Cabot Top Ten Trader Issue: January 16, 2024

Leaders Look Good, but More Volatility Likely

After a sour first week of the year, leading stocks snapped back very nicely last week—in fact, the action of leading stocks as a whole remain one of the market’s most positive signs, with the vast majority still respecting support and showing solid price/volume action. Throw in the other encouraging intermediate-term vibes (trends of the indexes and most sectors are up) and we remain bullish overall. That said, we’re also keeping our feet on the ground: The current advance is now about two and a half months old, earnings season is here and the broad market was a notable laggard last week, all of which means further volatility and crosscurrents are possible, even likely. Bottom line, we’re holding most of our strongest stocks, though partial profits here and there isn’t a bad idea and we’re aiming to enter new trades on dips toward support. We’ll leave our Market Monitor at a level 7.

This week’s list is another where there’s something for everyone, from growth to housing to turnarounds—and some names showing strength on upped guidance. Our Top Pick is Glaukos (GKOS), one of many medical-related stocks that’s showing strength thanks to a new product, great Q4 guidance and expectations of accelerating growth this year.

Stock 1

Atlassian (TEAM)

Why the Strength
Project management and collaboration specialist Atlassian is positioning itself to dramatically boost revenue from its customers when the next software spending cycle begins (industry experts see the industry starting to turn up this year). The company has spent the last few years transitioning to cloud-only installations in an effort to boost user productivity and improve functionality as remote work becomes more the norm. Atlassian’s flagship products, Jira (which allows technical and business teams to manage projects) and Confluence (a connected workspace that organizes knowledge across all teams), along with recent acquisitions of IT data quality management firm AirTrack and video messaging platform Loom, account for a combined customer base of 265,000 that use some or all of these software tools—and that number is growing each quarter. What’s more, artificial intelligence now powers the editing tool for Jira and Confluence while allowing developers to use natural language (instead of technical jargon) to search for issues. Atlassian also just launched a new product dubbed Compass, which helps developers track the more complex aspects of software projects. While growth has slowed with the tough tech spending environment of the past few quarters, it remains healthy and analysts see the deceleration phase being over: In fiscal Q1 (ended September 30), the company boasted revenue of $978 million (up 21%), while per-share earnings of 65 cents beat estimates by 11 cents and free cash flow of $163 million more than doubled from a year ago and was about equal to net income. When Atlassian reports fiscal Q2 earnings on February 1, management expects a 17% sales increase to just over $1 billion, led by a 33% leap in data center revenue and a 26% increase in cloud revenue, and Wall Street sees the top line picking up steam after that while the bottom line cranks out mid-20% growth for at least the next year and a half.

Technical Analysis
TEAM was one of the countless tech stocks that, while technically bottoming in late 2022 (near 115), wasn’t able to sustain any sort of uptrend after an initial rebound, with shares making no net progress from the start of February until early November of last year. But TEAM came alive in December, with the stock and relative performance (RP) line lifting to 15-month highs, and the latest bobbing and weaving south of round-number resistance near 250 looks normal; try to buy on a bit more weakness.

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Stock 2

Cameco (CCJ)

Why the Strength
Uranium prices have doubled in the nearly two years since Russia invaded Ukraine, in part due to supply disruptions from Russia itself (one of the top producers), though a big part of it is demand-related, too, with a jump in countries pledging to increase their nuclear power generation; all in, the U.S. and 20 other countries have announced plans to triple nuclear power by 2050, led by China and Japan, with utilities signing the highest number of uranium contracts since 2012. Back on the supply side (and further contributing to price pressures), a leading uranium producer last week warned there would likely be supply issues in the coming two years due to shortages of a key chemical used to extract uranium from ore. The news sent shares of Cameco (covered in the November 6 report) soaring, since the company is well positioned to fill the supply gaps and will get a boost from higher pricing. The company is one of the world’s top uranium miners and is benefiting from strong momentum across the nuclear energy industry thanks to what it calls the industry’s “best ever market fundamentals.” After last week’s statement from the U.S. Energy Department that it would solicit bids from uranium enrichment providers to establish a domestic supply of fuels for nuclear reactors, a major Wall Street bank drew attention to the “very tight” global uranium market, adding that supply disruptions worldwide would likely lead to even higher uranium prices ahead. While the numbers here can be lumpy, Cameco’s financial position is strong, with Q3 revenue increasing 48% from a year ago and inspiring management to raise the sales outlook going forward, based on the conviction a new long-term uranium contracting cycle is underway—but also bolstered by a spot market portfolio representing an impressive stream of earnings and cash flow that benefits from rising prices. When the firm reports Q4 earnings in early February, revenues should be up 57%, while analysts see the bottom line leaping in 2024.

Technical Analysis
CCJ etched a volatile, jagged launching pad from early 2022 until Memorial Day of last year when the stock broke out on the upside—and it had a very solid run afterwards, with just an early-October wobble on the way to the mid-40s in early December. Shares did see some selling after that, but the damage was reasonable, and last week’s big-volume surge to new highs tells us the buyers are still lurking. Given that CCJ is near round-number resistance at 50, we’ll aim to enter on weakness.

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Stock 3

Flex Ltd (FLEX)

Why the Strength
Flex is a leading global electronics manufacturing and logistics solutions provider, offering components, circuit board fabrication, design and engineering services to some of the world’s biggest companies at one of the industry’s lowest price points. The company operates in two segments, Reliability and Agility, with the former segment focused on automotive, industrial and health solutions, while the latter unit is devoted to consumer devices, cloud network infrastructure and premium household/lifestyle brands. (Flex’s third segment, the Nextracker solar business, was recently fully spun off after that firm’s IPO about a year ago.) As the post-Covid global supply chain continues to be repositioned while manufacturing capacity expands, Flex has benefited from these trends in the form of strong backlog and customer wins across multiple industries and continents. In its fiscal Q2 (ended September 29), revenue of $7.5 billion came in 4% lower (due to a strong comparison from last year’s Q2), but earnings of 68 cents beat estimates by 17%. Revenue growth in Flex’s automotive business outpaced the industry, while the cloud business also outperformed and is expected to grow 20% per year, driven by demand for generative artificial intelligence items. Cloud is where Flex plans to place an increasing focus, along with digital health and next-gen mobility (electric and autonomous vehicles and EV charging). Flex foresees eye-popping 50% compound annual growth in the mobility business and 10% growth in digital health, driven by “smarter and smaller” devices for drug delivery. Management guided for fiscal 2024 earnings (ending in March) to grow 8%, with Wall Street eyeing a sizable bottom-line acceleration in the next couple of years. The fiscal Q3 report is due out January 31 (post-market).

Technical Analysis
FLEX actually got going in the second half of 2022, with pullbacks to the 40-week line in late 2022 (near 12), April/May 2023 (just above 14) and again last October and December (at 17 and 18, respectively), finding support after multi-month rest periods. But after the December dip, we see FLEX moving up impressively, with the stock rallying five weeks in a row on plenty of big volume despite some occasional market hiccups during that time. You could enter after today’s dip or on a bit more retrenchment.

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Stock 4

Glaukos (GKOS) ★ Top Pick ★

Why the Strength
Glaukos is a pioneer in developing new treatments for glaucoma and other eye disorders and diseases. The company pioneered micro-invasive glaucoma surgery (MIGS) early last decade, which is emerging as a standard worldwide. In preliminary results for Q4 and full-year 2023, Glaukos saw revenue rise 14% to $81 million in the quarter (fastest growth rate in many quarters) and 11% to $313 million for the year, beating consensus estimates for both periods. Probably more important than the good results is the excitement around 2024 since regulators recently approved the firm’s iDose offering, which is a biocompatible titanium implant that delivers a small but around-the-clock level of a drug to a glaucoma patient’s eyes for up to three years. It’s likely an important step in the treatment of the affliction since the current treatment course of regular eye drops is shown by studies to be largely ignored or done incorrectly by patients – more than half of prescriptions never get refilled after six months. Glauckos says this treatment gives it a portfolio of eye treatments that extend to all stages of glaucoma and give surgeons options to intervene against the progression of the disease far earlier than they’ve previously had. Management is clearly bullish on iDose, having announced this month the price will be $13,950, much higher than analysts were expecting. Glaukos management said the initial sales of iDose should help get 2024 revenue to $350 to $360 million (up more than 14%), conservatively. Glaukos hasn’t turned a profit in six years as it has been investing in new product lines, but expectations are that 2024’s losses will narrow measurably to $1.93 per share. Another positive: Glaukos is debt-free and should be entering 2024 with more than $130 million cash on hand. Granted, it’s not growing at light speed, but we like the acceleration here along with potential upside from the new product. Q4 results are likely out in late February.

Technical Analysis
GKOS had a nice move starting after Q1 earnings in May, running up to the 80 level in mid-July before hitting a wall. The correction from there wasn’t fun (down 26%), but the iDose approval in December changed everything, with two huge-volume daily gains, and after a bit of rest, a move to higher highs after the firm released preliminary results for Q4. You could nibble here with a loose stop, though we’d prefer targeting dips of a couple of points.

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Stock 5

GoDaddy (GDDY)

Why the Strength
We’re seeing a handful of leading names these days that, while doing fine fundamentally, don’t offer much that’s truly special when it comes to growth—yet, after being left for dead, investor perception has taken a sharp turn up since the market got going in November due to big cash flow and some modest fundamental improvements coming this year. That’s the story with GoDaddy, which caters to smaller (often very small) proprietorships and small businesses, offering a variety of web services that help them get online and have a reasonably thorough online presence: It can start with domains, hosting, security, email and tailored logos, then progress to building an online store with payments and offline point-of-sale management and there’s even help with overall commerce management, marketing and social media, too—effectively it’s a one-stop shop for the small fry. Indeed, the firm has north of 21 million clients, but they pay an average of just $200 per year (85% retention rate is very good given the small size of customers). As you can see in the table below, growth has been slow, but many think that could pick up—GoDaddy’s Generative AI web-building platform (dubbed Airo) is being talked up by management because it exposes customers to more of its services and should lead to greater cross-selling. In the meantime, the firm’s commerce offerings are growing nicely (up 11% in Q3; the core domain and hosting business was flat) and everything is very profitable, with free cash flow likely totaling $7.25 per share last year (well ahead of earnings)—and management sees even better things ahead, with margins expected to expand another three points or so in 2024 as some heavy investments in recent years fall off. An aggressive share buyback program (share count is down 20% in the past two years!) is also helping. It’s an interesting special situation. Earnings are due February 13.

Technical Analysis
GDDY was dead as a doornail for a few years, but the early-November earnings report changed everything, with the stock gapping up in a huge way and running to new all-time highs in the 108 area. Shares did get hit a bit during the early-January rotation, but they found support near the century mark and have bounced back since. We do think GDDY could futz around a bit more, but we’re OK starting a position here or on dips.

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Stock 6

Intuitive Surgical (ISRG)

Why the Strength
Intuitive Surgical specializes in minimally invasive surgical tools, primarily its da Vinci robotic surgery platform. It’s a series of robotic arms that surgeons utilize to perform internal surgeries including in the urology and gynecology fields. The company has been operating for three decades in the robotic surgery field but still shows plenty of growth with more than 2.2 million surgeries performed with da Vinci systems worldwide in 2023, up 22% from the year before. Intuitive Surgical makes its money from selling the systems, of course, but the higher-margin sales come from servicing the machines and providing add-on accessories, such as tools for specific surgeries. Revenue in 2023 probably exceeded $7.1 billion according to a preliminary announcement last week, a 14% gain over the year prior. In many ways, da Vinci is the standard robotic surgery tool, which gives the business natural momentum, but it’s not without hurdles—China is underperforming due to regulations and price controls, and bariatric surgery is expected to eventually suffer from the rise of weight loss drugs. That said, trends in the U.S., Europe and Japan remain strong, and Intuitive Surgical sees a lot of potential from a more recently developed system for lung evaluation and biopsies, called Ion. It’s still a young system – in 2020 there were just 18 Ions in use worldwide, but that has grown quickly to 534 performing some 16,500 procedures in 2023. Management says the system probably could identify more than 500,000 lung cancers that go undetected each year in the U.S, and E.U., where the product is approved, and probably more than one million in China, where approval is pending. Full quarterly results are disclosed next week (January 24).

Technical Analysis
ISRG reacted well to earnings last May and ran nearly back to its 2021 highs in the summer but then gave it all back in the summer and fall—when all was said and done, the stock dipped 29% and saw some capitulation selling into the October low. The rally from there was solid, though didn’t set the world on fire, at least compared to the rest of the market. But last week, the Q4 guidance brought a breakout, with ISRG rallying 10% on Wednesday and holding those gains since. We’ll set our buy range back toward the 350 support area.

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Stock 7

Pinterest (PINS)

Why the Strength
Social media site Pinterest continues to attract a massive worldwide audience for those interested in finding recipes, home-and-style inspiration and crafting ideas, as well as organizing and planning tools. But Pinterest has more recently become a key facilitator for e-commerce, with more than half its users engaged in online shopping. And with the company’s integration of relevant ads with search results driving a substantial increase in advertising revenue, as well as strategic partnerships with giants like Amazon and Salesforce, many analysts believe 2024 will be a banner year for the company across several metrics. (Encouragingly, Pinterest’s recent partnership with Amazon Ads has resulted in a greater than 50% improvement in search relevance and a 100% improvement in overall relevance.) Further setting the stage for accelerating revenue growth is the company’s focus on expanding its monthly active user (MAU) base well beyond 500 million this year; there were 482 million MAUs in Q3, up 8% year-on-year, and analysts project 525 million MAUs are attainable by early this year. Meanwhile on the artificial intelligence front, management said the company’s use of generative AI has been “a great source of strength,” also providing “significant increases” in ad relevance. Big picture, there’s nothing terribly new in terms of the platform, but the top brass is making the right moves and Wall Street sees it paying off with gradually accelerating sales and earnings growth—indeed, a major Wall Street institution just pegged Pinterest as a top platform-related stock for 2024 on the belief the firm will reap gains from its deal with Amazon (a reason for the stock’s latest show of strength), as the number of ads appearing per page has increased along with page download speed. On the financial front, sales growth is already picking up steam as earnings regularly top estimates, meaning the current estimates (21% earnings growth in 2024) are likely conservative. Earnings are likely out in early February.

Technical Analysis
PINS was crushed in the bear market and effectively spent a year bottoming out, with lots of resistance in the upper 20s and never-ending choppy action through October of last year. But the Q3 report (and an improved market) changed everything, with shares staging a huge gap up (heaviest weekly volume in two years), leading to eight weeks up in a row that also saw plenty of tight, constructive action. Shares have been up and down the past three weeks with no red flags—we’re OK entering here with a stop under the 50-day line.

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Stock 8

Shopify (SHOP)

Why the Strength
E-commerce is a massive $9 trillion industry predicted to more than double in the next five years. Sitting atop this growth trend is Shopify (covered in the December 11 issue), which is the leading e-commerce software platform in the U.S. and the fourth-biggest globally. That alone is obviously a big growth angle, but the company is actually thinking bigger, pushing to become the world’s premier retail operating system for online and offline businesses of all sizes. Helping to facilitate this focus is the company’s move (along with everyone else) to embrace artificial intelligence, not just down the road but by providing tools for clients to harness data by embedding AI capabilities across the entirety of their businesses right now. To that end, the firm has released Shopify Magic, which offers AI-generated product descriptions that help merchants expedite the process of launching new stores or products. Shopify also just made available its Checkout Extensibility feature to all its clients, which is fully compatible with Shop Pay, making it the world’s first completely customized one-click checkout. Shop Pay in turn is quickly gaining popularity, with more choosing it over guest checkout and credit cards; it facilitated $12 billion in gross payments volume (GMV) in Q3, an increase of 50% year-over-year. Another benchmark underscoring Shopify’s renewed focus was its fourth consecutive quarter of positive free cash flow of $276 million in Q3, which accounted for 16% of revenue (versus negative free cash flow of $148 million a year ago). A strong holiday shopping season that set new records for online spending (the Black Friday to Cyber Monday period saw a 24% leap in sales from Shopify merchants) contributed to the stock’s overall strength, and Wall Street sees continued 20%-ish annual sales growth for several years ahead while earnings and free cash flow grow at faster rates. It’s not the young buck it once was, but Shopify remains a solid story. Earnings are likely to be released mid-February.

Technical Analysis
We missed getting into SHOP last month as the stock never dropped into our suggested buy range, instead rallying a few points before meeting resistance at 80. However, the stock has since had a decent exhale to start the year, tagging its 10-week line in the process, and impressively, SHOP immediately roared back to new highs, albeit on mundane volume. Even so, we like the relative strength and think modest dips would be buyable.

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Stock 9

TopBuild (BLD)

Why the Strength
It’s a fairly homogeneous group, but TopBuild looks like the leading housing supply firm of this intermediate-term advance. The firm’s claim to fame is being a top player in insulation—it’s #1 in residential installation and distribution, in commercial distribution and in mechanical and industrial-related distribution, too; all told, about 60% of revenue comes from installation, with 65% of the overall business residential. Obviously, the slowdown in single-family starts has affected business of late, but a shift toward multi-family and light commercial work has helped smooth things out, while the regular commercial business is doing great: In Q3, the overall installation business saw revenues rise 4.9%, with commercial being the big driver, with revenues up 9.4% (and up 13% for the first nine months of the year). It was a same (but slower) story for distribution, where overall business slipped 2%, though commercial was up 2%. Of course, none of that is thrilling, but TopBulid is in favor for three reasons, with the first being the Fed, with expectations that sinking mortgage rates (down about a point and a half from the peak) will goose the residential market. Second, TopBuild is a major industry consolidator (“acquisitions are by far our #1 capital allocation priority” according to the top brass), with four buyouts last year that should contribute $173 million in revenue—and that doesn’t count its big purchase of SPI (a specialty distributor of mechanical and metal building insulation), which should close this year and bolster the top line by another $700 million! Third, TopBuild is seeing margins improve (EBITDA margin of 20.4% in Q3, up 160 basis points), which is keeping earnings growth in good shape. Analysts see the bottom line up 9% this year, but that should prove conservative, especially if the housing market picks up and the economy remains strong. Earnings are coming February 21.

Technical Analysis
We tried to grab a stake in BLD in December, but the stock soared to new highs after the Fed hinted it was done with its tightening campaign, so we missed our entry. Since then, though, the stock stalled out near year’s end and, net-net, has come in a little bit so far this year as the 10-week line catches up. We do think the stock could retreat a bit more, but we’re OK starting a position here or (preferably) on dips.

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Stock 10

TransMedics Group (TMDX)

Why the Strength
TransMedics’ tagline is “Transforming the Standard of Care for Organ Transplants,” and that pretty much explains the firm’s gigantic idea: The current standard of care in this field (static cold storage) works for a few hours, but limits transportation options and, best intentions aside, results in a high risk of complications for recipients. TransMedics, though, has a better way, dubbed its organ care systems (OCS) for hearts, lungs and livers, which mimic real life for the organs, dramatically increasing how long they can “stay alive,” allow for monitoring so doctors can be sure the organs are still healthy and—most important—lead to far better outcomes. Translation: Using OCS, more transplants are able to occur (including many organs that used to be discarded even before cold storage!), and those that do have far less complications (50% fewer severe post-transplant issues with lungs, 65% fewer with hearts and 43% fewer in livers). Interestingly, though, TransMedics isn’t content to just sell machines—instead, the firm has built an entire network to make it as easy and seamless as possible for a hospital to increase transplant volumes, handling the procurement and logistics, including a recently launched aviation division and command center (!), where the firm is assembling a fleet of modern jets and dedicated pilots that can get organs from all over the U.S. to the major centers where the vast majority of transplants occur (80% of volume in just nine states). Clearly, management isn’t afraid to invest, so the bottom line is in the red, but the top line is exploding higher (Q4 was almost surely another triple-digit revenue quarter; analysts see 44% sales gains in 2024, which is likely conservative) and the long-term potential here is enormous. Earnings are likely out in late February.

Technical Analysis
TMDX actually bottomed in March 2022 and began a very choppy but big, sustained advance, soaring all the way to the century mark before the market’s summer/fall correction last year—which led to a whopping 63% decline! Normally that sort of pattern (big run, huge implosion) scares us away, but TMDX looks like a totally different animal since the low: Shares rallied back after the Q3 report on all-time record volume and it’s been acting mostly cool, calm and collected since, with last week’s solid rally to new recovery highs a good sign. It’s not for the rent money, but we’re OK with a small buy here or on further weakness.

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Previously Recommended Stocks

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