Cabot Top Ten Trader Issue: July 15, 2024

It’s Early—but Interesting

We rarely draw major conclusions from a couple of days of trading, as false starts can be common on news-driven moves and besides, big trends don’t up and die after a few days. That said, there’s no doubt the action since last week’s inflation report is very interesting, with the broad market coming alive—similar to what we saw in late April, short-term breadth has been hugely positive, so much so that it’s historically led to good things down the road—though that’s happening as some extended tech leaders wobble a bit. All in all, the intermediate-term trend is turning up and we are seeing a few more names emerge, though to us, it remains a stock-by-stock environment, so we’re focused on great setups and potential breakouts in stocks showing relative strength. We’ll leave our Market Monitor at a level 7 but could change that depending on how things go in the days ahead.

This week’s list is very eclectic, with everything from precious metals to bull market stocks to AI plays to biotech—a sign the broad market is kicking into gear. Our Top Pick is Krystal Biotech (KRYS), a mid-cap in the biotech space with very strong sales and earnings projections as their new drug grows rapidly.

Stock 1

Agnico Eagle (AEM)

Why the Strength
A dip in the U.S. dollar in July (mostly due to expectations of Fed rate cuts later this year) have provided already lofty gold prices with a further tailwind. Canada-based Agnico is the world’s third-largest gold miner, with a pipeline of high-quality exploration and development projects in the U.S., Canada, Mexico and Columbia, and owner of Canada’s top two biggest gold operations—the Canadian Malartic mine and Detour Lake project. Last month, Agnico unveiled plans to expand production at Detour Lake in Ontario to one million gold ounces annually over a 14-year period, starting in 2030. Management sees an opportunity to transform the asset into one of the top five gold mines in the world by output with the development of an underground mine to complement Detour’s existing open pit mine. Meanwhile on the financial front, strong gold prices have helped Agnico deliver record free cash flow and operating margin for the last two quarters—in Q1, revenue of $1.8 billion increased 21% year-on-year, with earnings of 76 cents a share beating estimates by 16 cents (a reason for the stock’s strength). Payable gold production in the quarter was just under 900,000 ounces at production costs per ounce of $892 and all-in sustaining costs (AISC, a key metric) of $1,190—roughly half of the current gold price just over $2,400 an ounce—and production was led by record quarterly production at Malartic and “strong” production at the company’s Canadian Nunavut and Macassa operations. But the accelerating gold price is the reason behind the stock’s latest strength, and to that end, management believes the metal is “just starting a long-term secular move” and is focused on cost controls (which a major ratings agency just recognized by upgrading Agnico’s credit with a “stable” outlook). Going forward, Wall Street sees earnings improving on both a sequential and year-over-year basis in each of the next three quarters. A solid dividend (2.1% yield) is an added enticement. The Q2 report is due out July 31.

Technical Analysis
After multiple tests of the mid-40s from late 2022 to February of this year, AEM got going in a big way, rallying to multi-year highs in May as it nosed over 70. Then came some wobbles, though really, the damage was very minor, especially compared to the prior rally—and now AEM and its peer group are at it again, with shares surging nicely since the start of July, making new highs. We’ll set our buy range down a bit, aiming to enter on minor weakness.

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Stock 2

Amkor Technology (AMKR)

Why the Strength
A surging market for advanced semiconductor packaging (a key differentiator in the chip industry that consists of protecting chips from damage and connecting them electronically), plus accelerating demand for artificial intelligence chips, are just two of the reasons behind the strength of Arizona-based Amkor. The company is one of the largest providers of outsourced semiconductor packaging (around 80% of revenues) and test services to integrated device manufacturers, fabless semiconductor companies and foundries. It serves a wide array of customers in the automotive, data center and consumer products industries, and its chips are ubiquitous within the smartphone ecosystem. Lately, however, AI, high-performance computing, 5G and electric vehicles have been major drivers for Amkor’s advance packaging solutions, as each of these industries have higher compute performance and power efficiency requirements. To further its leadership in this space, the company has announced plans to build a $2 billion packaging plant in Arizona (construction to begin next summer), with Apple to be its first and largest customer. A major Wall Street bank just initiated coverage of Amkor’s stock with an “overweight” rating, noting the company is fast becoming a “strong” second supplier for Chip-on-Wafer-on-Substrate packaging to Nvidia, along with other major semiconductor players (a reason for the stock’s latest show of strength). To be fair, business has struggled due to the overall semiconductor sector slowdown in recent quarters, but Amkor said it believes Q1 was the low point for sales and utilization, and it sees “positive signs of market recovery” in multiple areas across its portfolio. Revenue of $1.4 billion was 7% lower from the year-ago Q1, although EPS of 24 cents was 33% higher and beat estimates by 13 cents (a catalyst for the strength). Analysts see earnings rising 20%-ish this year, but growing over 40% in 2025 as the new semiconductor upcycle gains traction. The Q2 report is due out July 29.

Technical Analysis
AMKR finished 2023 on a high note, hitting at a multi-decade peak around 35 just before the calendar flipped. But the first five months of this year didn’t witness any follow-through, as shares remained stuck in a nine-point range and mostly gyrated sideways. The stock, though, tightened up nicely in May and changed character in June, with AMKR breaking out to new highs in the middle of the month and continuing to climb since then. If you’re game, aim for dips of a point or two and use a loss limit in the mid 30s.

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Stock 3

Blackstone (BX)

Why the Strength
Blackstone is the granddaddy of Bull Market stocks, with its fingers in many different portfolio cookie jars that bring in lots of fee-related income—at the end of March, the firm had assets under management of $1.07 trillion, including $782 million that were fee-related, which has led to solid very cash flows (95 cents per share of fee-related earnings in Q1, $3.67 per share during the past 12 months). However, growth has been slow (total assets up just 7% in the past year) and the stock has been lagging in part due to the fact that real estate is still the largest part of business ($302 billion in assets) but performance has been lagging (both of its main strategies were down during the past 12 months), which has kept a wrap on expansion (real estate assets up just 2% over the past year while fee-related earnings were up 1%); growth has also been slow at private equity, another big component of business. Still, given the elevated rate environment, business has been solid overall (the variable dividend totaled $3.36 per share during the past year, which doesn’t hurt), and the stock might be starting to change character as Fed rate cuts—which could lead to an improved environment for everything, especially real estate—come into view. To be fair, there are other Bull Market stocks that act better, but Blackstone has the potential to be a vacuum for institutional money if the environment truly turns up and the money spigots begin to open a bit. Earnings are due out Thursday (July 18) before the market opens.

Technical Analysis
Not surprisingly, BX looked like it was getting going with the market last November, when shares rallied strongly from a shakeout below the 40-week line and eventually staging a powerful breakout in mid-December. But when the calendar flipped, the stock’s advance halted, with shares entering a shallow (14% deep) six-month consolidation. The stock did pretty much hold the 40-week line and it began to tighten up in May—before a sharp uptick in recent days after last week’s inflation report. Granted, BX doesn’t have the typical strong Top Ten-type chart, but we think the setup is a good one—we’re OK nibbling here or on dips.

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Stock 4

Evercore (EVR)

Why the Strength
Although the big comeback in global M&A activity that many on Wall Street envisioned for 2024 has been touch and go, there are signs that merger and acquisition deals are finally picking up. Total worldwide M&A volume rose 30% in Q1 from a year ago—up 60% in the U.S. alone off a low base—according to a major analytics firm, and many analysts foresee the deal landscape heating up from here. Those expectations are one reason behind the growing enthusiasm for Evercore, a leading global independent investment banking advisory firm; advisory revenue comprises the bulk of Evercore’s business, and the company enjoys a top-ten ranking in this category among all investment banks with North American involvement, with a number-one ranking among independent firms. Total revenue in Q1 came in just 2% higher at $587 million, while per-share earnings of $2.13 were in-line with expectations. Advisory fees were 7% lower, but assets under management (AUM) were up 18%, to $13 billion, and up 5% sequentially. More important than those figures, though, is that the company noted the appearance of green shoots on the M&A front, with global M&A activity on a dollar volume basis rising 42% and U.S. M&A volume up 81%, with larger transactions leading the way—while the total number of $100 million-plus deals announced globally was down 7%, the number of announced deals over $1 billion was up almost 50%, with Evercore playing a “meaningful role” on that front. (The firm has advised on five of the 15 largest global transactions year-to-date.) All told, the top brass is “positive” about the trajectory of the broader M&A, capital markets and financing markets, with its backlog building, and it expects to see greater sales strength in the second half of 2024 and into next year. Wall Street sees 60% bottom-line growth this year and 44% next, which could prove conservative if M&A activity gains traction. All in, Evercore has a good niche Bull Market story. Earnings are due out Wednesday, July 24.

Technical Analysis
EVR is benefiting from the improving momentum across the broad financial sector and has gradually picked up steam in recent weeks following a solid breakout last November and advance into its March high just shy of 200. That move was followed by some down-up-down action, with shares making no net progress into the end of June, but now EVR is freewheeling, running to new highs on solid volume. We’ll try to enter on a pullback, and you might consider keeping positions small given the upcoming quarterly report.

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Stock 5

KB Home (KBH)

Why the Strength
Is the economy going to hold up reasonably well (soft landing) while interest rates are cut and mortgage rates come down? That’s essentially the big question when it comes to homebuilders—if the answer turns out to be yes, then the group should thrive as selling prices remain elevated and as demand picks up, driving already-elevated earnings for the group much higher. KB Home, in fact, looks like it could be one of the bigger beneficiaries—the firm operates in nearly 50 markets, but nearly half of business comes from first-time home buyers, with another quarter coming from first time move-up buyers … both groups of buyers that have likely been “stuck” in recent years (either renting or in a starter home) as rates have moved up and as inventories have plunged, so if the environment improves, many could make the leap. Of course, one of the key bullish factors here is that, despite the slower market, KB’s business has remained strong: After a brief hiccup last year, sales have stabilized and earnings started to rebound, and the forward-looking components have hung in there, with the latest quarter (ending in May) seeing orders actually up 2% from a year ago (with the dollar value of orders up 7%), which caused analysts to up their outlook a bit. From here, though, the stock is surely going to be moved by economic and interest rate perception: If the rate cuts are thought to happen (likely starting in September, though today brought some murmurring about cuts this month) while the economy hangs in there and inflation comes down, the current earnings estimates could easily prove very low. A modest valuation (10x trailing earnings) and dividend (1.3% yield) add to the appeal, and it doesn’t hurt that the firm has tons of liquidity to build more aggressively if the environment improves.

Technical Analysis
KBH had a nice run in late 2022 and early 2023, and after a correction last fall, stormed out of the gate when the market bottomed; shares did rest near year-end but ended up running to a high above 70 in March. Then came lots of bobbing and weaving, with a 16% dip and, after a bounce in May, another 12% dip into last week. But the retreat in Treasury rates saw the stock power ahead to new highs on two big days of volume, putting it ahead of most peers. If you want in, we’re OK starting a position here or on minor dips with a stop in the upper 60s, though don’t be shocked to see some near-term wiggles.

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Stock 6

Krystal Biotech (KRYS) ★ Top Pick ★

Why the Strength
Krystal Biotech is seeing continued follow-through from an excellent launch of its treatment Vyjuvek. It has sold $95 million in its first three quarters on the market, a better-than-expected start that now has management telling analysts it sees Vyjuvek as a blockbuster. Today Vyjuvek is approved in the U.S. to treat a rare and serious skin disorder called dystrophic epidermolysis bullosa (DEB), which causes serious blisters on the skin, as well as occasionally occurring on the linings of internal organs, after even the mildest of agitation like scratches or heat. It’s a type of herpes-simplex virus that often appears shortly after birth and which can display moderate to severe blistering. It’s very rare—as many as many as 3,000 people in the country suffer from the affliction, with roughly a third of those showing moderate to severe expressions of DEB that make them likely to receive Vyjuvek. A variant of the affliction affects the eye, which Krystal is hopeful it can get approval to target as well. Add in expected approval for the drug in Japan and the European Union and management sees a path to $1 billion in peak revenue. Not only is Vyjuvek on par with the best early performance of rare disease drug launches, but it is also already a money maker for Krystal – the company has turned a net profit each quarter since launch, and 62 cents per share net income is expected for the current fiscal Q2. For the year, Wall Street expects revenue to $266 million and profits north of $2.50 per share. Vyjuvek is Krystal’s only product right now but its pipeline is promising: Half of its dozen drugs in development treat other rare genetic disorders, including for cystic fibrosis. The company also pursues skin treatments to reverse the normal effects of aging through its Jeune Aesthetics division, which it expects to one day spin off to focus on rare diseases.

Technical Analysis
After seeing a massive gap up after Q4 results in February, KRYS suffered a 24% maximum correction (low in early May) and a four-month stretch of no net progress. But there was some big-volume buying in mid June, and in recent days, resistance in the 190 area has given way, with KRYS lifting to new highs north of 200 with a persistent upmove in recent days. We’re OK buying a few shares here or (preferably) on weakness, albeit with a looser stop under 180.

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Stock 7

MKS Instruments (MKSI)

Why the Strength
MKS says that it plays a role at some stage of the production process for every chip made in the world, a claim not without foundation. The Massachusetts-based company, which provides measuring instruments, systems and process control solutions to leading edge semiconductor customers, has been around for over 60 years and offers equipment covering virtually every facet of the semiconductor industry. Its main operating segments include Vaccuum & Analysis (pressure measurement and power), Light & Motion (lasers, photonics and optics) and Equipment & Solutions (solutions for the micro-machining industry). Beyond chips, the company’s equipment also supports the production of device displays, LED lights and solar panels, providing it with an expansive footprint across multiple growth industries. But chip firms are the main customers for MKS, with giants Applied Materials and Lam Research accounting for a third of its annual revenue. Indeed, an anticipated reacceleration of wafer fab equipment (WFE) spending across the industry is a reason why Wall Street has lately been upping its expectations for MKS, including a major bank that just put a “buy” rating on the stock based on an expected earnings recovery driven by the new WFE upcycle after the decline seen in 2022 and 2023 (a reason for the stock’s recent strength). The bank also noted the consistent strength of MKS’s gross margins compared with its peers, which was again evident in Q1. Revenue of $868 million increased 9% from a year ago, driven by AI-related broad chip market strength, while earnings of $1.18 a share beat estimates by a whopping 60% and rose for the first time in at least two years, while margins improved for a third consecutive quarter. Now investors are thinking the next many quarters will see big growth, with analysts seeing the bottom line up mid-teens this year and booming 45% next—both of which could prove conservative if the cycle really turns up. The Q2 report is likely out near month-end.

Technical Analysis
MKSI rode the broad semiconductor sector rally from last November into March before peaking at 135 earlier this spring. A sharp 21%, three-week correction followed, but shares held above the 40-week line before crawling higher later that month. It spent several more weeks tightening up, when shares moving to new highs on good volume last week. We’re OK taking a stake here with a stop under the 50-day line.

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Stock 8

Neurocrine Biosciences (NBIX)

Why the Strength
Timing is key in the market, and Neurocrine (and many other medical/biotech names) could be a great example of that: The firm’s sterling numbers and outstanding story didn’t prevent the stock from being waterlogged for a long time, but now perception may be on the upswing. The firm’s biggest claim to fame is Ingrezza, which treats tardive dyskinesia (rare disease where the face or body makes sudden involuntary movements) as well as a more recent approval to treat chorea (another movement disorder that’s a side effect of Huntington’s Disease); sales have been rapming for years, and while growth has slowed some, it’s still strong, with Q1 Ingrezza revenue of $506 million rising 23% from a year ago and making up basically all of the firm’s revenue. Growth there is supposed to continue (the top brass sees $2.15 billion of Ingrezza sales this year, up 15% or so on the year), but Neurocrine will likely be broadening its portfolio soon: The FDA recently accepted a new drug applications for Crinecerfont to treat CAH, a group of inherited disorders that affect the adrenal glands; it would be the first new treatment for the disease in 70 years, with a decision coming before year-end. (Some analysts reportedly think peak sales could be north of $1 billion for the drug in the years ahead.) There’s also excitement about a drug the firm has in Phase II trials to treat major depressive disorder; it’s partnered with Takeda Pharmaceuticals and has positive top-line results released in May, so while it’s a ways off from potential approval, the upside is there. In the meantime, sales and earnings here have been kiting higher, with analysts seeing mid-teens top-line growth through 2025, though any ramp in Crinecerfont could help boost the already-bouyant outlook. Earnings are out August 1.

Technical Analysis
Following a good-sized decline in the first half of 2023, NBIX enjoyed plenty of upside from June of last year until February of 2024, taking the stock up to all-time highs above 140 in January. And then the stock went … totally flat, with shares bouncing in a 12% range for the next six months! However, after a late-June test of the 40-week line (and lots of tight weekly closes), the stock has started to change character, with shares now up three weeks in a row, scoring new closing highs in the process. Granted, the power of the move has been just OK so far, but we like the wear-you-out setup—we’re OK entering here or on dips with a tight loss limit in the mid-130s.

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Stock 9

Urban Outfitters (URBN)

Why the Strength
Persistent inflation, high interest rates and ballooning credit card debt have caused American shoppers to pull back and be more selective when it comes to retail spending this year, resulting in softer sales for the overall fashion apparel industry. But Urban Outfitters, which focuses on fashion apparel, footwear and accessories for younger adults (particularly Gen Z women), didn’t get that memo. The lifestyle retailer has fought against a rather harsh retail sales backdrop in recent quarters, yet it managed to set revenue and earnings records for fiscal Q1 (ended April). Company-wide sales of $1.2 billion increased 8% from a year ago, while earnings of 69 cents beat estimates by 16 cents and lifted 23% from last year’s tally. Total retail segment revenue increased 6%, with comparable retail segment sales rising 5%, driven by continued strength across the Anthropologie (up 10%), Free People (up 17%) and FP Movement (up 25%) brands. Additionally, gross margin increased from higher initial merchandise markups (which were somewhat offset by markdowns at the Urban Outfitters brand). Indeed, a softer wholesale business led to weaker results at the Urban Outfitter brand, which saw sales decline 14%. But the firm’s Nuuly segment stole the show: The monthly women’s apparel subscription rental service saw revenue boom by 51%, largely thanks to a “robust” 56% year-over-year increase in subscribers in Q1 (up 9% from Q4), while the brand’s active subscriber count is now over the quarter million milestone. The service allows women to rent six different pieces of clothing each month, with the firm taking care of repairs and laundry, with the option to buy anything at any time. The company also just transitioned to a new facility in Missouri, which management said will support future subscriber growth by tripling the brand’s total capacity. (The firm expects Nuuly to be profitable on a full-year basis for fiscal 2025.) What’s more, despite the lackluster sales for its namesake brand, the company still opened four more Urban Outfitter stores, two Anthropologie and two Free People stores in the quarter. Analysts see earnings up 20% or so this year, which could prove too low given the recent earnings beats.

Technical Analysis
Unlike many of its retail peers, URBN managed to maintain an upward trajectory during last fall’s broad market weakness. It twice tested the 200-day line—in September and November—and after confirming the uptrend, continued strengthening into 2024. URBN gapped higher shortly after the calendar flipped, shooting up to a multi-year peak just below 48. Since then the stock has built a fresh launching pad, and after a late-June shakeout, has tried to move to new highs before Friday’s reversal. We’ll set our buy range up a bit from here, looking to enter on another push higher.

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Stock 10

Zeta Global (ZETA)

Why the Strength
Zeta uses vast amounts of data and identifiers to help companies to better market to customers over the Internet, allowing clients to both lower their cost of marketing and data spending while improving their advertising results. Zeta’s cloud-based system uses tons of data, as well as AI, to allow companies to better identify website visitors, the vast majority of whom are otherwise anonymous. Zeta also manages all the disparate bits of data that web visitors and clients produce, automates marketing and improves engagement systematically for marketers. Basically, the harder it’s become to identify potential customers on the Internet because of privacy restrictions, the more Zeta finds corporate marketing officers anxious to use them. The company serves 40% of the Fortune 100, with a pretty diversified customer base across a dozen or so industries, including retail, telecom and financial services, its three largest groups at 17%, 15% and 10-% of revenue, respectively. The business has been a consistent grower, posting nine straight quarters of 20% or greater sales gains. Zeta appears to be gaining better traction it the marketplace, finding it easier to pitch and sign up larger firms to given that its client base is expanding (about 500 companies now, including BMW, CNN, Jaguar, TaxAct, Citizens Bank and even Motel 6) and getting larger on average; most of its customers have been clients more than three years and contribute more sales on average than newer customers. For 2023, management projects $900 million in revenue while EBITDA should be $171 million, up 25% and 32%, respectively, from a year ago. It’s a solid niche software story; earnings are due July 31.

Technical Analysis
ZETA started to round up from a long bottoming phase early this year, and the advance kept accelerating until the roof blew clean off in May after the Q1 report. However, that marked a near-term top, with shares entering a choppy phase—the stock did fall five weeks into the 10-week line, but found some big-volume support at that point, with the early-July wobble also finding support north of the 10-week—and today the stock lifted to new highs on great volume. We’re OK starting a position on the breakout, though use a stop near the 50-day line in case something goes awry.

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Previously Recommended Stocks

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

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