Cabot Top Ten Trader Issue: July 8, 2024

Here Comes Earnings Season

Two of the past three weeks have had odd mid-week holidays, which combined with the time of year, has led to some pretty slow trading since the tail end of June. Now, some of that has probably helped in the sense that we’re now seeing more tightness and legitimate setups out there (possibly putting the finishing touches on multi-month rest periods for many names, which began in March), so if the buying pressures spread we think there could be a surprising number of names (including a handful of fresher titles) that provide solid entry points. While there are some signs that could be starting (some equal-weight indexes are perking up, and a few more names are hitting new highs), earnings season is set to ramp, and as always, that will likely tell the intermediate-term story. For now, given that the market’s decent-but-tricky evidence hasn’t changed much, our advice isn’t changing, either: Take things on stock-by-stock basis, aim for solid entry points, honor stops and book some profits as they appear. Our Market Monitor remains at a level 7.

This week’s list has another batch of intriguing setups that could go if the market cooperates. Our Top Pick is Monday.com (MNDY), which has always had a good story and great numbers, and now the stock seems to be ready to move as the software sector comes back to life. Start small, ideally on dips, and build should shares get moving.

Stock 1

AngloGold (AU)

Why the Strength
After spending the last few months treading water, gold prices have recently shown signs of life thanks in part to a weaker dollar, a softening job market and rising expectations that the Fed will begin its long-awaited easing campaign, possibly in September. Combined with some new developments, these are some of the reasons for the renewed enthusiasm for AngloGold, the world’s sixth-largest gold miner by production and owner of a high-quality portfolio of gold, silver and copper mining assets across South America, Africa and Australia. Led by a 10% year-on-year rally in the gold price, plus higher company-wide production levels, AngloGold’s outlook is bright. In Q1, gold production was 2% higher at 581,000 ounces, driven mainly by better recovered grades (but partly offset by lower tons processed), with production in the Americas leading the way (up 26%). The company’s assets in Brazil outperformed following a “significant turnaround” from last year’s operational issues, with improvements on most production metrics across its key mining operations, while Africa saw gold output lift 16%. Another highlight of the quarter was AngloGold’s completion of its purchase of a 12% stake in G2 Goldfields, a Canadian gold miner with exploration properties in Guyana. On that front, the company just provided an update for its ongoing exploration venture at the G2 OKO-Aremu project in Guyana, with recent drilling finding “a significant extension of gold mineralization” in several targets (a reason for the stock’s latest show of strength). In the wake of the company’s improved outlook in a rising gold price environment, several Wall Street institutions have raised their price targets on AngloGold, including one big bank that gave the stock a top ranking on its list of “overweight” gold stock picks. Looking ahead, management expects to produce around 2.7 million ounces of gold in 2024 (up 4% if realized), with Q4 expected to be the strongest quarter of the year, while analysts see sales and earnings leaping higher in the quarters to come.

Technical Analysis
AU spent the last few months of 2023 and the first couple months of this year forming a big bottom in the 15 to 16 area. That changed in early March, with the stock breaking out and chugging over 30% higher before meeting resistance at 26 in May. This was followed by a brief correction into early June, but buying interest picked up as the month progressed, and now we’re seeing some of the highest volume in over a year, aided by the latest gold exploration update from Guyana. We’ll set our buy range down a bit, aiming to enter on an exhale.

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Stock 2

Blueprint Medicines (BPMC)

Why the Strength
Blueprint is a precision therapy firm that designs drug candidates for cancer patients and rare blood disorders. Its rapidly advancing pipeline includes Ayvakit (avapritinib), a drug that’s commercially approved for multiple indications, including treatment of adults with mutant gastrointestinal stromal tumors (a type of cancer in the digestive tract). The company also produces Gavreto (pralsetinib) for rearranged during transfection (RET)-cancers, as well as four other clinical programs designed to treat multiple indications. Ayvakit is the big story here, and a recent label expansion for treating indolent systemic mastocytosis (a bone marrow disease) is generating lots of interest from Wall Street while bolstering the drug’s potential to reach blockbuster status. On the strength of the latest label expansion, in fact, a major financial institution recently put a buy rating on Blueprint, citing the potential trajectory for around $2 billion in peak annual revenues for Ayvakit, as well as paving the way for Blueprint to be “self-sustainable and profitable in the near future.” In Q1, Blueprint delivered what management described as an “exceptionally strong commercial performance,” reporting revenue of $96 million, a 52% year-on-year increase, driven by the success of the Ayvakit launch (sales there were up 135%)—management now sees about $400 million sales for that drug this year, up from the prior view of $375 million. Earnings did come in at $1.40 per share, but that was due to a one-time accounting gain; the bottom line will still be in the red going ahead, though expect losses to shrink. In the wake of the stellar quarter, a major bank put Blueprint on its list of drug companies that are potential buyout candidates for 2024 (a reason for the strength). Meanwhile, in the company’s oncology portfolio, Blueprint recently reported positive results from early clinical activity of BLU-222 in combination with Ribociclib and Fulvestrant in hormone-positive HER2-Negative Breast Cancer patients, which the firm believes demonstrates the best-in-class potential of this combo. Analysts see sales up 72% this year and 51% next as Ayvakit ramps.

Technical Analysis
BPMC looked dead in the water as of last October but got going from there, embarking on a massive rally to the 94 level in December. That began a tricky period, with the stock retreating 23% and making no net progress through April. The stock’s gap on the Q1 report in early May looked like the kickoff of a new uptrend, but like so much of the market, shares meandered sideways since then, unable to get a head of steam going. Now BPMC is looking intriguing, repeatedly testing resistance in the 111 area—and today it broke through. We’re OK starting small here or on modest dips with a stop near the 50-day line.

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Stock 3

Coherent (COHR)

Why the Strength
Coherent is a leading provider of advanced illumination solutions for 3D sensing applications, including lasers and other precision instruments used in multiple industries. The company operates through two main segments: Photonic Solutions and Compound Semiconductors, with the former providing optics, microchip lasers and optoelectronic modules used in diverse consumer and commercial applications, while the latter segment caters to aerospace/defense and medical markets by providing commercial laser and imaging applications, including semiconductor lasers and detectors. In fiscal Q3 (ended March), Coherent reported just OK top- and bottom-line results that did little to pop the stock. Revenue of $1.2 billion was 2% lower on a year-over-year basis but increased 7% sequentially. And while earnings of 53 cents were five cents lower from a year ago, they beat estimates by 11 cents and improved 50% sequentially. Even so, what sent shares soaring was the news last month that Coherent appointed as its new CEO the highly sought-after Jim Anderson, the former CEO and president of Lattice Semiconductor, who helped that company achieve a string of record profits and gross margin during his tenure. It’s widely expected on Wall Street that Anderson will be instrumental in driving Coherent’s growth potential, particularly in its artificial intelligence-related datacom portfolio, which is small but has been booming of late thanks to strong demand for its 800G datacom transceivers. (Indeed, the company’s 800G sales totaled $20 million last year but shot up to $50 million in fiscal Q1 and to over $100 million in Q2, and management expects revenue for 800G to hit $250 million by fiscal Q4.) Meanwhile, Coherent reported signs of improvement in its industrial end market (34% of total revenue), along with further signs of stabilization in the instrumentation and electronics areas, which the firm expects will eventually return to growth. Analysts see sales and earnings returning to year-on-year growth in the June quarter, with earnings in the current fiscal year (which just began July 1) nearly doubling.

Technical Analysis
After a long, deep bear market, COHR finally changed character last November, rising all but two weeks from its low until early February as investors started to look ahead to better results. However, a tough correction followed (28% deep), and shares didn’t look so hot in late May, with the earnings report and an improved market failing to help the cause. However, the hiring of Mr. Anderson brought a big wave of buying, and COHR has crawled higher a few points during the past month. If you want in, minor weakness would be tempting, with a stop in the mid 60s.

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Stock 4

GE Aerospace (GE)

Why the Strength
We’ve written about numerous aerospace-related names in Top Ten over the past few months, and GE Aerospace—one of three firms that resulted from the GE breakup—might be the liquid leader of the group. The firm has the sector’s largest business for engines and other propulsion systems, mostly for commercial jets (about three-quarters of overall business, with the rest defense), though, ironically, supply chain issues probably limited Q2 deliveries (one reason for the stock’s June wobbles). However, that’s more likely a shorter-term hiccup, with underlying demand for new jets strong as travel expands and airlines upgrade and expand their fleets. And more important, the big idea business-wise isn’t one-time jet engine sales (some of which are actually sold at a loss) but the aftermarket business following each placement, which GE says brings in about three times as much revenue as the initial sale over the following many years; indeed, this sort of service revenue makes up 70% of the company’s total and provides for some reliability in results. As for the defense segment, there’s less excitement there, but business is steady and should grow over time, with some advanced products selling well (like hypersonics) and, unfortunately, with a lot of equipment being used in today’s hotspots. Big, institutional investors are always on the lookout for firms that have a long runway of rapid, reliable growth (what we call the Three Rs), and GE has that in spades: At its Investor Day in March, the company forecast high single-digit annual revenue growth through 2028 (faster than that this year and next), while operating profit grows quicker (low double digits) and free cash flow comes in north of $5 billion this year (something around $4.50 per share) and it should grow at a low/mid-double-digit pace from there, backed up by a ridiculous remaining performance obligation tally north of $150 billion. The valuation is up there, but this looks like a long-lasting growth story as the recurring revenue (service) side of the business booms.

Technical Analysis
It didn’t get many headlines, but GE staged a beautiful, smooth advance from last fall’s market low, including a stretch of 13 weeks up in a row into April. The stock finally ran into resistance above 160 in May, but impressively, the correction since then has been tame (10% at its worst point), with what looked like a breakdown in June (on fears of engine deliveries) quickly seeing the stock snap back. To us, it’s a solid setup: We wouldn’t argue with a nibble here, but officially we’ll set our buy range up from here, looking to enter on strength.

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Stock 5

KKR (KKR)

Why the Strength
KKR looks like the leading big-cap Bull Market stock of the cycle, with a big ($578 billion, up from $504 billion at the start of 2023), diversified (from private equity to alternative and leveraged credit to real estate and even infrastructure) asset base that is benefiting from the renewed rise in asset prices and the expectation of easier money sometime in the months ahead, which should both support even higher asset prices as well as attract new funds. Like most in its field, the emphasis on fee-earnings assets (instead of one-time realizations) has been big, and the top brass is aiming high: Business held up well during the 2022/2023 slow times and is now picking up, and KKR thinks it can get overall assets to the trillion dollar mark within five years (it says 80% of the strategies it’s managing haven’t scaled yet, so there’s plenty of inherent upside over time just from what it’s already doing), while the top brass believes fee-related earnings can grow 20% annually through 2026 to $4.50 per share while earnings lift 30% annually to $7.50 per share—a figure that is on its way to $15-plus of earnings per share within 10 years. Helping the cause (and investor perception) was a bold move late last year to buy out the portion of insurer Global Atlantic it didn’t already own; again, management is bullish here, saying it has strong conviction it can double that operation’s assets under management over time, providing a big source of investable assets. And, of course, the firm sees big growth in its core private equity business, which now has 19 holdings (up from nine three years ago) that as a whole are growing nicely and should spin off more cash going ahead. Of course, long-term forecasts in this business should be taken lightly—should the market keel over or money for some reason become even tighter, all bets are off—but if the bull market continues and big-picture market sentiment continues to improve (as the odds favor), there’s no reason KKR can’t meet or exceed its multi-year goal as its holdings appreciate and as money pours in.

Technical Analysis
KKR got going as soon as the market did last November and enjoyed a great run that didn’t test the bulls much at all until it approached the century mark in February. Since that time, the stock hasn’t done much wrong, but it’s been super choppy, with plenty of dips and shakeouts after every minor new high. The latest retreat (coming after the stock was added to the S&P 500), though, has been better controlled, so far holding north of its 50-day line. As we have with many other stocks of late, we’ll set our buy range up from here, looking to buy on a strong bounce off support.

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Stock 6

Monday.com (MNDY) ★ Top Pick ★

Why the Strength
Monday.com has always had a great growth story that made sense, along with increasingly powerful sales and earnings numbers—and now, with sponsorship continuing to increase (past four quarters saw 450, 540, 621 and 690 funds owning shares), the chart may finally be getting into shape as the software sector does the same. The story here revolves around the firm’s WorkOS platform, which provides businesses of all sizes a better option than off-the-shelf targeted solutions or complex enterprise softare: WorkOS offers work/project management, sales CRM and development modules, and it’s known for its ease of use, with all employees (not just the IT team) able to use and customize it, with drag-and-drop functionality, virtual whiteboards, the ability to link many projects to one portfolio, as well as many automation features (like alerts based on whiteboards, calendar apps and more). The work module is the core offering, but the CRM (nearly 17,000 accounts at the end of March, up 27% from the prior quarter) and Development (2,090 accounts, up 44% sequentially) are new and are seeing rapid adoption, with big upside down the road. Monday historically targeted small and mid-sized accounts but now it’s swimming upmarket, with the number of firms paying at least $100k a year up 54% from a year ago, faster than the growth of the overall business. To be fair, revenue growth has slowed somewhat and should taper off a bit more, but analysts see Monday’s top line still expanding 27% in 2025 (probably conservative) and faster this year, and the big-spending days of yesteryear are over, resulting in solid margins, huge earnings (up four-fold in the March quarter) and buoyant free cash flow (about $5 per share during the past four quarters). Another catalyst is a new pricing scheme that is just starting to roll out—but despite that, Q1 saw the firm’s highest-ever retention rate. The valuation isn’t cheap, but 25% to 30% revenue and faster earnings/free cash flow growth looks likely for many quarters to come.

Technical Analysis
MNDY showed a handful of very bullish signs as far back as a year ago, with some big-volume weekly buying and positive earnings reactions—but, while there was some upside over time, shares actually made no net progress from last June into May of this year. However, the Q1 report in May brought a big gap higher and now we see a reasonable six-week structure with the stock back near new high ground. We’re OK buying some here or (preferably) on minor weakness given resistance near 250, with the idea of averaging up if MNDY can decisively break out.

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Stock 7

Natera (NTRA)

Why the Strength
The emerging science of personalized precision medicine is fast becoming a go-to for patients seeking safe, accurate diagnoses and prescriptions based on their genetic profiles. The global market for this sector is expected to double to $1.2 trillion by 2033, led by cancer testing in North America (the number two leading cause of death), so the growth potential here is enormous. A leader in the DNA screening segment of this industry is Austin-based Natera, which provides non-invasive prenatal tests (NIPT) for prospective parents and early-stage pregnancies as well as screening for genetic abnormalities (including cancers). The company’s three main focuses are women’s health, organ health and oncology; in the latter category, Signatera—a custom-built circulating tumor DNA test for treatment monitoring and assessing multiple cancer types—is one of its major revenue drivers. Strength in Natera’s oncology portfolio was a big contributor to the latest quarterly results: In Q1, the firm processed nearly 115,000 oncology tests, up 62% from a year ago, with most of these units coming from the core Signatera clinical business and representing a big acceleration of growth from what’s been seen in recent quarters. There were also record sales across the other two segments in Q1, with its larger women’s health “particularly strong” and up more than 85,000 units from Q4 (driven by both new account wins and an increase in purchases from existing clients), and the organ health area (its Prospera test) is quickly becoming a go-to tool among doctors for post-transplant risk/rejection assessment. Total revenue was $368 million, up 52% year-on-year, which Natera called a “significant step up,” and a contributor to the company reaching its cash flow breakeven target “significantly ahead of schedule” (a reason for the strength). Granted, a chunk of the faster growth surrounded higher selling prices rather than increased testing volumes, but the top brass sees that as sustainable. The upbeat results prompted a major hedge fund to buy a stake in the company (another reason for the strength). Long term, this is a huge, borderline revolutionary idea.

Technical Analysis
In a market where most stocks have been wild and strength has been sold into, NTRA has been a very cool customer—shares have been trending strongly up since last October’s market low, with the occasional test of the 25- or 50-day line bringing support. To be fair, progress has slowed since the last earnings-induced rally in early May, but NTRA has avoided any major dings and has tightened up as its 50-day line approaches. It’s not in the first inning of its intermediate-term advance, but we’ll set our buy range up a few points from here, thinking a move to new closing highs would kick off a run.

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Stock 8

Onto Innovation (ONTO)

Why the Strength
Capacity expansions for high-performance computing (HPC) and high-bandwidth memory (HBM) that support the growth in artificial intelligence are among the key drivers for the recent strength behind Onto. The Massachusetts-based company provides process and control equipment and software to the chip sector, as well as a breadth of offerings spanning the entire semiconductor value chain, from 3D metrology, macro defect inspection and factory analytics, to lithography for advanced semiconductor packaging. In Q1, total sales of $230 million increased 15% year-on-year, with revenue from specialty and advanced capacity customers setting another quarterly record of $161 million, while earnings of $1.18 beat estimates by 10 cents. The big idea here (and a highlight in the quarter) was the 30% sequential increase in shipments of its top-selling Dragonfly G3 inspection system—almost exclusively in support of AI packaging. The company emphasized that the increasing complexity of advanced packaging is creating new demand for the Dragonfly G3, which is of vital importance for supporting memory and logic devices for AI applications. The firm is also seeing increasing adoption of its front-end metrology systems, driven by HPC for AI, with increases in demand for advanced memory and new chiplet architectures “setting the stage” for what Onto sees as an even stronger 2025. Elsewhere, revenue from power device manufacturers declined in Q1 after a record 2023, but Onto continued to add new customers and expand its footprint among existing customers, and the top brass expects to see growth return in Q2 and carry through to the second half of the year. Finally, the firm’s advanced nodes business saw revenue increase 45% sequentially, while orders to support advanced logic devices represented the largest growth and was roughly half of sales from advanced nodes customers. Put it together and the firm thinks the AI-induced boom will continue while sales for its more traditional products are set to turn up—which could lead to boom times in 2025 and beyond. Analysts see earnings surging from here.

Technical Analysis
ONTO has had a big move since its original breakout back in May 2023, but it’s not showing many signs of slowing down—in fact, the action during and right after the market’s spring correction was very bullish, with a 17% dip and a quick snapback to new highs on big volume told us the buyers were still at it. Now we see ONTO setting up another structure as it’s meandered sideways in a reasonably tight range (13% deep) for the past six weeks. We’re OK starting a position here, albeit with a tight stop near the recent lows.

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Stock 9

Pan American Silver (PAAS)

Why the Strength
The “electrification of everything” trend is dramatically boosting electricity demand but is also putting a tremendous strain on the electrical grid. The more recent buildout of AI data centers is further adding to this strain, as artificial intelligence requires up to 10 times more electricity (!) than a typical Google search. This is where Pan American (covered in the April 29 issue) comes in, as its main product, silver, plays a critical role in this buildout due to its excellent electrical conductivity (the highest of all metals), not to mention its widespread use in applications ranging from wind and solar energy production to electric vehicles and other alternative energy sectors. Pan American is one of the world’s biggest silver producers, as well as a miner of gold, zinc, lead and copper, with operations in several countries throughout North and South America. Management guided for silver production to expand in the coming months, as global demand for the precious metal strengthens. Specifically, company-wide silver production is expected to increase by more than 15% in the second half of 2024, while gold production should come in at similar levels. In Q1, Pan American reported revenue of just over $600 million, which increased 54% from a year ago, thanks to an increase in gold and silver ounces sold and, of course, higher realized metal prices. Earnings of one cent didn’t wow anyone, but they did beat estimates by seven cents while cash flow from operations more than doubled. All-in sustaining costs (AISC, a key metric) for silver were $15.89 per ounce for silver (versus the current price of $31.50) and $1,580 for gold (versus the current $2,400)—and, more important, these metrics are expected to fall substantially in the second half of the year, with Pan American’s gold and sliver AISC falling to $1,525 and $13, respectively. Translation: Margins should soar going forward, and that prompted a major bank to single out Pan America as a top pick for investors wanting silver exposure (a reason for the stock’s strength). Analysts see the bottom line booming from low levels this year and then doubling in 2025, and those could prove conservative if the precious metals bull market continues.

Technical Analysis
PAAS finally busted loose from its multi-year bear market in February, bottoming near 12 for a couple of weeks and then quickly turning the corner, zooming higher for three straight months before running out of steam at the end of May near the 23 level. The dip that followed last month was reasonable (15% deep), with the stock finding support just under the 50-day line and giving back only a small amount of the prior rally. And now PAAS is perking up again, rallying in sympathy with silver prices. There is overhead, of course, but the main trend is up and the correction appears to be ending—we’re OK entering here with a stop near the recent lows.

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Stock 10

ServiceNow (NOW)

Why the Strength
ServiceNow has become a blue-chip cloud software name in recent years by offering the leading platform for digitizing workflows to enhance productivity—and more recently, the company has emerged as a leader in artificial intelligence used for IT applications. For Q1, the company continued a trend of outperforming its guidance across all metrics, with total revenue of $2.6 billion increasing 24% from a year ago and per-share earnings of $3.41 beating estimates by 28 cents. The bullish results were led by subscription revenue that increased 25% and current remaining performance obligations (CRPO, a key metric) that rose 21%, plus eight transactions worth over $5 million in new annual contract value (up 100%). The firm reiterated its plan to reach nearly $11 billion in revenue this year (up 21%) and said it expects AI will fuel the innovations to expand its business, noting that GenAI adoption “remained on a tear” in Q1, led by “record-breaking” orders for its GenAI assist product (dubbed NNACV for Pro+), which is the fastest-selling offering in the company’s history. Also on the AI front, the company expanded its partnership with Microsoft to include new generative AI capabilities while also integrating Now Assist AI and Copilot into employee experiences. Moreover, ServiceNow expects to see up to $1 billion of incremental subscription revenue from existing Pro customers, with the possibility of that figure exceeding $2.5 billion if they migrate to its Pro+ offering. All told, the company believes its total addressable market could reach a stunning $275 billion by the end of 2026 so the long-term upside remains enticing. The strong showing in Q1 prompted a number of high-profile Wall Street firms to up their share price guidance for ServiceNow (a reason for the recent strength). Looking ahead, analysts see the growth story continuing to play out—analysts expect earnings to rise 25% this year and 20% next, and that’s likely conservative.

Technical Analysis
NOW broke out from a solid, multi-month base last October, kicking off a three-month bull run before running into resistance in February just above 800. From there, the stock ground its way lower, falling 22% over three and a half months and knifing below its 40-week line in May as software stocks tumbled. But since then, NOW has staged a terrific comeback, rallying five weeks in a row (usually on low volume) back to its old highs. The stock was hit on a downgrade today after it approached resistance, but that sets up a pullback resumption pattern—we’ll aim to enter if shares recoup most of today’s damage, which would likely tell you the stock is ready for new highs.

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Previously Recommended Stocks

The next Cabot Top Ten Trader issue will be published on July 15, 2024.

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