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Top Ten Trader
Discover the Market’s Strongest Stocks

Cabot Top Ten Trader Issue: July 29, 2024

The top-down evidence remains decent, with the broad market holding its gains and testing new recovery highs. The issue, though, is the formerly strong tech stocks that included a ton of the market’s liquid leadership—frankly, many of these names have decisively cracked intermediate-term support and look vulnerable to further selling. As we’ve written a few times now, there are still a decent number of setups out there, but for now, we think it’s better to play things a bit cautiously: We’re leaving our Market Monitor at a level 6.

This week’s list has some early earnings winners and includes some ideas outside of traditional growth. Our Top Pick is another real estate play that appears to be lifting out of a longer-term consolidation.

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Broad Market OK, but Leadership Having Trouble

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The top-down evidence remains decent, with the broad market holding its gains and testing new recovery highs. The issue, though, is the formerly strong tech stocks that included a ton of the market’s liquid leadership—frankly, many of these names have decisively cracked intermediate-term support and look vulnerable to further selling, and when they have slid, they’ve pulled down the rest of the market, too. As we’ve written a few times now, there are still a decent number of setups out there, as well as some growth areas that could kick into gear during earnings season (medical and software have potential), but for now, we think it’s better to play things a bit cautiously: We’re leaving our Market Monitor at a level 6 and thinking holding a chunk of cash, sticking with names that are fresher and have shown good buying power of late and stalking earnings winners is the right way to go.

This week’s list has some early earnings winners and includes some ideas outside of traditional growth. Our Top Pick is CBRE Group (CBRE), which looks like it’s staging a long-term breakout after a couple of years in the wilderness.

Stock Name

Price

Buy Range

Loss Limit

Argenx (ARGX)

498

475-490

425-430

Boot Barn (BOOT)

131

128-131

114-116

CBRE Group (CBRE) ★ Top Pick ★

111

107.5-111.5

95-97

GE Aerospace (GE)

171

174-177

158-160

Guardant Health (GH)

35

33-35

28-29

Mohawk Industries (MHK)

163

153-157

134-136

ServiceNow (NOW)

805

830-845

755-765

Spotify (SPOT)

324

333-338

298-302

United Rentals (URI)

749

720-740

645-655

Valaris (VAL)

78

81-83

74-75

Stock 1

Argenx (ARGX)

Price

Buy Range

Loss Limit

498

475-490

425-430

Why the Strength
Belgian immunology biotech firm Argenx just posted its 10th straight quarter of strong growth for its first commercial drug, Vyvgart (efgartigimod), which treats generalized myasthenia gravis (gMG) in adults who test positive for the anti-acetylcholine receptor antibody. It’s a rare chronic autoimmune disease that causes weakness in skeletal muscles controlling the eyes, mouth, limbs and, in a potentially life-threatening situation, the throat. In the latest quarter, reported last week, Argenx generated $498 million revenue, $478 million of which was Vyvgart, up 80% from the same quarter in 2023 and 20% sequentially. That’s roughly the same type of Vyvgart growth management expects for the next few quarters. The Vyvgart molecule is expected to lead to other related treatments that Argenx expects will allow the business to have 50,000 global patients by 2030 (current patients total about a tenth of that today). This quarter, Vyvgart Hytrulo, which combines a newly approved molecule with efgartigimod, has hit the market for the treatment of chronic inflammatory demyelinating polyneuropathy (CIDP), a rare neuropathy that causes weakness and loss of feeling in the arms and legs. Management isn’t divulging much about the early Hytrulo-related sales other than saying they are happy with the preliminary results. About 60% of Hytrulo patients are new to Vyvgart, which suggests a sizeable expansion of potential revenue. Analysts are predicting Q3 Argenx sales will hit $541 million, up 56% from last year, and Q2’s surprise profit has analysts thinking Argenx’s bottom line is set to soar in 2025 and beyond. The company appears to have a good pipeline, with four new Vyvgart-related trials underway this year and nine other “first-in-class” molecules they expect to develop further.

Technical Analysis
ARGX enjoyed a spate of enthusiasm a year ago that gapped shares to an all-time high of 548, but those gains eroded and the stock was hit very hard last December on some poor Vyvgart-related trial results. From there, the stock essentially went sideways for half a year, but ARGX began to change character in May and then had a great gap up in late June on the CIDP approval—and shares have continued higher since then, notching 10 weeks up in a row, including a positive reaction to earnings. We’ll set our entry range down from here, as there is old resistance to chew through and the 500 area could prove a short-term barrier.

Market Cap$28.7BEPS $ Annual (Dec)
Forward P/EN/AFY 2022-13.05
Current P/EN/AFY 2023-5.16
Annual Revenue $1.66BFY 2024e-1.40
Profit MarginN/AFY 2025e5.40
Qtrly RevQtrly Rev GrowthQtrly EPSQtrly EPS Growth
($M) (vs. yr-ago-qtr)($)(vs. yr-ago-qtr)
Latest qtr48974%0.49N/A
One qtr ago41379%-1.04N/A
Two qtrs ago418129%-1.68N/A
Three qtrs ago340132%-1.25N/A

Weekly Chart

ARGX Weekly Chart

Daily Chart

ARGX Daily Chart

Stock 2

Boot Barn (BOOT)

Price

Buy Range

Loss Limit

131

128-131

114-116

Why the Strength
Boot Barn is a unique situation, where it has a great underlying retail story—both in terms of its product offerings and its overall growth path—but it’s still fighting off the after-effects of a ridiculous pandemic-era boom that’s weighing on its overall results. The company is the leading play in western apparel (including blue-collar work wear) for both men and women, and it does so via more than 400 stores as well as a few online properties (Sheplers, Boot Barn, Country Outfitters; it also does a small business on Amazon). The attraction here is that the sector is actually on a steady growth path, and the company has made a move toward exclusive brands (now making up 37% of revenue), which cut down on the already low levels of discounting seen in this industry. Then there’s the cookie-cutter aspect of the story, which features not just rapid store growth (460 by next March, up from 400, 345 and 300 the prior three years; the goal is to reach 900 locations by 2030) but is also grounded in excellent store economics (average 1.5-year payback of the initial investment, and that’s with a big increase in the average new store size). So what’s the problem? Mainly that business went ballistic in 2021 due to cabin fever and outdoors-y living—same-store sales that year rose 54%!!—and we’re still seeing some sloughing off from those figures. However, the stock has been strong because that effect might be close to ending: The top brass does see the coming year producing negative same-store sales growth, but Wall Street is a bit more optimistic, and even with that, earnings are expected to rise some and margins are increasing. The bottom line is that, eventually, Boot Barn’s underlying growth story was always going to take the baton eventually, and many see that happening later this year. The June-quarter report is due August 7.

Technical Analysis
Lots of retail stocks have soured, but big investors have been drawn to BOOT’s potential turnaround situation, with shares reacting well to earnings back in February and pushing consistently higher into early June. The 130 to 135 area brought in the sellers, with the stock gradually sagging before meeting with some distribution this month, but BOOT’s snapback late last week was a good sign. As with most names right now, the upcoming earnings report is a risk, but if you want in, you can nibble here with a stop near last week’s low area.

Market Cap$3.95BEPS $ Annual (Mar)
Forward P/E26FY 20235.57
Current P/E27FY 20244.85
Annual Revenue $1.67BFY 2025e4.97
Profit Margin10.5%FY 2026e6.02

Qtrly RevQtrly Rev GrowthQtrly EPSQtrly EPS Growth
($M) (vs. yr-ago-qtr)($)(vs. yr-ago-qtr)
Latest qtr389-9%1.01-33%
One qtr ago5201%1.814%
Two qtrs ago3757%0.91-14%
Three qtrs ago3845%1.11-12%

Weekly Chart

BOOT  Weekly Chart

Daily Chart

BOOT  Daily Chart

Stock 3

CBRE Group (CBRE) ★ Top Pick ★

Price

Buy Range

Loss Limit

111

107.5-111.5

95-97

Why the Strength
The commercial real estate sector has been commanding headlines in the last couple of years, most of them bad. The high interest rates and tightened lending standards since the pandemic years (as well as less need for office space given the work-from-home trends) have resulted in a major slowdown in property sales, prompting banks to dump commercial property loans. But what the headlines seldom mention is that steep discounts are driving a burst of activity from investors, while the office leasing end of the market has launched an encouraging recovery, which is driving growth for CBRE. The Dallas-based company is the world’s largest commercial real estate services and investment firm, with nearly $150 billion in assets under management, offering property sales and facilities management, mortgage origination and asset and property portfolio management services. Last week’s Q2 report has investors talking, as CBRE’s strong performance metrics were led by “great strength” in the global office leasing market, with signs that growth in this market is accelerating thanks to “big movements” in square footage per transaction and rent per transaction. Revenue of $8.4 billion was 9% higher from the year-ago Q2, bolstered by a double-digit jump in U.S. office leasing revenue (particularly in New York) and an 18% sales bump due to its recent decision to combine its project management business with Turner & Townsend, a property management specialist which CBRE already had a 60% stake in (CBRE now owns 70% of the combined business). Meanwhile, earnings of 81 cents a share, while flat from a year ago, beat estimates by 10 cents, while free cash flow improved “meaningfully” to $220 million (up 155%), prompting the company to raise the full-year free cash flow outlook to slightly over $1 billion. Looking ahead, management sees the momentum in leasing continuing into next year, prompting “increased confidence” in achieving its goal of record EPS in 2025, even above that from the boom times of a few years back. It’s a well-run firm offering an interesting turnaround situation.

Technical Analysis
CBRE spent most of the last couple of years in a funk along with the rest of the real estate sector. It peaked at 110 at the start of 2022 and hit its low-water mark around 65 last October (down 40%). The stock had a nice rally after that, recovering to almost 100 by March, then entered into another base-building effort, this one 15% deep and showing lots of tightness during the past couple of months. But now expectations of Fed easing and an improving office environment have resulted in what looks like a long-term breakout. We’re OK entering here or (preferably) on minor weakness.

Market Cap$33.9BEPS $ Annual (Dec)
Forward P/E27FY 20225.69
Current P/E29FY 20233.84
Annual Revenue $33.2BFY 2024e4.12
Profit Margin3.9%FY 2025e5.50

Qtrly RevQtrly Rev GrowthQtrly EPSQtrly EPS Growth
($B) (vs. yr-ago-qtr)($)(vs. yr-ago-qtr)
Latest qtr8.399%0.81-1%
One qtr ago7.947%0.78-15%
Two qtrs ago8.959%1.384%
Three qtrs ago7.874%0.72-36%

Weekly Chart

CBRE Weekly Chart

Daily Chart

CRBE Daily Chart

Stock 4

GE Aerospace (GE)

Price

Buy Range

Loss Limit

171

174-177

158-160

Why the Strength
While Boeing has produced a bunch of negative headlines in the aerospace sector during the past few months, the suppliers—from specialty metals firms to parts makers to engine producers—offer a combination of solid and reliable growth for many years to come that many big investors are finding attractive. GE Aerospace is one of the three firms that split apart earlier this year from the former behemoth, and it has the makings of a liquid leader in its space: The company is the largest player in engines/propulsion systems (three of four commercial flights are powered with its engines), with commercial sales (75%-ish of sales) driving things, though it also does a good business in defense applications as well (including some advanced products like hypersonics). What’s attractive here from a business point of view is that the sale of the engine is just the tip of the iceberg in terms of the firm’s revenue—in fact, GE takes in two to three times as much revenue after the sale in aftermarket services (!), though admittedly that money comes in the door over the following decade or two. Still, when you combine all that with the fact that the industry itself is in expansion mode (the travel boom and the pandemic’s slow times in this sector have airlines ordering tons of new jets), there’s every reason to think this company will see booming sales, earnings and free cash flow in the years ahead. In Q2, some supply chain issues limited engine orders, but sales still rose 4%, while earnings boomed and easily topped estimates, all while commercial orders lifted an impressive 38% (orders rose 18% overall as defense lagged). More important, the top brass hiked its full-year free cash flow outlook (now looking for nearly $5 per share), which should grow at double-digit rates for many years to come. It’s a good, blue-chip story with a buoyant outlook; as far as big-caps go, we like it.

Technical Analysis
GE’s stupendous run to start the year (up 13 weeks in a row) was a good sign, and while the 170 area finally capped the advance, the wobbles since then (including a shakeout in June on production worries) didn’t dent the stock much (10% max decline). And then the Q2 report and increased outlook created a breakout attempt ... that ran into a wall the next day. We still like the stock’s overall positioning, but we’ll set our buy range up a bit from here, looking to enter on confirmation of the post-earnings strength.

Market Cap$186BEPS $ Annual (Dec)
Forward P/E42FY 20220.85
Current P/E43FY 20233.26
Annual Revenue $54.8BFY 2024e4.08
Profit Margin18.3%FY 2025e5.10

Qtrly RevQtrly Rev GrowthQtrly EPSQtrly EPS Growth
($B) (vs. yr-ago-qtr)($)(vs. yr-ago-qtr)
Latest qtr9.104%1.2062%
One qtr ago9.0014%0.9447%
Two qtrs ago19.415%1.0337%
Three qtrs ago17.320%0.82N/A

Weekly Chart

GE Weekly Chart

Daily Chart

GE Daily Chart

Stock 5

Guardant Health (GH)

Price

Buy Range

Loss Limit

35

33-35

28-29

Why the Strength
Guardant Health has had a great business for the past few years in liquid biopsies—the firm’s Guardant 360 test is non-invasive, requiring just a couple of vials of blood, and can help guide treatment options (either new treatments or adjustments to current regimens) for a wide variety of stage III or IV cancers; obviously it’s a boon for those where traditional tissue biopsies aren’t an option. (Turns out that tumors release trace amounts of information into the bloodstream, and Guardant’s technology picks up on it.) That business remains solid and growth has been in the 20% to 30% range, as you can see in the table below. But the story just got a lot better: Guardant has a new product, dubbed Shield, which just received FDA approval today (it got a very strong recommendation from an FDA advisory panel a few weeks back) as a colorectal cancer screening test that, again, requires just a vial or two of blood; results are similar to other methods, which means it’s poised to grab huge share compared to stool-based tests (think Cologuard) and even from colonoscopies, as Shield will clearly have a much higher compliance rate. (The current screening rate for those 45 years and older is just 59%, well below where it should be.) Of course, there are still some ducks to line up here, such as Medicare reimbursement, but that looks like a sure thing given Sheild was approved as a primary screening option by the FDA, so it should be able to compete on a level playing field. Combined with still-strong growth from 360, it’s a good bet that Guardant’s business could take a step function leap higher in the quarters and years ahead. The Q2 report is still coming up (August 7), but the focus is on the future and what Shield can deliver going ahead.

Technical Analysis
We recommended GH a few weeks back after a strong off-the-bottom rally that appeared to be the real deal—and so far we think things are shaping up nicely. Initially, the stock had a tedious retreat, but it found support where it was supposed to (just above the 50-day line) and quickly snapped back to new recovery highs. Shares then wiggled around for a few days, refusing to give up ground, followed by today’s approval-induced pop. Earnings are a risk, but we’re OK with a small buy here or on minor weakness, with a stop under the 30 level.

Market Cap$4.04BEPS $ Annual (Dec)
Forward P/EN/AFY 2022-4.26
Current P/EN/AFY 2023-3.15
Annual Revenue $604MFY 2024e-3.22
Profit MarginN/AFY 2025e-2.80

Qtrly RevQtrly Rev GrowthQtrly EPSQtrly EPS Growth
($M) (vs. yr-ago-qtr)($)(vs. yr-ago-qtr)
Latest qtr16931%-0.46N/A
One qtr ago15522%-0.64N/A
Two qtrs ago14322%-0.67N/A
Three qtrs ago13726%-0.82N/A

Weekly Chart

GH Weekly Chart

Daily Chart

GH Daily Chart

Stock 6

Mohawk Industries (MHK)

Price

Buy Range

Loss Limit

163

153-157

134-136

Why the Strength
Stubbornly high mortgage rates and inflation have put pressure on the U.S. housing market, resulting in homeowners putting off remodeling efforts. This has undercut the domestic flooring market, but Mohawk Industries expects that if the Fed starts cutting interest rates this year (as is widely expected, with most seeing September bringing the first reduction), the industry will bounce back, led by pent-up demand for flooring. In the meantime, the company is making efforts to capitalize on a rebound, with residential remodeling (the industry’s largest category) expected to lead the recovery as rates decline and consumer confidence improves. Mohawk is the world’s largest flooring manufacturer, serving both residential and commercial customers across multiple channels globally, with offerings that include ceramic, porcelain and natural stone tiles, as well as carpets, quartz countertops, installation materials and other products. The company just released Q2 earnings that featured both hits and misses but left an overall positive impact on Wall Street. Revenue of $2.8 billion was 5% lower year-on-year, but earnings of $3 a share beat estimates by 25 cents while improving 60% from the prior quarter (the reason for the stock’s strength). Results were led by the firm’s global ceramic business, and while sales in this category declined 3%, it remained “highly competitive” as lower energy costs plus high-end market demand from commercial channels kept overall sales strong. The commercial sector also outperformed residential, with hospitality, government and education channels leading the way. What’s more, management is reducing costs and said it will result in $100 million in annualized savings, $25 million of which will be recognized this year. In recognition of the cost-cutting efforts, a major institutional bank has double upgraded Mohawk shares to “buy” from “underperform” with “an outlook for continued margin recovery, attractive valuation and improving capital allocation.” Wall Street sees earnings up 6% this year, improving to 15% to 20%-ish growth in 2025 as costs are cut and business improves.

Technical Analysis
MHK didn’t reach its bear market low until last fall, though the rally from there through March was solid, taking the stock to 52-week highs. Then came a 14-week, double-bottom base, with the stock retreating to test its 40-week line a month ago—but now the buyers are running wild, with two weeks of accumulation after the tame inflation report in early July, and last week’s boom after Q2 earnings. We’ll set our buy range down from here, aiming to enter on weakness.

Market Cap$10.3BEPS $ Annual (Dec)
Forward P/E17FY 202212.85
Current P/E17FY 20239.19
Annual Revenue $10.9BFY 2024e9.70
Profit Margin8.7%FY 2025e11.26

Qtrly RevQtrly Rev GrowthQtrly EPSQtrly EPS Growth
($B) (vs. yr-ago-qtr)($)(vs. yr-ago-qtr)
Latest qtr2.80-5%3.009%
One qtr ago2.68-5%1.866%
Two qtrs ago2.61-1%1.9648%
Three qtrs ago2.77-5%2.72-19%

Weekly Chart

MHK Weekly Chart

Daily Chart

MHK Daily Chart

Stock 7

ServiceNow (NOW)

Price

Buy Range

Loss Limit

805

830-845

755-765

Why the Strength
Cloud software giant ServiceNow (covered in the July 8 issue) provides the leading platform-as-a-service (PaaS) for digitizing workflows to enhance productivity usually at larger firms, and more recently has emerged as a leader in artificial intelligence used for IT applications. The company’s just-released second-quarter earnings are the reason for the stock’s latest strength, and it highlighted the momentum from ServiceNow’s generative AI packages. The top brass drew attention to the “unprecedented trajectory” behind the number of deals with enterprise customers using the firm’s GenAI offerings in Q2, with big-name customers like American Honda, Adobe, Dell and Merck signing up. Total revenue of $2.6 billion increased 22% from the year-ago Q2, with earnings of $3.13 beating estimates by 29 cents. The results were led by a 23% increase in subscription revenue and a 31% jump in remaining performance obligations (RPO, a key metric for the future revenue pipeline). ServiceNow also saw 88 transactions over $1 million in annual contract value (ACV, another key performance indicator), up 26%. Just as important, the company noted that net-new ACV for its Pro Plus edition, which includes the firm’s GenAI capabilities, doubled on a sequential basis (!) while delivering 11 deals over $1 million and two deals over $5 million in value. What’s more, Pro Plus deal sizes have tripled compared with deals made during last year’s upgrade cycle, partly thanks to the fact that Pro Plus prices rose 30% over Pro in Q2. The quarter’s stellar performance prompted several Wall Street institutions to raise target prices, with several analysts spotlighting ServiceNow’s large deal momentum and “emerging GenAI opportunity.” Further out, the company views itself as the go-to platform for the AI-focused business transformation, which it sees being in the early innings. Analysts see 28% earnings growth this year, followed by several more years of 20%-ish growth (probably conservative) for this emerging blue chip.

Technical Analysis
We wrote about NOW earlier this month but it never was able to trigger an entry as the stock failed to rally into our suggested buy range after being rejected by its prior highs. Instead, shares spent the next couple of weeks chopping violently sideways, though it refused to break support around 720. It was still looking sloppy heading into earnings last Wednesday, but as can often happen, the report changed NOW’s landscape, with a huge gap on heavy volume (heaviest daily volume since late 2022) to new highs, though it’s sagged a bit since then. We’ll set our buy range up a bit from here, looking to buy on a resumption of the post-earnings move.

Market Cap$170BEPS $ Annual (Dec)
Forward P/E60FY 20227.59
Current P/E66FY 202310.78
Annual Revenue $9.96BFY 2024e13.77
Profit Margin31.0%FY 2025e16.54

Qtrly RevQtrly Rev GrowthQtrly EPSQtrly EPS Growth
($B) (vs. yr-ago-qtr)($)(vs. yr-ago-qtr)
Latest qtr2.6322%3.1332%
One qtr ago2.6024%3.4144%
Two qtrs ago2.4426%3.1136%
Three qtrs ago2.2925%2.9249%

Weekly Chart

NOW Weekly Chart

Daily Chart

NOW Daily Chart

Stock 8

Spotify (SPOT)

Price

Buy Range

Loss Limit

324

333-338

298-302

Why the Strength
The world’s largest music streaming service, Spotify has successfully shifted from growth-at-all-costs mode to profitability over the past year, posting its first-ever three quarters of net income over the past 12 months with last week’s Q2 release. The company reported 626 million worldwide users among both paid and free, ad-supported, tiers, which generated a 21% rise in sales in local currency to €3.8 billion ($4.13 billion) with net income of €1.33 ($1.45) compared to a loss of €1.55 ($1.69) a year ago. Spotify is seeing good traction with increasing the number of specially priced tiers—student, duo and family passes, for example—with relatively little subscriber churn even as it has raised prices in mature markets like the U.S. The subscription growth does have a downside, having come partly from cannibalizing free listeners who have converted to paid. That puts pressure on the company’s stated goal of getting ad revenue up to 20% of sales—up from about 6% today—and growing total monthly average users (including free ones) more quickly. Still, Spotify says listeners are gravitating strongly to its increasing stable of long-form podcasts in developed markets, widening margins—podcasts demand fewer royalties than songs—and that improved marketing in developing markets should boost listener growth. For the current quarter, Spotify projects 639 million monthly average users, of which 251 million will be paid subscribers. That should result in about €4.029 billion in sales ($4.38 billion), up 20%, with net income hitting €1.77 ($1.92) compared to per-share profit of €.033 ($0.36) in the year-ago quarter. Analysts see earnings continuing to catapult going forward.

Technical Analysis
SPOT has had a huge run from its lows near the end of 2022, so it’s not in the first inning of its overall advance—that said, the advance was as strong as ever heading into May before some churning took place in the 300 to 330 area for the next couple of months. The dip under the 50-day line in July looked ominous, but the Q2 gap up is certainly a good sign ... though like most things in the tech area, the strength hasn’t followed through. Like some other names in this week’s report, we’ll aim to buy if the rally resumes.

Market Cap$65.1BEPS $ Annual (Dec)
Forward P/E53FY 2022-2.39
Current P/E135FY 2023-3.01
Annual Revenue $15.6BFY 2024e6.12
Profit Margin4.8%FY 2025e8.55

Qtrly RevQtrly Rev GrowthQtrly EPSQtrly EPS Growth
($B) (vs. yr-ago-qtr)($)(vs. yr-ago-qtr)
Latest qtr4.0818%1.43N/A
One qtr ago3.9219%1.05N/A
Two qtrs ago4.0520%-0.4073%
Three qtrs ago3.5519%0.35N/A

Weekly Chart

SPOT Weekly Chart

Daily Chart

SPOT Daily Chart

Stock 9

United Rentals (URI)

Price

Buy Range

Loss Limit

749

720-740

645-655

Why the Strength
Despite continued pressure in the residential construction market, the non-residential building trend remains strong thanks to the data center boom, plus growth in facility construction for healthcare, utilities and battery manufacturing. At the leading edge of this trend is United Rentals, the market share leader in North American equipment rentals with a $20 billion fleet consisting of around 4,700 equipment classes used for industrial and non-residential construction. The company’s latest stock price surge was courtesy of a Q2 report that featured some beats and misses across key metrics but left investors with an overall sense of enthusiasm for the firm’s future direction. Revenue of $3.8 billion missed estimates but grew 6% from a year ago, and per-share earnings of $10.70 beat the consensus by 19 cents while adjusted EBITDA increased 4% to a second-quarter record. The mostly upbeat numbers were led by a 27% leap in specialty rental revenue, with some of that strength being driven by United’s acquisition of portable platform specialist Yak Access in March (up 18% excluding Yak). Further highlights include overall rental revenue increasing 8%, while fleet productivity rose 5% (but offset by a 5% decrease in used equipment sales). Free cash flow increased 30%, to $1.1 billion, including merger and restructuring-related payments, which was miles ahead of reported net income. Another highlight was the firm’s average original equipment cost (OEC), which nudged 3% higher, with United calling the used equipment market “unusually healthy,” allowing it to sell a record amount of OE in Q2. Looking ahead, management sees used equipment remaining “strong” and expects full-year sales in this category to reach $1.5 billion for 2024. Moreover, it sees “particular strength” in large projects with plans to capitalize on these opportunities “in addition to other long-term avenues of growth.” Add in the view that the Fed will become a tailwind soon, supporting the economy, and earnings should continue to plow ahead.

Technical Analysis
URI shares kited higher by over 300 points in the bullish November-to-March broad recovery period before having its first meaningful decline. It pulled back sharply into April, then chopped along for a few weeks when a final shakeout to 600 in the first half of June brought the correction to an end. The stock established a higher low after that and then raced higher earlier this month as the broad market recovered. It has hacked around in recent days before and after earnings, but overall, we think URI’s path of least resistance has turned up. Try to buy on minor weakness.

Market Cap$50.1BEPS $ Annual (Dec)
Forward P/E17FY 202232.50
Current P/E18FY 202340.75
Annual Revenue $14.8BFY 2024e44.06
Profit Margin24.3%FY 2025e47.61

Qtrly RevQtrly Rev GrowthQtrly EPSQtrly EPS Growth
($B) (vs. yr-ago-qtr)($)(vs. yr-ago-qtr)
Latest qtr3.776%10.708%
One qtr ago3.496%9.1515%
Two qtrs ago3.7313%11.2616%
Three qtrs ago3.7723%11.7327%

Weekly Chart

URI Weekly Chart

Daily Chart

URI Daily Chart

Stock 10

Valaris (VAL)

Price

Buy Range

Loss Limit

78

81-83

74-75

Why the Strength
It’s not widely publicized, but there’s a stealth boom in the U.S. offshore oil and gas drilling sector, as vessel rates have hit 10-year highs while a key industry activity index is projected to reach all-time highs this year. As the world’s largest offshore and well drilling company, Valaris has been a big participant in this boom with its 52 rigs, including 36 offshore jackup rigs, 11 drill ships and five semi-submersible platform drilling rigs. The Houston-based company has seen its contract awards swell in recent months, most notably winning a multi-year, 13-well contract offshore in Angola at a leading-edge day rate for a standard duty jackup rig at an estimated average “clean” day rate (the total daily cost of renting a drilling rig) of approximately $190,000—one of the highest jackup rig rates in recent years. Adding to the award list, Valaris last week announced a multi-year contract with Norwegian state-owned energy firm Equinor valued at around $500 million for its DS-17 drillship to work offshore Brazil on Project Raia, which is expected to meet up to 15% of total gas demand in Brazil once in operation (scheduled to begin in 2026). On the financial front, the company in Q1 achieved an excellent revenue efficiency of 97%, a key metric for Valaris reflecting its ability to maximize revenue from available operational days (and critical for securing new contracts). Revenue of $525 million increased 22% from a year ago, with per-share earnings of 35 cents beating estimates by 31 cents (a reason for the stock’s strength). But more important is what’s to come: The firm increased total contract backlog to more than $4 billion, representing the sixth consecutive quarter of backlog growth (up 43%), and the top brass said it’s seeing strong customer demand for work that is expected to commence in 2025 and 2026, which should continue to support earnings and cash flow growth over the next few years. When Valaris reports Q2 earnings on Thursday (pre-market), Wall Street expects sales to jump 40%, while earnings are expected to double on a sequential basis to 72 cents.

Technical Analysis
Starting in May 2021, VAL saw its share price leap from 20 all the way up to 80, where it peaked 21 months later. But since then, shares have been stuck in a sideways range, with a low in the 55 area in the middle of last year, near 60 earlier this year and above 70 in the past couple of months—but the 80 area rejected all breakout attempts during the past two years. But now VAL is testing that key area again. Earnings will be key: We’ll set our buy range up from here, looking to enter on a decisive breakout, but keep positions small if the breakout comes ahead of the report.

Market Cap$5.79BEPS $ Annual (Dec)
Forward P/E20FY 20222.21
Current P/E119FY 20230.34
Annual Revenue $1.88BFY 2024e4.03
Profit Margin7.3%FY 2025e9.83

Qtrly RevQtrly Rev GrowthQtrly EPSQtrly EPS Growth
($M) (vs. yr-ago-qtr)($)(vs. yr-ago-qtr)
Latest qtr52522%0.35775%
One qtr ago48412%0.4841%
Two qtrs ago4554%0.15-85%
Three qtrs ago4150%-0.31N/A

Weekly Chart

VAL Weekly Chart

Daily Chart

VAL Daily Chart

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The next Cabot Top Ten Trader issue will be published on August 5, 2024.


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A growth stock and market timing expert, Michael Cintolo is Chief Investment Strategist of Cabot Wealth Network and 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 was 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.