No student of the market is going to look at the action of the past week and shrug it off; that said, looking at the evidence, we can’t say the rally has gone kaput, at least not yet: By our measures, the intermediate-term trend is still pointed up, and a lot of high relative strength stocks (like those found in Top Ten) are pulling back very normally at this point, We’re not going to whistle past any graveyard: We’ll move our Market Monitor back down to a level 5, and if things worsen from here, we’ll quickly bring that down another notch or two--but we’re still holding our resilient names until something changes.
This week’s list reflects the renewed strength we’ve seen in commodity and “old world” names, even as the market has retreated. Our Top Pick is a name we missed a couple weeks back but think this pullback marks a decent entry point.
Cabot Top Ten Trader Issue: August 29, 2022
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Not Great—but Not Broken (Yet)No student of the market is going to look at the action of the past week and shrug it off—no, the sellers clearly showed up, and instead of a modest, grudging decline, stocks quickly gave up ground, and of course the Fed’s thumbs down on Friday then caused many indexes to plunge. That said, looking at the evidence, we can’t say the rally has gone kaput, at least not yet: By our measures, the intermediate-term trend is still pointed up, and many broader indexes are outperforming their larger-cap brethren. Similarly, a lot of high relative strength stocks (like those found in Top Ten) are pulling back very normally at this point, which is in stark contrast to the other legs down we’ve seen this year. Even so, we’re not going to whistle past any graveyard: We’ll move our Market Monitor back down to a level 5, and if things worsen from here, we’ll quickly bring that down another notch or two--but we’re still holding our resilient names until something changes.
This week’s list reflects the renewed strength we’ve seen in commodity and “old world” names, even as the market has retreated. Our Top Pick is a name we missed a couple weeks back but think this pullback marks a decent entry point—Advanced Drainage Systems (WMS) isn’t changing the world but should do well if the market can hang in there.
| Stock Name | Price | Buy Range | Loss Limit |
| Advanced Drainage Systems (WMS) ★ TOP PICK ★ | 139 | 135-140 | 118-121 |
| Chord Energy (CHRD) | 147 | 141-146 | 124-127 |
| Arch Resources (ARCH) | 164 | 161-166 | 143-146 |
| Devon Energy (DVN) | 75 | 71.5-75 | 62-64 |
| Livent (LTHM) | 33 | 30-32 | 26-27 |
| Palo Alto Networks (PANW) | 562 | 550-565 | 500-510 |
| RBC Bearings (ROLL) | 247 | 238-248 | 218-223 |
| Steel Dynamics (STLD) | 67 | 82-85 | 73-75 |
| Stem Inc. (STEM) | 15 | 13.0-14.0 | 11-11.5 |
| Super Micro Computer (SMCI) | 70 | 64.5-67.5 | 54-56 |
Stock 1
Advanced Drainage Systems (WMS) ★ TOP PICK ★
| Price | Buy Range | Loss Limit |
| 139 | 135-140 | 118-121 |
Why the Strength
We wanted to get into Advanced Drainage Systems earlier this month on a dip but soon had to move on as the stock didn’t oblige—but now the maker of water control products (pipes, chambers, basins and leach field equipment) has eased back during the market’s retrenchment, getting to an area we’re keen to add some shares. The story here is led by good growth – the company has been growing faster than the broad water segment with a 14% annualized growth in revenue since 2018 – and bolstered by a strong ESG focus – Advanced Drainage is the largest user of recycled plastics in America. Recycled polymer is the feedstock for more than half its product line, all of which is plastic. Plastic water infrastructure products are lighter, which means they’re cheaper to transport and easier (and therefore also cheaper) to install, making it a favored choice of real estate developers nationwide. Advanced Drainage also owns some of the country’s largest plastic recyclers, which provides it a steady flow of feedstock that helps insulate it from supply chain problems and price surges in new polymer, keeping margins high. The increase in water problems – from lack of it in some places to far too much of it at times in others – means water capture and control is a big macro infrastructure trend that should help Advanced Drainage continue to grow even if residential and commercial building slows. Sluggishness hasn’t hurt the business yet, with management recently hiking full year guidance to about $3.3 billion in sales, a 19% rise over last year. Wall Street sees earnings per share more than doubling, to $6.59 a share, with further growth in 2023. Management also entered August with $875 million of a stock buyback plan left to be spent, suggesting dips like last week’s, on inflation fears, will bring out the buying. It’s a solid story.
Technical Analysis
WMS sank all the way to an 18-month low of 83 in June, capping off a poor five-month stretch, before reversing and surging almost unabated through mid-August, both before and after its excellent Q2 report. Such straight-up action is abnormally good, but also often leads to a short- to intermediate-term pullback, and we think that’s has begun—to this point, WMS’ retreat looks very normal, with support showing up today near the 25-day line. We’re OK nibbling here or (preferably) on further weakness.
| Market Cap | $11.8B | EPS $ Annual (Dec) | |
| Forward P/E | 21 | FY 2021 | 2.59 |
| Current P/E | 32 | FY 2022 | 3.15 |
| Annual Revenue | $3.01B | FY 2023e | 6.59 |
| Profit Margin | 20.5% | FY 2024e | 6.94 |
| Qtrly Rev | Qtrly Rev Growth | Qtrly EPS | Qtrly EPS Growth |
| ($M) | (vs. yr-ago-qtr) | ($) | (vs.yr-ago-qtr) |
| Latest qtr | 914 | 37% | 2.22 | 155% |
| One qtr ago | 678 | 53% | 0.54 | 135% |
| Two qtrs ago | 715 | 47% | 0.86 | 39% |
| Three qtrs ago | 707 | 30% | 0.88 | -5% |
Stock 2
Chord Energy (CHRD)
| Price | Buy Range | Loss Limit |
| 147 | 141-146 | 124-127 |
Why the Strength
Chord Energy quacks like a new powerhouse in the energy exploration space, created via a merger of equals that was finalized around mid-year—Oasis and Whiting Petroleum’s were two solid players in the Williston Basin, and the resulting combination led to a new name and some very attractive fundamentals. The new entity is now the largest acreage holder in the Williston Basin (in North Dakota and Montana; nearly one million acres), with the second-highest output tally (next to Continental Resources), and at current rates it believes it has more than a decade of high-return drilling inventory ahead of it. Besides getting bigger, the merger should lead to massive synergies (about $800 million, which is around 12% of the current market cap!) since so much of their operations overlap, and when combined with limited CapEx and so-called maintenance drilling, it will lead to great cash flows—at $90 oil (near current levels) and $6 gas (miles below current levels of around $9.40), Chord should see free cash flow above $35 per share annually, a figure that could rise as money-losing hedges drop off in 2023 and beyond. And because debt here is already well under control, the top brass is firmly in payout mode, aiming to return 75%-plus of free cash flow via a base dividend (which yields a very solid 3.4%) as well as variable dividends and share buybacks (it cleared out about 2% of all shares outstanding just in July!). And, while energy prices will be key, even if they slip somewhat the cash flow here will be enormous ($80 oil should lead to $7.50 of free cash flow per quarter in the second half of this year). We think Chord is an exciting, mid-cap energy story.
Technical Analysis
CHRD was in a three-steps-forward, two-steps-back advance during the spring and then ran to new highs near 160 in early June before the energy complex got hit, leading to a quick, sharp plunge to the mid 90s. But then the merger went through, and CHRD has impressively been in a relatively persistent advance since then, pushing to within a few percent of all-time highs. We’ll set our buy range down a bit, thinking the next pullback should be buyable.
| Market Cap | $60.5B | EPS $ Annual (Dec) | |
| Forward P/E | 4 | FY 2020 | 42.55 |
| Current P/E | 7 | FY 2021 | 9.43 |
| Annual Revenue | $2.33B | FY 2022e | 37.52 |
| Profit Margin | 19.4% | FY 2023e | 36.70 |
| Qtrly Rev | Qtrly Rev Growth | Qtrly EPS | Qtrly EPS Growth |
| ($M) | (vs. yr-ago-qtr) | ($) | (vs.yr-ago-qtr) |
| Latest qtr | 789 | 117% | 7.30 | 493% |
| One qtr ago | 653 | 101% | 7.77 | 252% |
| Two qtrs ago | 522 | 310% | 4.25 | -89% |
| Three qtrs ago | 369 | 36% | 1.70 | 673% |
Stock 3
Arch Resources (ARCH)
| Price | Buy Range | Loss Limit |
| 164 | 161-166 | 143-146 |
Why the Strength
After years of being spurned, coal is making a comeback as nations (led by Europe) are turning to the fuel in the face of war-related natural gas shortages and rising electricity demand. A part of Arch Resources’ business is dedicated to providing thermal coal that powers electric utilities; Arch is actually in maintenance mode with that operation, but prices are exploding and that division is effectively a cash cow at this point. That said, Arch’s main focus is on metallurgical (or “met”) coal used for steel production. In fact, Arch is the second-largest supplier in the U.S., and its flagship Leer mine ranks among the lowest-cost, highest-quality U.S. metallurgical mines. In Q2, a red-hot met market contributed to record realizations and gross margins for Arch’s coal, allowing it to deliver record net income for the third consecutive quarter. Revenue of $1.1 billion was an eye-watering 152% above the year-ago period, and while per-share earnings of $19.30 missed estimates, they were 50%-ish higher than the previous quarter. Arch acknowledged that met coal demand is coming down to Earth due to softer global economic conditions, but said it expects demand to remain supported by lower exports from major suppliers like Australia (which accounts for more than 50% of met coal supply) and Russia. The firm further expects support from the “nearly unprecedented” negative spread between met and thermal coal prices that allowed Arch to sell a vessel of met coal to a European thermal customer for delivery in Q4 at an attractive price, with plans to pursue related opportunities from its “robust” legacy thermal segment. Arch is returning most of its massive cash flow to shareholders, with a $6 dividend declared for Q2 (3.6% yield for that one quarterly payment, payable in September), with even greater amounts likely going ahead. Even with next year’s expected dip, earnings should remain out of this world.
Technical Analysis
ARCH had a solid multi-month run starting in January, when it broke out at 100 and soared in the following weeks, hitting a peak of 180 in early May. A correction followed over the next 13 weeks, with the stock twice testing the 40-week line around 120, and then the buyers stepped back up—ARCH has surged three weeks in a row (the first two on big weekly volume) and is now testing its prior peak. We’re OK taking a swing at the stock here or on dips.
| Market Cap | $3.17B | EPS $ Annual (Dec) | |
| Forward P/E | 3 | FY 2020 | -22.74 |
| Current P/E | 3 | FY 2021 | 19.20 |
| Annual Revenue | $3.40B | FY 2022e | 60.23 |
| Profit Margin | 36.0% | FY 2023e | 33.33 |
| Qtrly Rev | Qtrly Rev Growth | Qtrly EPS | Qtrly EPS Growth |
| ($M) | (vs. yr-ago-qtr) | ($) | (vs.yr-ago-qtr) |
| Latest qtr | 1133 | 152% | 19.30 | 999% |
| One qtr ago | 868 | 143% | 12.89 | N/A |
| Two qtrs ago | 806 | 123% | 11.92 | N/A |
| Three qtrs ago | 594 | 55% | 4.92 | N/A |
Stock 4
Devon Energy (DVN)
| Price | Buy Range | Loss Limit |
| 75 | 71.5-75 | 62-64 |
Why the Strength
We view Devon Energy as being one of (if not the) institutional leaders of the oil patch during the past year; it was one of the first to shift to the new playbook (less CapEx, flat-ish production, harvesting free cash flow) and a variable dividend (paying out 50% of free cash flow above its base dividend). Interestingly, while the firm continues to do great with elevated energy prices (about half of output is oil, but a quarter is gas and another quarter is liquids, so it does benefit a good amount from the current sky-high gas prices), with a $1.55 quarterly dividend set for September (ex-dividend date is September 9), we think the reason Devon has come back stronger than many peers is that it’s not just sitting on its hands but is actually playing offense: In July, it completed an $865 million bolt-on buyout of a player in the Williston Basin that brought 38,000 acres and more than 100 top-notch drilling locations, and then earlier this month, it announced a $1.8 billion (all cash) bolt-on buyout of a firm in the Eagle Ford, with 42,000 acres and 350 excellent drilling locations and another 150 re-frac candidates. Most important, though, is that Devon isn’t chasing deals--both acquisitions were accretive to cash flow (in fact, both were acquired at prices resulting in free cash flow yields north of 25% at strip pricing!), with the first leading to a 13% base dividend hike and the second (not yet completed) anticipated to boost Devon’s free cash flow profile by 10% and lead to bigger variable dividends and potentially accelerated share buybacks, too. Clearly, energy prices are key, but Devon continues to improve its story and anything in the $80 to $90 oil range should lead to a bevy of payouts and share buybacks in the quarters ahead.
Technical Analysis
DVN topped around 78 with the energy group in early June, correcting very sharply to just under 50 a month later. But after that break, the stock began to repair itself—shares held the 40-week line on that initial dip, and after bouncing into the low 60s, held that key long-term trend line again earlier this month. And now it looks like the sellers have left the building, with a very impressive, persistent move into the mid 70s. We’re not opposed nibbling here, but would prefer entering on dips.
| Market Cap | $48.7B | EPS $ Annual (Dec) | |
| Forward P/E | 8 | FY 2020 | -0.17 |
| Current P/E | 11 | FY 2021 | 3.53 |
| Annual Revenue | $17.2B | FY 2022e | 9.31 |
| Profit Margin | 30.3% | FY 2023e | 9.82 |
| Qtrly Rev | Qtrly Rev Growth | Qtrly EPS | Qtrly EPS Growth |
| ($M) | (vs. yr-ago-qtr) | ($) | (vs.yr-ago-qtr) |
| Latest qtr | 5.63 | 133% | 2.59 | 332% |
| One qtr ago | 3.81 | 86% | 1.88 | 318% |
| Two qtrs ago | 4.27 | 234% | 1.39 | 999% |
| Three qtrs ago | 3.47 | 225% | 1.08 | N/A |
Stock 5
Livent (LTHM)
| Price | Buy Range | Loss Limit |
| 33 | 30-32 | 26-27 |
Why the Strength
Governments around the world are doubling down on electric vehicle (EV) initiatives, underscored by California’s move to ban gas-powered vehicles by 2035 and, of course, the subsidies included in the recent green energy bill. This is lighting a veritable bonfire under companies that mine lithium, as global supplies of the critical battery metal are forecast to be in “acute” shortage by that same year if not before. Livent is the largest U.S. lithium-only miner, deriving over 90% of its revenue from battery-grade lithium compounds and providing a range of lithium-based products that serve the EV, chemical, aerospace and pharmaceutical industries. Livent reported “exceptionally strong” lithium demand and tight market conditions through the first half of 2022, allowing the firm to realize higher prices across its entire product portfolio. Revenue of $219 million in Q2 spiked 114% from a year ago, with EPS of 37 cents 23% above estimates as net income rose 10x from a year ago. The company is addressing market tightness through a 10,000 metric-ton (mt) expansion of its lithium carbonate operation in Argentina (aiming to be up and running early next year), with an additional 10,000 mt capacity boost by late 2023, plus a 5,000 mt expansion of its lithium hydroxide plant in North Carolina by Q4. Livent also scored a huge long-term supply win with General Motors earlier this month to deliver lithium hydroxide for GM’s EV batteries beginning in 2025, for which GM will provide Livent with a $198 million advanced payment later this year. Sales and earnings are expected to go bananas this year, with more good times in 2023.
Technical Analysis
To say LTHM has been subject to some ups and downs over the past 10 months would be an understatement. After hitting a record high last November near 32, the stock has thrashed between 20 or so on the low end, and the 34 area on the high end, a couple of times each. The latest rally, though, looks enticing, not just because it’s back up to its highs but also due to the relative persistency of the move. If the market can hold together, we think LTHM can do well—aim to buy on weakness.
| Market Cap | $5.36B | EPS $ Annual (Dec) | |
| Forward P/E | 25 | FY 2020 | -0.04 |
| Current P/E | 48 | FY 2021 | 0.18 |
| Annual Revenue | $590M | FY 2022e | 1.35 |
| Profit Margin | 33.5% | FY 2023e | 1.68 |
| Qtrly Rev | Qtrly Rev Growth | Qtrly EPS | Qtrly EPS Growth |
| ($M) | (vs. yr-ago-qtr) | ($) | (vs.yr-ago-qtr) |
| Latest qtr | 219 | 114% | 0.37 | 825% |
| One qtr ago | 144 | 56% | 0.21 | 950% |
| Two qtrs ago | 123 | 50% | 0.08 | N/A |
| Three qtrs ago | 104 | 43% | 0.03 | N/A |
Stock 6
Palo Alto Networks (PANW)
| Price | Buy Range | Loss Limit |
| 562 | 550-565 | 500-510 |
Why the Strength
Many areas of the tech sector are being hit by reduced budgets as companies brace for possible recession, but the cloud space remains resilient. Indeed, experts see cloud adoption accelerating even as IT budgets are cut, leaving lots of growth room for cybersecurity providers. Palo Alto is a leading player in this field, with a historical dominance in firewalls and network security, and that older business remains in good shape. More recently, however, the company is focused on providing security solutions for the hybrid cloud and remote workforces as the work-from-home trend expands. In its fiscal fourth quarter (just reported last week), Palo’s revenues of $1.5 billion grew 27% from a year ago, continuing a very consistent 25% to 30% growth trend. And there’s no sign of any slowdown, either—billings in the quarter came to nearly $3 billion, up 44% and fiscal 2022 (just ended in July) billings of $7.5 billion were up 37%. Per-share earnings of $2.39, meanwhile, beat estimates by 11 cents. Palo Alto released 49 new products in the latest fiscal year, up 70% from a year ago, and they’re being adopted en mass; its next-generation secure access service edge (SASE) product line saw the client base leap 50% to 3,556 in the recent quarter. The firm expects SASE adoption to continue growing at an annual rate of nearly 30% over the next five years. Rounding out the good numbers were remaining performance obligations jumping 40%. Management also announced a 3-for-1 stock split (another reason for the strength) and guided for total billings in fiscal Q1 of about $1.7 billion, up 23% if realized, and midpoint revenue of $1.54 billion, up 24% and in-line with Wall Street’s estimates. Palo Alto’s growth story continues to crank ahead.
Technical Analysis
PANW did a great job of resisting the market’s decline into April, when it reached an all-time high near 640, but it finally gave up the ghost after that, plunging to 422 within five weeks! However, the stock steadied itself nicely from then on; check out the many tight weekly closes and small ranges in the 500 area during the next three months, which is usually an indication that big investors are accumulating shares. And last week saw a massive-volume earnings gap, with the pullback since more than acceptable. If want in, we’re fine starting small here with a stop in the low 500s.
| Market Cap | $56.3B | EPS $ Annual (Jul) | |
| Forward P/E | 60 | FY 2021 | 6.14 |
| Current P/E | 76 | FY 2022 | 7.56 |
| Annual Revenue | $5.51B | FY 2023e | 9.43 |
| Profit Margin | 16.4% | FY 2024e | 11.34 |
| Qtrly Rev | Qtrly Rev Growth | Qtrly EPS | Qtrly EPS Growth |
| ($M) | (vs. yr-ago-qtr) | ($) | (vs.yr-ago-qtr) |
| Latest qtr | 1.55 | 27% | 2.39 | 49% |
| One qtr ago | 1.39 | 29% | 1.79 | 30% |
| Two qtrs ago | 1.32 | 30% | 1.74 | 12% |
| Three qtrs ago | 1.25 | 32% | 1.64 | 1% |
Stock 7
RBC Bearings (ROLL)
| Price | Buy Range | Loss Limit |
| 247 | 238-248 | 218-223 |
Why the Strength
Inventory snafus, a shortage of skilled workers and pent-up demand from the last two years are reasons why manufacturers across many industries are now working overtime. Integral to meeting this demand is a steady supply of parts and components used in the manufacturing process, and this is where RBC enters. The company is an integrated manufacturer of engineered precision bearings and products used in machines, aircraft and other systems, which can reduce machine maintenance and wear at a time when producers can’t afford any downtime. RBC has two main divisions: Aerospace (60% of sales), which provides parts for commercial and military aircraft and engines, as well as for satellites and rockets; its customers include big names like Boeing, Raytheon and Lockheed Martin. Industrial is RBC’s other division (40% of sales), and its products are used in mining, automotive, agriculture, medical and rail transport, with clients like Caterpillar, Oshkosh and Applied Materials. Sales in Q2 were strong across most of the company’s industrial and aerospace end markets. While revenue missed estimates, the $354 million figure RBC achieved was an eye-popping 127% above the year-ago level, due in large part to the acquisition of the Dodge power transmission business from ABB late last year; organic sales were up 13%, a growth rate that accelerated from 7% the prior quarter. Meanwhile per-share earnings of $1.19 rose 24%. And RBC isn’t sitting on its hands even after that buyout, recently acquiring leading supplier of modular tooling systems, on top of last year’s $3 billion purchase of Dodge. Analysts see earnings catapulting higher by 88% this fiscal year (which just began in July).
Technical Analysis
After soaring to a post-pandemic record high of 250 in July last year, ROLL topped out for a few months and then began skidding with the market late last year, finally hitting a nadir of 153 in May. Then came a brief bottoming effort during the next month, and then a change in character—ROLL rallied eight weeks in a row, easily notching new highs, and the pullback of the past two weeks has been tame and come on low volume. We’re OK nibbling here with a stop near the 50-day line.
| Market Cap | $7.07B | EPS $ Annual (Mar) | |
| Forward P/E | 34 | FY 2021 | 3.87 |
| Current P/E | 63 | FY 2022 | 3.82 |
| Annual Revenue | $1.14B | FY 2023e | 7.18 |
| Profit Margin | 11.4% | FY 2024e | 8.07 |
| Qtrly Rev | Qtrly Rev Growth | Qtrly EPS | Qtrly EPS Growth |
| ($M) | (vs. yr-ago-qtr) | ($) | (vs.yr-ago-qtr) |
| Latest qtr | 354 | 127% | 1.19 | 24% |
| One qtr ago | 359 | 124% | 1.26 | 17% |
| Two qtrs ago | 267 | 83% | 0.70 | -22% |
| Three qtrs ago | 162 | 10% | 0.89 | -4% |
Stock 8
Steel Dynamics (STLD)
| Price | Buy Range | Loss Limit |
| 67 | 82-85 | 73-75 |
Why the Strength
China accounts for roughly half the world’s steel output, and that country’s recent problems account for the industry’s return on Wall Street’s radar. A combination of power cuts, Covid-related shutdowns and a real estate crisis are plaguing China’s steel mills, forcing many of them to the verge of bankruptcy. This has paved the way for U.S.-based producers like Steel Dynamics—one of America’s largest producers of carbon steel—to fill the global supply gap. Last week, a large Australian financial institution increased its holdings in Steel Dynamics by 5% (a reason for the strength), but bigger picture, an even bigger attraction is in Steel’s use of electric arc furnaces, which greatly reduce energy requirements and allow steel to be made from a 100% scrap metal feedstock. This enables the firm to realize higher margins while providing more flexibility compared to many of its rivals which rely on traditional blast furnaces. Steel Dynamics is also diversifying into aluminum, with plans to build a $2 billion recycled aluminum flat rolled mill in the southeastern U.S. Management said the project will allow it to take advantage of a two million-ton domestic aluminum supply deficit, as well as continued supply-chain disruptions. On the financial front, Steel reported record Q2 sales of $6.2 billion (up 39% from a year ago), along with earnings of $6.73 per share that beat estimates by 33 cents. The firm also reported record cash flow of $1 billion and record adjusted EBITDA of $1.7 billion, both up 70%. Management said steel demand remains “healthy across all of our businesses” and reported near-record backlog volumes and forward pricing levels for steel fabrication operations. To be fair, Wall Street sees some return to normalcy next year, but those estimates have been rising and remain very elevated (north of $10 per share).
Technical Analysis
STLD went bananas on the upside after its January plunge, riding the steel price boom to a spike high near 100 in April. Then came the pullback, and it was a doozy, with shares falling 38% and sinking below their 40-week line. However, notice the tightness near the lows (a sign of accumulation), which preceded the strong rebound we’ve seen since, including last week’s good-volume rally. We like the action, but given the market, we think aiming to grab a small position on dips makes the most sense.
| Market Cap | $16.5B | EPS $ Annual (Dec) | |
| Forward P/E | 4 | FY 2020 | 2.83 |
| Current P/E | 4 | FY 2021 | 16.12 |
| Annual Revenue | $22.2B | FY 2022e | 21.39 |
| Profit Margin | 20.3% | FY 2023e | 10.37 |
| Qtrly Rev | Qtrly Rev Growth | Qtrly EPS | Qtrly EPS Growth |
| ($M) | (vs. yr-ago-qtr) | ($) | (vs.yr-ago-qtr) |
| Latest qtr | 6.21 | 39% | 6.73 | 98% |
| One qtr ago | 5.57 | 57% | 6.02 | 187% |
| Two qtrs ago | 5.31 | 104% | 5.78 | 496% |
| Three qtrs ago | 5.09 | 118% | 4.96 | 873% |
Stock 9
Stem Inc. (STEM)
| Price | Buy Range | Loss Limit |
| 15 | 13.0-14.0 | 11-11.5 |
Why the Strength
So here’s a interesting story: Stem Inc. is all about energy storage, including actual storage systems (sourced from battery OEMs) but, more importantly, through its Athena artificial intelligence software platform, which allows clients to save on energy costs via demand charge management and real-time processing of demand and energy prices. The big idea here is that fossil fuels are always on (barring a weather event or the like), but as the transition to renewable sources gains steam (with their intermittent energy production), the need for energy storage will be vital, as it can provide grid power right quick when needed—and Athena’s seemingly best-in-class forecasting and AI capabilities unlocks the value of these storage systems, saving clients money and keeping the lights on. In a nutshell, it dramatically increases the value of these renewable energy assets by optimizing output, which should be a gigantic market going forward. Stem has been around a while (it came public via a SPAC last year) and has more than 2GWh of storage assets under management (and 32 GW of solar assets, up from zero a year ago!), so it’s the go-to player in this field, with clients usually inking 10- to 20-year deals. Not surprisingly, the numbers are beginning to accelerate: Revenues are bounding ahead at triple-digit rates, as is the overall backlog ($727 million at the end of Q2, up 191%), while contracted annualized recurring revenues finished June at $58 million, up 12% from the prior quarter (and likely to be in the mid $70s by year-end). The bottom line is still in the red but we think Wall Street (298 funds own shares) is far more focused on capturing market share. Stem will host an Investor Day on September 28, which could move the stock.
Technical Analysis
STEM had a good first few weeks after the SPAC buyout, but then crashed and burned like most of its brethren that came public that way, falling to 6 in May and again in June. Shares did bounce and hold up for a few weeks after that, but the green energy bill changed perception, causing STEM to basically double in just a couple of weeks! It’s somewhat speculative and crazy volatile, but the stock has held the move very well, especially given the market. If you’re game, you could nibble on further dips.
| Market Cap | $2.27B | EPS $ Annual (Dec) | |
| Forward P/E | N/A | FY 2020 | -3.46 |
| Current P/E | N/A | FY 2021 | -1.15 |
| Annual Revenue | $201M | FY 2022e | -0.65 |
| Profit Margin | N/A | FY 2023e | -0.31 |
| Qtrly Rev | Qtrly Rev Growth | Qtrly EPS | Qtrly EPS Growth |
| ($M) | (vs. yr-ago-qtr) | ($) | (vs.yr-ago-qtr) |
| Latest qtr | 67 | 246% | -0.21 | N/A |
| One qtr ago | 41.1 | 166% | -0.15 | N/A |
| Two qtrs ago | 52.8 | 183% | -0.32 | N/A |
| Three qtrs ago | 39.8 | 334% | -0.15 | N/A |
Stock 10
Super Micro Computer (SMCI)
| Price | Buy Range | Loss Limit |
| 70 | 64.5-67.5 | 54-56 |
Why the Strength
Name a current trend in the corporate computing space – AI, IoT, cloud, software defined storage, 5G – and Super Micro Computer is benefitting. The San Jose-based company designs and manufactures full server racks as well as components for organizations that want to build their own. Business is growing very fast, up 46% over fiscal 2021 at $5.2 billion, with Q4, ended June 30, seeing the top line soar 53% as growth accelerated through the quarter. The business has been doing super thanks to the company’s plug-and-play server rack systems, which mean customers have shorter lead times for getting new capacity up and running. Super Micro has close relationships with chip providers NVIDIA, will be rolling out lines with new chips coming from Intel and AMD and has been expanding capacity in anticipation new systems will be in big demand and drive sales higher. For the current year, fiscal 2023, Super Micro’s management says revenue will come in around $6.6 billion, which would be up 27%. The company has had the good fortune of being able to beat expectations a lot on recent quarters and it has the capacity to continue to do so, with the ability to meet up to $12 billion in sales between its California and Taiwan factories. Increasingly, the company’s focus on energy efficient products is winning more business than peers. Super Micro’s “green computing” uses energy efficient chips, free air cooling (using cooler exterior air to help regulate temperatures) and pooled computing resources to create a far more power efficient data center. Long-term, management is bullish on growth and profitability, suggesting its 17% gross margin, which has been the top of their guidance, may be the new normal. The low P/E (12 times trailing earnings) is an added plus.
Technical Analysis
SMCI has shown signs in recent months of wanting to get going, surging to new highs in November 2021 and, after a tedious retreat, doing so again in May—but each time, the stock was pulled down by the market. But now SMCI is clearly changing character, with a jaw-dropping seven-week rally that easily moved it to new highs. It’s a bit thinly traded and moves around a ton, but further dips would be tempting; just be sure to use a loose loss limit if you enter.
| Market Cap | $3.68B | EPS $ Annual (Jun) | |
| Forward P/E | 9 | FY 2021 | 2.48 |
| Current P/E | 13 | FY 2022 | 5.65 |
| Annual Revenue | $5.20B | FY 2023e | 7.74 |
| Profit Margin | 8.9% | FY 2024e | 8.60 |
| Qtrly Rev | Qtrly Rev Growth | Qtrly EPS | Qtrly EPS Growth |
| ($M) | (vs. yr-ago-qtr) | ($) | (vs.yr-ago-qtr) |
| Latest qtr | 1.64 | 53% | 2.62 | 223% |
| One qtr ago | 1.36 | 51% | 1.55 | 210% |
| Two qtrs ago | 1.17 | 41% | 0.88 | 40% |
| Three qtrs ago | 1.03 | 35% | 0.58 | 5% |
Previously Recommended Stocks
Below you’ll find Cabot Top Ten Trader recommended stocks. Those rated HOLD are stocks that traded within our suggested buy range within two weeks of appearing in the Top Ten and still look good; hold if you own them. Stocks rated WAIT have yet to dip into our suggested buy range … but can be bought if they do so within the next week.
Those stocks rated SELL should be sold if you own them; they will no longer be listed here. Finally, Stocks in the DROPPED category are those that failed to trade within our buy range within two weeks of our recommendation; that’s not a bad thing, we just never got the price we wanted. Please use this list to keep up with our latest thinking, and don’t hesitate to call or email us with any questions you may have. New recommendations each week are in bold.
| Date | Stock | Symbol | Top Pick | Original Buy Range | Price as of 8/29/2022 |
| HOLD |
| 8/15/22 | Albermarle | ALB | ★ | 272-283 | 285 |
| 7/5/22 | Alliance Resource Ptnr | ARLP | | 17.3-18.3 | 26 |
| 8/22/22 | Alnylam | ALNY | | 208-215 | 209 |
| 8/15/22 | Arista Networks | ANET | | 123-127 | 122 |
| 6/27/22 | Biomarin Pharm | BMRN | | 83-86 | 90 |
| 8/22/22 | Carlisle Co. | CSL | | 297-307 | 303 |
| 5/16/22 | Celsius | CELH | | 53-56 | 105 |
| 8/15/22 | CF Industries | CF | | 98.5-101.5 | 113 |
| 7/18/22 | Consol Energy | CEIX | | 53.5-56.5 | 75 |
| 7/25/22 | Chesapeake Energy | CHK | | 89-92 | 104 |
| 8/1/22 | Chart Industries | GTLS | | 187-193 | 195 |
| 6/21/22 | CrowdStrike | CRWD | | 161-168 | 192 |
| 8/22/22 | Deckers Outdoors | DECK | | 318-324 | 328 |
| 5/10/21 | Devon Energy | DVN | ★ | 25-26.5 | 74 |
| 6/6/22 | Enphase Energy | ENPH | | 197-205 | 285 |
| 8/1/22 | EQT Corp. | EQT | | 40.5-43 | 50 |
| 8/8/22 | First Solar | FSLR | | 100-104 | 122 |
| 8/15/22 | Flex Ltd | FLEX | | 18.2-19.2 | 18 |
| 7/25/22 | Gitlab | GTLB | ★ | 53.5-56 | 63 |
| 8/15/22 | Globalfoundries | GFS | | 60.5-62.5 | 59 |
| 8/22/22 | Hyatt | H | | 84-86 | 90 |
| 8/22/22 | Insulet | PODD | | 257-264 | 264 |
| 7/18/22 | Lantheus | LNTH | | 65-67.5 | 80 |
| 8/8/22 | Monolithic Power | MPWR | | 512-532 | 462 |
| 6/13/22 | Neurocrine Bio | NBIX | | 89-92 | 105 |
| 8/15/22 | New Fortress Energy | NFE | | 54.5-57.5 | 60 |
| 8/8/22 | Onsemi | ON | | 64-66 | 70 |
| 8/22/22 | Novanta | NOVT | | 145-148.5 | 139 |
| 8/8/22 | Paylocity | PCTY | ★ | 248-263 | 241 |
| 8/1/22 | Petrobras | PBR | | 13.5-14 | 15 |
| 7/11/22 | PTC Therapeutics | PTCT | | 41-43 | 50 |
| 8/15/22 | Pure Storage | PSTG | | 29-31 | 30 |
| 6/13/22 | Scorpio Tankers | STNG | | 31-33 | 42 |
| 8/1/22 | Shoals | SHLS | | 21-22.5 | 25 |
| 6/27/22 | Shockwave Medical | SWAV | | 185-195 | 310 |
| 8/1/22 | WillScot | WSC | | 37-38.5 | 41 |
| 8/22/22 | Wingstop | WING | | 115-120 | 113 |
| 8/22/22 | Wolfspeed | WOLF | ★ | 104-109 | 116 |
| 8/1/22 | WW Grainger | GWW | | 530-550 | 565 |
| WAIT |
| 8/22/22 | Denbury | DEN | | 86-89 | 92 |
| SELL RECOMMENDATIONS |
| 6/21/22 | Argenx | ARGX | | 345-355 | 383 |
| 7/18/22 | Axonics | AXNX | | 60-62 | 72 |
| 8/1/22 | Cadence Design | CDNS | ★ | 178-183 | 175 |
| 7/18/22 | Day One Pharma | DAWN | | 16-17.5 | 23 |
| 8/8/22 | Frontier Group | ULCC | | 13.7-14.5 | 13 |
| 7/25/22 | Lattice Semi | LSCC | | 54.5-56 | 56 |
| 6/21/22 | Ollie’s Bargain Outlet | OLLI | | 56-58.5 | 59 |
| 5/23/22 | Nexstar Media | NXST | | 173-178 | 193 |
| 8/15/22 | Trade Desk | TTD | | 70-74 | 63 |
| DROPPED |
| 8/15/22 | Cheniere Energy | LNG | | 152-156 | 165 |
The next Cabot Top Ten Trader issue will be published on September 6, 2022.
About the Analyst
Mike Cintolo
A growth stock and market timing expert, Michael Cintolo is Chief Analyst of Cabot Growth Investor and Cabot Top Ten Trader. Since joining Cabot in 1999, Mike has uncovered exceptional growth stocks and helped to create new tools and rules for buying and selling stocks. Perhaps most notable is his development of the proprietary trend-following market timing system, Cabot Tides, which has helped Cabot place among the top handful of market-timing newsletters numerous times.
