Cabot Top Ten Trader Issue: December 5, 2022

Getting Better

All in all, the evidence has continued to show some marginal improvement in recent weeks—there’s still a lot of selling on strength, but more names are moving above resistance; there are still names hitting air pockets, but the number is fewer than a month ago; and there are still many names flopping around wildly, but more and more are settling down (a sign institutions are in control). Plus, some top-down measures (long-term trend, health of the broad market) are looking better … but not quite enough for green lights. All in all, what we’re seeing are steps in the right direction—the market and many individual stocks are doing what they have to in order to repair the damage. But we still need to see continued progress to really extend our line, as little is being sustained on the upside and movements remain driven by the news of the day. We’ll again keep our Market Monitor at a level 5.

This week’s list is a hodgepodge of names from different sectors and in different positions in their charts. Our Top Pick is BioMarin Pharmaceutical (BMRN), which has had some stops and starts but looks to have finally broken out on the upside ahead of good 2023 results and with good news for a high-potential drug in development.

Stock 1

Agnico Eagle AEM

Why the Strength
After spending two straight quarters in the doldrums, gold prices have turned up again, thanks to a weakening U.S. dollar and expectations of less aggressive interest rate hikes from the Fed. Gold’s late-year resurgence has also put the spotlight on gold miners like Agnico, a senior Canadian producer with a pipeline of high-quality exploration and development projects in the U.S., Canada, Mexico and Columbia. Agnico’s all-in sustaining cost (a key metric) of $1,106 per ounce in Q3 was well under the current gold price of $1,820 but higher than a year ago due to increased mining costs. However, cash costs in the quarter were still lower than a year ago despite the inflationary pressures thanks to “solid” cost controls, and increasing gold prices should boost Agnico’s profits going forward. Q3 payable gold production increased a huge 50% from a year ago, to 817,000 ounces, with year-to-date production of around 2.5 million ounces growing 57%. The production boost pushed Agnico’s revenue significantly higher, totaling $1.45 billion (up 47%) in Q3. Cash flow from operations nearly doubled, coming in at $575 million for the quarter and $1.7 billion for the first nine months (up 57%). The company reiterated its commitment to growth through expansion projects and aggressive drilling at its most productive mining operations. Agnico also took a step toward expanding its North American mining footprint when it, along with partner Pan American Silver, recently entered into an agreement to acquire Yamana (which owns Canada’s biggest gold mine, as well as properties throughout South America). Analysts see revenue jumping 52% in Q4 and 2023 should be solid if gold continues to rally. A 3.1% dividend yield ties a bow on this package.

Technical Analysis
AEM got off to a good start in 2022, gaining 25% in the first 15 weeks, before reaching a high water mark in April at 66. The stock promptly turned tail after that on gold price weakness, falling to 38 in July, which is where a multi-month bottoming effort began—shares generally held between 37 and 46 into November, but now the stock has found buyers, pushing above its 40-week line for the first time since the spring. We’re OK nibbling here or (preferably) on dips.

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Stock 2

Apollo Global APO

Why the Strength
You likely haven’t heard of Apollo Global, but you’re undoubtedly familiar with many of its holdings, including Yahoo, ADT and Shutterfly. Apollo is one of the world’s largest asset managers, specializing in private equity, credit and real estate investments. Most of Apollo’s earnings are from fees on committed capital (which is mostly locked up for seven years or more!) and spread-related earnings (mainly through its insurance business)—both of which result in stable, recurring income in an otherwise volatile business. That said, there are also good-sized performance fees from its private markets business. But Apollo is more than just managing financial assets, as it often takes an active part in transforming the companies it acquires. For its majority stake in Yahoo (whose revenue jumped 13% in the year after Apollo took over in 2021), for instance, Apollo plans to boost its sports, finance and email functions, intending to add a sports betting and retail stock trading platform to the mix. The numbers here are relatively lumpy, but in Q3, total revenue of almost $3 billion increased a whopping 176%, supported by record quarterly fee-related income (FRE) of $365 million (up 14%; FRE smooths out some of the bumps or irregular gains on sales), along with growth in management fees and record transaction fees. Moreover, total assets under management (AUM) of $523 billion reached a new record (up 9%), including “strong” asset management and retirement services inflows totaling $34 billion. Long-term, Apollo plans to more than double earnings and FRE by 2026 and sees a “favorable interest rate uplift” next year and beyond, while analysts expect the bottom line to be back near $7 per share in 2023. It’s a solid Bull Market stock.

Technical Analysis
APO peaked at 80 last October when the bulls promptly hit the brakes on the stock’s 19-month rally. Shares slid along with the broad financial sector for the first half of this year, finally finding support in June near 46. The summer rally faded with the market, but APO’s retest of its June lows held, and the stock has changed character since, booming through its 40-week line in early November and kiting higher since. Today’s drop was sharp (most financial stocks dipped) but shares are still north of their 25-day line. We’ll set our buy range down a bit if you want in.

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Stock 3

BioMarin Pharmaceutical BMRN ★ Top Pick ★

Why the Strength
BioMarin’s most promising drug in its development pipeline, Roctavian, got a lift in late November when the FDA decided not to hold an advisory panel meeting to discuss its biologics license application. Roctavian is a gene therapy that treats hemophilia A under certain conditions, and it has orphan drug designation in the U.S. and E.U., and full approval in the E.U. is expected this quarter. U.S. approval has been problematic: Two years ago, the drug’s application was turned down in a surprise move by the FDA, but the fact that the FDA dropped the recently planned meeting suggests the approval path is clearer than it has been. (BioMarin also says it’s on track for an inspection of its Roctavian manufacturing facility, which is obviously another step in the right direction.) Approval of the drug likely means a huge new revenue stream for the company; in fact, a competing gene therapy treatment was just priced at $3.5 million per patient! BioMarin isn’t reliant on Roctavian, however, as this year it debuted Voxzogo, a treatment for achondroplasia, a form of short-limbed dwarfism. Sales have been brisk, with management saying full-year revenue could be as high as $170 million for that treatment, well ahead of analyst expectations at the start of 2022. BioMarin also offers another six major drugs, including its best-seller Vimizim, with $623 million of revenue last year, used to treat Morquio A syndrome, a rare disorder in which an inability to break down sugar chains to build bone and connective tissue leads to problems including scoliosis. Full year revenue should be about $2.1 billion with EPS of 71 cents, but analysts see the top line up 22% and earnings soaring in 2023.

Technical Analysis
BMRN had a failed breakout stemming from FDA concerns on some of the drugs in the pipeline in August, keeping shares trapped in a very long range. But the stock went on to etch a reasonable double-bottom structure, and the late November, Roctavian-induced advance finally did the trick, with BMRN lifting over the century mark and to its highest level since late 2020. We’re OK grabbing some here or on dips.

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Stock 4

Celsius CELH

Why the Strength
Celsius certainly looks like “the next” Monster Beverage, with a new kind of energy drink that’s gaining adoption and taking share—and, possibly most important for investor perception, the firm has a giant backer that’s likely to continue driving growth for years to come. To review, Celsius’ various energy drink offerings aren’t just copycats of competitors, but thanks to its unique formula, it’s actually made for the active person—there are no preservatives, aspartame, high fructose syrup and the like, and moreover, the drink actually turns on the body’s thermogenesis response (the body produces heat), which in turns boosts your metabolism! Celsius has been rapidly expanding in all sorts of channels, including convenience stores (management sees the biggest opportunity here), fitness centers (Lifetime Fitness), club stores (Sam’s Club and more) and grocery (Kroger’s and Publix). But the big enchilada came in August, when it inked a distribution deal with Pepsi (that firm also took a position in the company via convertible stock)—in the first month or so of the deal being in effect, Celsius saw volumes (up 11%) and products per store (8.3 vs. 7.7) rise nicely, and that’s likely the tip of the iceberg. (The drinks were in 174,000 locations at the end of Q3, up 54% from a year ago). Because of the Pepsi deal, the near-term numbers are funky; Celsius had to pay money to cancel existing distribution deals, plus it will have to fill in inventory, but there’s little doubt sales will growth rapidly in the quarters and years ahead as the Pepsi partnership rolls out going ahead.

Technical Analysis
CELH nosed to new highs in the summer, but as the market caved in again, this stock did get yanked lower—sharply, too, falling 34% within a few weeks. Still, when looking at the weekly chart, the decline wasn’t abnormal given the prior action. More recently, CELH was rejected a couple of times near 100, but has stormed back to its old highs in recent days, a positive sign. As with most names, we suggest starting small, aiming for dips and using a loose loss limit if you want in.

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Stock 5

Five Below FIVE

Why the Strength
Five Below has always been one of our favorite big-picture cookie-cutter stories, selling mostly teen and tween-type goods (candy, sporting goods, cheap electronics, toys, room/décor, pet supplies, beauty products, arts and crafts and more), though it does target younger parents, too—and the goods are almost always priced for $5 or less, though it has been expanding price points to $10 over the past couple of years. Moreover, management has perfected its store concept, with an average 9,000 square foot size that pays back the initial investment in less than a year! There has been increased spending on distribution centers, but the store economics allows for a rapid increase in its footprint; the firm has 1,292 stores now, up 10% from a year ago, and the top brass thinks it can eventually have 3,500 in the U.S., so there’s plenty of whitespace out there to fill in. All that said, the company has hit a few snags in recent years—first when the U.S.-China trade war was heating up, then of course the pandemic, which shuttered many stores, and more recently inflation, which has hiked both costs of goods sold and SG&A, even as sales slowed. However, the Q3 report and outlook has Wall Street thinking the underlying growth story is back on track: Sales and earnings topped expectations, and management sees the holiday quarter bringing flat same-store sales (snapping the streak of shrinkage of late), while earnings should total near $3 per share, up 20% or so from a year ago; they’re also sticking with their long-term forecast of $10 of annual earnings by 2025 ($4.61 projected for this year). Five Below looks like a solid growth and turnaround idea.

Technical Analysis
FIVE was basically cut in half from its peak in August 2021 to its low in May 2022, but it’s been repairing the damage since then, with a solid bottoming effort into the summer and a slow advance in the fall. The stock lifted above some resistance (and its 200-day line) in early November, but it was last week’s huge earnings reaction (biggest volume in 14 months) that could be the game changer. We’ll set our buy range a bit lower, thinking shares will relax in the near-term.

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Stock 6

Gap Inc. GPS

Why the Strength
There are plenty of bears hovering around this beaten-down retailer, but they may have oversold the fact that people still buy jeans and casual clothes at Gap stores and Old Navy locations. Third quarter results, reported mid-November, destroyed pessimistic estimates, with the company posting a 1% same-store sales increase in the period when a decline of 2% was forecast, while earnings of 71 cents per share easily outpaced expectations of a breakeven quarter. There was still weakness in Old Navy, which accounts for just over half of sales (Gap, Banana Republic and Athleta are its other brands). Yet Old Navy’s same-stores dropped 1% against a Street-forecast 4% slip, and metrics like expanding gross and operating margins have given fresh air to bulls. Bears point to heavy discounting as a factor in better sales, but management counters that eliminating inventory gives the business a reset for next year. Basically, a lumpy pandemic supply chain and missteps by management left the company with too much fleece and sweaters and too little of items people feel comfortable wearing in their return to the office. Gaps says slashing prices to get goods out is part of its plan to restock as its manufacturing efforts shift to the Americas and away from Asia to balance out supply needs. The lack of a permanent CEO (Sonya Singal stepped down in July) hurts the narrative that Gap’s turnaround is underway, as do expectations the current quarter will be weaker. But there’s a growing feeling the worst has passed, or close to it—analysts see fiscal 2024 (which starts next February) bringing a small sales gain and earnings of 80 cents per share, both of which could prove conservative.

Technical Analysis
GPS got crushed from May 2021 through June 2022, falling from a peak near 35 to a low in the 8 area. The bounce in the summer was weak, but the retest in September held—and, really, since then, GPS has been extremely impressive, advancing steadily to 12 and showing an accelerated upmove to 15 before and after earnings on giant volume. It’s low priced, but a pullback of a few dimes would be interesting.

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Stock 7

Nutanix NTNX

Why the Strength
Nutanix is a leading cloud infrastructure company that deals in hyper-converged systems, which combine servers and data storage into a single platform (basically allowing customers to easily move different apps between clouds). It’s a big area and Nutanix is a leader in the field, though the numbers took a hit in recent years as Nutanix transitioned from selling hardware appliances to run its software into a subscription software model, following in the footsteps of most cloud firms. The good news is that the transition is now complete and appears to be paying off, as evidenced by last week’s fiscal Q1 report that topped expectations on most key metrics. Total revenue of $434 million increased 15% from a year ago, while per-share earnings of 3 cents beat estimates by 15 cents. But more important was the continued progress on the company’s subscription-based business model, with 27% annual contract volume billings growth and a big 34% hike in annual recurring revenue (ARR). Free cash flow, meanwhile, mushroomed from a $2 million loss a year ago to a head-turning $46 million in Q1 (around 20 cents per share and much larger than net income). Additionally, the company touted continued success in retaining customers, with a laudable gross renewal rate above 90%. The other part of the stock’s strength surrounds buyout rumors in recent months, including some last week, with Bloomberg saying that Hewlett Packard Enterprises (HPE) has held off-and-on talks with Nutanix over a potential buyout (though a price agreement has reportedly yet to be reached). Looking ahead, management guided for Q2 revenue of $465 million (up 7% from Q1 if realized) and ACV billings of around $250 million (up 8% sequentially). Wall Street sees sales, earnings and cash flow kiting higher during the next couple of years.

Technical Analysi
NTNX participated in the Covid-era rocket ride along with other major cloud stocks, rising from a trough at 12 in March 2020 to an apex at 44 last September. The going got rough for the stock after that, with shares collapsing almost 70% over the next several months before finally coming to rest at 14 earlier this summer. However, the action since then has been eye-opening—NTNX has had just two down weeks in the past 20 (!), including its recent bullish earnings reaction. We suggest aiming for near-term dips.

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Stock 8

Pinduoduo PDD

Why the Strength
Say what you will but there are many Chinsee (and Chinese-related stocks like casinos) that have put in nice bottoms and are getting going, and Pinduoduo might be the best looking of them all. Of course, business hasn’t exactly been booming for most Chinese companies during this year’s Covid shutdowns, but the country’s third-largest e-commerce player is a standout. Pinduoduo continues to dominate online shopping in China thanks to its deep-discount appeal to stretched consumers. The company, which boasts a monthly active user base of over 750 million and nearly 900 million active buyers, posted head-turning revenue of $5 billion in Q3 that rose 50% from a year ago (in dollar terms), led by an increase in sales from online marketing and transaction services. Per-share earnings of $1.21 beat estimates by 54 cents and were more than triple the year-ago level, while net cash flow increased 34%. A key part of Pinduoduo’s success—and continued growth strategy—is its focus on “ag digitization,” which involves bringing farmers into the digital economy by increasing the number of farm products available on its site. During a recent nationwide farm festival event (sponsored by Pinduoduo), the company launched Harvest Hall, an online platform featuring over 500,000 ag products from around China, generating huge buying interest. The firm is using the same partnership approach to bring the products of small craftsmen and local manufacturers to its customers, resulting in over nine million merchants now selling their wares on the e-commerce site. It expects China’s weak economic conditions will likely serve as a tailwind for the company in the next two quarters as consumers aim to save money, adding that any recovery would take time to become established. Wall Street sees plenty of growth down the road.

Technical Analysis
As with most Chinese stocks, PDD hit its ultimate nadir in March, when it saw wild, giant-volume support show up—but the next few months, while improving, were extremely sloppy and choppy, with three more sharp dips (into June, September and again in October). But it’s hard not to be impressed with PDD’s power of late, including the earnings breakout and follow through last week. We wouldn’t chase it, but a shakeout would be intriguing.

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Stock 9

TechnipFmc FTI

Why the Strength
TechnipFMC was formed back in 2017 by the merger of FMC Technologies and Technip of France, creating a well-rounded oil service outfit that’s nominally headquartered in Britain. Investment-wise, the firm looks like a down-the-food-chain story that’s beginning to play out in the energy sector: With prices remaining elevated for both oil and gas, and after years of underinvestment in the sector, explorers are gradually opening their wallets to drill offshore, which is a big part of TechnipFMC’s business, offering all sorts of subsea trees, drilling systems, design offerings and more. (It has leading market positions in many niche products, and its integrated offering is attractive as a one-stop-shop for clients.). And business there is surging, with order flow promising good things for many quarters to come: In Q3, the firm’s subsea segment (which makes up 81% of revenue) rose 8% from a year ago, but more important, orders (up 26%) and backlog (up 14%) were up nicely, with $3.7 billion of backlog for 2023 and $2.9 billion already booked for 2024 and beyond. Surface (non-offshore) operations are also in big demand (revenue up 19%, orders up 80% and backlog up 263%, though the absolute figures are much smaller), and investors are seeing the writing on the wall—in Q3, total sales were up 10% and earnings remained just above breakeven, but free cash flow was big (40 cents in the quarter alone) and analyst see earnings taking off next year (52 cents per share, likely conservative). Clearly, if energy prices tank, orders will dry up, but the longer this recovery goes on, the greater this company’s backlog will be, which should drive investor perception.

Technical Analysis
FTI peaked in early 2021 and bumped downhill for the next 18 months or so; shares dipped into the mid 5s in December 2021 and actually undercut that low slightly in July. But since then the stock has flipped the switch and entered a solid uptrend—the Q2 report in the summer got it going, and FTI has spent all but a few days north of its 25-day line since. Today was a bad day, but the uptrend is intact; aim for further dips if you want in.

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Stock 10

Wynn Resorts WYNN

Why the Strength
Pent-up demand from the pandemic has led to a boom year for both vacation and business travel as in-person conferencing returns. This has benefited hotel and casino operators, but for Wynn Resorts—which derives a significant chunk of its revenue from the gambling mecca of Macau—continued Covid-related restrictions in China have remained an obstacle. Wynn reported revenue of $890 million in Q3 that was 11% lower from a year ago, along with a per-share loss of $1.20. The subpar results were attributed the travel restrictions in Macau, although the company reported “encouraging pockets of demand” during the recent October holiday season in China. The disappointing top- and bottom lines also obscured a new quarterly record for adjusted property EBITDA (up 12%) at the hotelier’s Wynn Las Vegas and Encore Boston Harbor properties, which generated over $1 billion in EBITDA combined thanks to returning domestic travel demand. The company is also advancing on the late stages of a plan for Wynn Marjan, a multi-billion-dollar integrated luxury resort in the United Arab Emirates, and expects to begin construction on the property (Wynn’s first beach resort) by the middle of next year. The firm said its liquidity position is “very strong” at nearly $3 billion, and management has been confident enough to repurchase 2.9 million shares so far this year (3% of the float). Looking ahead, the biggest part of the story is that Wynn expects improvement in its Macau operations in the quarters ahead as Covid restrictions are gradually relaxed (Wynn’s casino license in Macau was just tentatively renewed for another 10 years). Wall Street sees sales dropping 8% in Q4, then exploding higher in the next several quarters as China presumably reopens in 2023.

Technical Analysis
WYNN’s post-pandemic rally peaked in March 2021; 15 months later, shares were down by nearly two-thirds. But the stock began a bottoming process at that point, with a quick retest in July and, after a choppy rally, another test in October. But a blastoff on Halloween (when Tilman Fertitta, a billionaire investor, took a stake in the firm) changed perception, and WYNN has kited higher ever since. Minor weakness should be buyable.

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Previously Recommended Stocks

The next Cabot Top Ten Trader issue will be published on December 12, 2022.