prices, which would boost free cash flow further. It’s not on the lips of many investors, but Chord is a small/mid-cap name that’s set to gush cash in the quarters to come.

Technical Analysis
CHRD has actually been one of the strongest oil plays for a long time—whereas the group topped in mid-2022, this stock hit higher highs late that year and, after an early 2023 correction, actually trended nicely higher into the fall. CHRD did etch a 15% deep consolidation from November through February, but shares have acted like smoke up a chimney in recent weeks, pushing persistently into new high ground. As with most commodity stocks at this point, we advise trying to get in on further dips.

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Stock 4

Coinbase (COIN)

Why the Strength
Even including the actual coins, there aren’t many institutional-quality investable cryptocurrency instruments out there, which is one reason why Coinbase has already garnered lots of support (1,048 funds own shares, up from 881 six months before)—and that should grow further as the crypto world becomes more integrated and accepted and as the company itself expands its reach. Right now, transaction revenue is still a big draw, more than half of revenues in Q4, though it’s extremely volatile; Q4’s figure was up 80% from Q3, for instance, and is a big reason why Coinbase’s earnings can go from red to black (and back again) in an instant. However, the company isn’t sitting on its hands, making moves to broaden its appeal so its business doesn’t gyrate wildly: First, the firm has moved aggressively into more stable subscriptions and services including stablecoin revenue (a crypto that’s tied to something stable; made up 22% of sales in Q4), blockchain rewards (including users “staking” their coins to help firms mine more crypto; 11% of revenue) and a subscription service ($30 per month) that gives clients cheaper trading fees. Then there’s the firm’s trading offerings, with Coinbase moving further into futures (just launched Litecoin and Bitcoin Cash futures; Dogecoin launching later this month) and registering as a restricted dealer in Canada, becoming the biggest international crypto exchange in that country. And finally, after the horrific bear phase, the firm has slashed costs, with operating expenses down 45% (!) last year and likely to only grow modestly in 2024. Of course, a big decline in bitcoin would certainly affect investor perception near term, but with crypto in a bull trend, we see good potential here assuming the market doesn’t completely cave in.

Technical Analysis
COIN is as volatile as they come, with wild moves in both directions a regular thing—indeed, just since the market low last October, this stock has boomed from 70 to 187 in December, then plunged to 115 in February before soaring to 283 near the end of March! However, it’s the action since that peak that intrigues us, with shares actually holding relatively firm despite slippage in growth stocks and, of course, in bitcoin itself. It’s not for the faint of heart, but we’re OK with a small position here, but honor your loss limit if the selling continues.

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Stock 5

Coupang (CPNG)

Why the Strength
Coupang is the dominant online retailer in South Korea. Like Amazon.com, it sells everything from electronics to groceries, performs its own logistics and offers its own video streaming service. Coupang’s management takes a long-term look at entering new businesses—it spent years and billions of dollars creating its own fulfillment and logistics business from scratch, and that’s now become a growth area with entrepreneurs launching businesses on the Coupang app using the company as their fulfillment partner. Now management is focusing on two new projects, the first of which is going more upscale and expanding its markets outside of Korea: In January, Coupang acquired Farfetch, a global digital brand for luxury products—mainly apparel but also home goods, jewelry and other accessories; Coupang paid $500 million for it and expects it will take a restructuring charge this period as part of consolidating it into its operations. But management expects to make Farfetch self-funding in a few quarters and to make it a big player in the still-fragmented global luxury retailing business. As for the second move, Coupang jumped into Taiwan under the brand Rocket in late 2022 and, while there’s a lot of money being spent to build this business (hundreds of millions of dollars this year alone), management sees that country on track to be profitable in the near future. In 2023, Coupang overall generated $24.4 billion revenue, and net income of $0.26 a share, while Wall Street sees $28.7 billion with $0.29 EPS this year—though that could prove conservative following the just-announced big price hike for its Wow membership program, which offers customers a variety of benefits (and which also displays its belief that clients should be relatively sticky). It’s a good growth story.

Technical Analysis
CPNG crashed into its bear market low in mid-2022 and, after a couple of months of rebounding set a high near 21—and that high has basically been in place since, rejecting a few rally attempts in late 2022 and again last summer, the latter of which led to a sharp 32% dip. But CPNG spiked nicely off its lows on big volume, and after resting for five weeks south of 20, boomed last week (especially last Friday) after the Wow price hike. We don’t advise chasing it here, but dips of a few dimes would be tempting.

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Stock 6

Datadog (DDOG)

Why the Strength
Datadog’s focus on cloud infrastructure, network and server monitoring has helped the firm grow its client base to over 27,000 while pushing its market cap north of $40 billion. But just when it looked like the halcyon days of runaway cloud-related growth were ending, the company has found what should be a significant long-term growth driver in artificial intelligence. Datadog recently unveiled a virtual artificial intelligence assistant, Bits AI, to assist companies in extracting more value from its cloud monitoring platform; the product’s conversational interface promises to facilitate better problem detection, allowing IT managers to fix any issues faster while saving them countless hours of work. In a recent investor day presentation, management highlighted the opportunities it sees in AI-driven security, stating that Bits AI should help drive further cloud adoption. The company also sees the cloud market growth rate averaging 20% a year for the foreseeable future, providing plenty of runway for additional growth, plus it anticipates increased business from those looking to consolidate on a smaller number of vendor platforms, which bodes well for leading players like Datadog. The sanguine news on the AI and cloud fronts has prompted several Wall Street institutions to upgrade the shares, including a major bank that just added Datadog to its list of high-conviction stocks with productivity opportunities due to AI. On the financial front, the days of breakneck growth are probably over, but the company should see steady and solid expansion ahead—in Q4, Datadog increased revenue 26% while earnings of 44 cents a share more than doubled and free cash flow came in north of 60 cents per share, while this year and next should see the top line grow more than 20% while free cash flow picks up. It’s a solid story, with Datadog looking like one of the few pandemic leaders that’s still in favor today.

Technical Analysis
DDOG was rejuvenated last fall after a three-month, 30% correction, with the earnings report gapping the stock up hugely on the heaviest weekly volume in more than three years—a major clue the tide had turned. The stock eventually ran to nearly 140 in February before taking a breather, though the retreat was relatively controlled (15% high to low), and now shares are perking up: DDOG has actually risen four weeks in a row and nosed above its 50-day line last week despite the wobbles in growth stocks. We’ll set our buy range up from here, thinking a solid rally would imply the stock is ready to move.

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Stock 7

Nvidia (NVDA)

Why the Strength
Nvidia is essentially the flag-bearer of this bull move, or at the very least the flag-bearer in terms of growth and AI stocks—it’s clearly the premier artificial intelligence chip designer and already controls 90% of the AI data center market. Indeed, a substantial portion of the California-based chip giant’s revenue is tied to the company’s growing importance for the generative AI models that have been developed using Nvidia’s graphics processing units (GPUs). The firm’s H100 is one of the most in-demand GPUs for powering AI used in the training of large language models (LLMs), while the just-released Blackwell series of chips is designed to run real-time GenAI on LLMs at up to 25x less cost and energy consumption than other chips. Another new addition to Nvidia’s product lineup is the GB200 AI superchip that offers “30x the performance” for the server farms that run, rather than train, chatbots such as Claude or ChatGPT, while also reducing power consumption by up to 95%. Nvidia has also taken a leading role in the field of robotics, recently unveiling an AI model (through its Project Groot) that could power humanoid robots by allowing them to learn from a handful of human demonstrations as well as from video data. That said, data center demand continues to be a key earnings driver for Nvidia: In fiscal Q4 (ended January), EPS of $5.16 a share beat estimates by 56 cents, while revenue of $22 billion more than tripled from a year ago (reasons for the stock’s strength). The sanguine results were led by a record 400% increase in data center sales, driven by both training and inference of GenAI and LLMs across multiple industries. Meanwhile, compute revenue grew more than five-fold and networking revenue tripled from last year, while gaming revenue rose 60%. Going forward, the top brass expects total revenue to more than double in fiscal Q1, to $24 billion. Earnings are expected around May 22.

Technical Analysis
NVDA peaked in August of last year and took a multi-month breather, with a very reasonable correction and some enticing tightness near year’s end. The breakout from there led to a moonshot, with shares nearly doubling in just nine weeks! Now, though, the stock has calmed down for five weeks, pulling back as much as 15% (quite tame compared to the advance) and kissing its 10-week line last week during the market’s selloff. Like a few names in this week’s issue, we’ll set our buy range up a bit from here, aiming to buy on a resumption of the overall upmove.

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Stock 8

Trade Desk (TTD)

Why the Strength
Digital advertising has become one of (if not the) key ways for businesses to find new customers, with digital ad spend expected to increase 16% annually through 2030. Trade Desk is the largest aggregator of connected TV ad impressions across every major content provider, allowing advertisers to buy ad space across various platforms while helping them quantify the value of each ad and make real-time adjustments. A sizable chunk of Trade Desk’s business hinges on streaming video service providers, including media giants like Disney and Warner Bros. Discovery, and the move in recent quarters from those and their peers toward more ad-supported subscription tiers is a tailwind, with Trade Desk helping these big boys hook up with advertisers to fill the needed ad space. The artificial intelligence revolution has also opened up a new opportunity for the company by helping media buyers realize even greater returns on their ad spending—its AI-powered trading platform, Solimar, helps marketers optimize their digital advertising campaigns across the open internet by using valuable first-party data (instead of third-party cookies), while its recently launched OpenPath service bypasses traditional sell-side platforms like Magnite to directly connect advertisers with publishers. Trade Desk launched a new platform called Kokai last June (hailed as the industry’s most advanced, intuitive media buying platform), featuring a more advanced AI engine that helps ad buyers find the right customers at the right time. The firm’s platform expansion drove stellar results in Q4, including revenue of over $600 million that increased 23% from a year ago, while EBITDA lifted 16% and total ad spend for 2023 set a record of almost $10 billion. Customer retention remained over 95% for the tenth consecutive year, and the multiple bullish factors have Wall Street expecting that revenues will rise by north of 20% this year and next.

Technical Analysis
TTD enjoyed a nice recovery into last July, when the 90 area rejected the advance. The correction from there wasn’t pleasant (34% deep) but wasn’t abnormal, either, and a very powerful earnings reaction in February changed the stock’s tone. TTD has been setting up nicely since that point, though today definitely saw some sloppy action with the market. Thus, if you want in, we’d aim to buy on the upside, which would tell us today’s dip was likely a shakeout.

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Stock 9

TransMedics (TMDX) ★ Top Pick ★

Why the Strength
TransMedics has developed a superior way of storing donated organs, a technique that forms the basis of TransMedics’ fast-growing business of getting organs to those who need them. Traditional organ harvesting from donors flushes organs with a pharmaceutical solution, then puts the organ into a plastic bag on ice and moves it in a cooler, causing a lot of damage to the organ and resulting in the fact most donated organs go unused. TransMedics has a better mousetrap, keeping lungs, hearts and livers alive during transportation through special components that infuse the organs with blood and provide circulation in a way that closely mimics what happens in the body. The company’s organ care system (OCS) is the only FDA-approved alternative to the cold-storage method, and management has developed an end-to-end system for getting the organs to recipients using their own staff to collect the organs and transport them via its own network of jets coordinated by a central command center; last quarter was the first the logistics arm was fully operational, and it helped power revenue up 159% to $81.2 million, continuing a string of triple-digit revenue growth. This year, management says sales should grow about 50%, to $365 million or so, but that could easily prove conservative. Interestingly, the business posted a surprise profit in Q4, too, and while that could reverse near term, the fact that TransMedics is already near breakeven is a plus. Given it’s still early stages for the OCS system, there are expectations TransMedics will continue quickly supplanting cold storage in the U.S.—by year’s end, the business was handling about a quarter of heart and liver transplants, and about 4% of lung, so there’s still huge upside potential.

Technical Analysis
After a big, prolonged run, TMDX finally topped near the century mark last summer—and then imploded in the three months that followed, with shares falling more than 60%. But the Q3 report seemed to wipe the slate clean, with a humongous upmove on enormous volume leading to a run back to the 90 level. And while TMDX saw some selling after, the 40-week line offered support and now the buyers are back at it, with the stock pushing higher on a nice-looking volume cluster (string of above-average volume buying days). It’s a hot potato, but the strength is noteworthy; a nibble here or on dips is OK with us.

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Stock 10

Valero Energy (VLO)

Why the Strength
With crude oil prices nudging toward six-month highs on rising geopolitical tensions and OPEC+ output cuts, the recent share price strength for Valero (covered in the March 18 issue) requires little in the way of explanation. The oil refining juggernaut crushed earnings estimates in Q4, posting EPS of $3.55 to beat Wall Street’s consensus by 20%, while Valero’s refining system achieved an eye-catching 97% mechanical availability for the full year, setting a new company record. Management further guided for first-quarter refining margins to be supported by tighter supply and “heavy” industry turnaround activities ahead of the summer driving season, despite new refinery startups. Meanwhile, several institutional analysts have raised earnings estimates for Valero for 2024 and 2025 in just the past few days, with one major bank pointing to “persistent demand” for crude and gasoline in Europe (the world’s third-largest oil consumer) as a reason why prices are likely headed even higher in the coming months. Indeed, Valero expects global demand growth to outpace supply additions and said its 14 refineries would operate at just 85% of combined total throughput capacity in Q1 (down from 94% in Q4). On the alternative energy front, Valero said its Sustainable Aviation Fuel (SAF) project in Texas with partner Diamond Green Energy will be one of the world’s largest low-carbon SAF outfits when completed next year (estimated in Q1). Moreover, Valero’s additional refining growth projects are aimed at increasing the firm’s flexibility in the Gulf Coast, while also improving key product markets and margins around existing refining assets. Earnings here are still deflating from the out-of-this-world levels of the pandemic, but they’re falling far less than expected, with the surging crack spreads these days likely to see estimates head even higher.

Technical Analysis
We missed getting into VLO last month after the stock never fell back into our suggested buy range, but we’re thinking the current retreat could prove an opportunity. Shares broke out from a multi-month basing formation in early March on the back of rallying energy prices, with the stock soaring after that to a series of record peaks. Now we’ve seen VLO exhale a bit, dipping on low volume toward the 25-day line—near-term volatility will probably be elevated, but we’re OK taking a swing at it here with a stop near the 50-day line.

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Previously Recommended Stocks

The next Cabot Top Ten Trader issue will be published on April 22, 2024.

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