Cabot Top Ten Trader Issue: June 10, 2024

Split Tape

It’s now been a couple of months since the market’s April low, but instead of a firm uptrend that’s telling you big investors are diving in or adding to positions, we’re seeing lots of split action: Some stocks and sectors look good, but many are seeing selling on strength and a few have tanked; new highs have dried up in a big way, even on days the big-cap indexes are up, while new lows are elevated; broad indexes are languishing while big-cap indexes are firm; and yet, even the lagging indexes are just a few days away from all-time high ground. Whether this turns out to be a fresh launching pad for most stocks or near-term toppy action that will lead to a summer slump is anyone’s guess—right now, we’re just following along with the evidence, which means holding and targeting stocks that are fresher and under accumulation, raising stops and dumping names that crack and holding a chunk of cash given the sloppiness seen in the broad market. We’ll leave our Market Monitor at a level 7, but once again, it’s mostly a stock-by-stock situation right now.

From solar to chips to biotech to aerospace, this week’s list is another that has something for everyone. Our Top Pick is Teradyne (TER), a turnaround-type chip player that has its hands in some growth-y areas, and the stock decisively blasted off in late April as business is set to turn up. We missed our entry three weeks ago, but we’re OK taking a position after its recent rest.

Stock 1

ASML Inc (ASML)

Why the Strength
Netherlands-based ASML is famous for being a key producer of advanced semiconductor equipment systems, including lithography, metrology and inspection systems. But the reason it’s been dubbed by some as the world’s most important technology company has to do with it being the sole provider of extreme ultraviolet (EUV) lithography machines, which are essential for creating advanced microchips (using ever-smaller wavelengths to etch lines on a chip) used in basically every advanced application including data centers, cars and smartphones. The company’s EUV machines (which can cost up to $380 million) have seen resilient demand during the chip sector downturn (though some restrictions on sales to China have been an occasional thorn in the firm’s side), and it’s nearly a sure thing that another step-function hike in demand is coming with the AI wave, and the stock has shown renewed strength as the next-generation systems should be placed soon—last week brought news that ASML plans to ship its latest EUV system, the High Numerical Aperture EUV, to its biggest customers, Taiwan Semi, Samsung Electronics and Intel, later this year. This represents the industry’s first version of the technology, which can imprint semiconductors with lines that are eight nanometers thick (about half the size as prior generations), and which will be used for making chips to power various AI applications and advanced consumer electronics. A major Wall Street bank noted that new orders for the technology are likely to push ASML’s 2025 revenue into the upper half of its guidance range, with full-year sales next year likely to exceed $40 billion (up over 30% if realized). In Q1, revenue of $5.6 billion was down 22% from a year ago (which the company attributed to “lumpy” seasonal demand), although earnings of $3.36 surprised estimates by 18%. More importantly, the company said it had orders of almost $14 billion in the last six months, which it said was “quite significant.” Management guided for Q2 revenue to increase 13% on a sequential basis and expects the second half of 2024 to be stronger before true boom times set in next year.

Technical Analysis
ASML etched a beautiful launching pad from July of last year into mid-January of 2024 before earnings produced a breakout. The rally from there took the stock over the 1,000 level, but that led to another correction (20% deep) that got a bit ugly during the market’s April correction. But shares began to crawl back soon after, and last week brought in some big buying after news of the next-generation placements. If you want in, we’re OK taking a position here or on dips of a couple of percent; the share price is high, but just buy fewer shares if you want in.

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Stock 2

Dycom Industries (DY)

Why the Strength
Dycom Industries is eseentially a technology infrastructure firm, but it doesn’t have anything to do with servers, chips or data centers directly—instead, it’s a leading contractor (engineering and design, project management, construction, maintenance, etc.) for telecom firms that are building out fiber networks, which many big players see as the most cost-effective way to deliver services to clients, giving them many revenue opportunities from a single (admittedly big) investment. Thus, the fiber deployment area is steadily growing as the big players (all of which use Dycom in part) are spending tons of money to allow for the latest/greatest digital offerings over their networks, including in rural areas (thanks in part to grants from the 2022 infrastructure bill, rural investment has been picking up). Of course, as is the case with almost all good-sized engineering and construction firms, growth here isn’t going to be at light speed and can occasionally be lumpy, but over time expansion is steady and should play out for a long time: In Q1, organic revenue rose 2.5%, EBITDA lifted a solid 15% and earnings gained 17%, as the backlog (while down a bit from a year ago) was still a very healthy $6.4 billion; the top brass sees organic contract revenue growth picking up going ahead, with a high-single-digit growth rate in Q2. Given the sector, revenue concentration is an issue—AT&T itself is nearly 20% of Dycom’s sales, while its top five customers (including Lumen, Comcast, Verizon and Charter) make up 56% of business, but that’s actually down from a year ago, and given the underlying trends in the business (and the lack of big contract players out there), it shouldn’t be an issue. Dycom’s sales and earnings have been kiting higher for years, and there’s no reason that can’t continue.

Technical Analysis
DY was basically a nothingburger from early 2021 through last fall, but the Q3 earnings report changed the stock’s character, kicking off a rally back to multi-year resistance near 120. After many tight weeks, the breakout came, leading to a rush above 140 and, after another quiet stretch, another earnings-induced upmove in May took the stock to 180 or so. DY has held its gains nicely, though we’re still thinking pullbacks will mark better entry points as the moving averages catch up.

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Stock 3

First Solar (FSLR)

Why the Strength
First Solar is the leading U.S. solar panel maker and well positioned to ride out a current slump in global panel prices, partly because most of its output is sold out for years to come at quality pricing levels. Full-year revenue is expected to rise about 36%, to $4.5 billion, thanks to a backlog of orders—78.3 gigawatts as of May—and increasing interest due to the green energy bill from a couple of years ago. That bill provides tax incentives for renewable energy products made in the U.S. and the scale of the incentives makes First Solar competitive domestically thanks to its production at three Ohio factories. The company also focuses on other markets where protectionist policies allow it to be competitive, like India, where it will produce a modest 2.6 gigawatts of PV panels this year. Bigger picture, First Solar sells utility customers on its cadmium telluride-based Series 7 photovoltaic panels, which perform better in hot and humid conditions compared to the crystalline silicon panels most of the industry produces; they’re also certified as the most environmentally friendly panels on the market for manufacturing and materials sourcing. While global solar prices have slumped from cheap Chinese supply, First Solar is fully sold out through 2026 and is working to keep customers on board by emphasizing technical expertise and product quality. In cases where clients cancel orders, it has actually benefitted the business, allowing the firm to collect a cancellation fee and redirect the product feed to its growing backlog. Meanwhile, some trade protectionism of late should help the industry as a whole, and even China has made waves about not cranking out too much output, fearing firms in that country will suffer in the end if prices stay down. Tax credits are a big part of business—projected to be about half of gross profit dollars this year—but net-net, the firm is booming: In Q1, First Solar saw sales surge 45% and earnings of $2.20 per share grow more than five-fold, while Wall Street sees the bottom line leaping to $13.50 this year and nearly $21 next.

Technical Analysis
FSLR had a huge six-month run after the green energy bill passed Congress, but it began a rough decline starting last summer into last fall (down 44% in total), and despite some support after that, the stock wasn’t far off its lows in March of this year. FSLR moved higher after that, testing the 200 level in May—before the roof blew clean off, with an out-of-this-world move to new price highs on its heaviest weekly volume since 2018, followed by two tight weeks of trading. There’s risk of a dip given the recent run, but we like the power and recent tightness; if you’re willing to use a loose stop, we’re OK starting a position around here or on minor dips.

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Stock 4

Halozyme (HALO)

Why the Strength
Halozyme is a company that’s always had a great story and very solid numbers, but the chart’s been a mess for a couple of years because of patent-related worries—but now that may be changing, and the stock is responding. The story here revolves around Enhanze, which is Halozyme’s unique drug delivery system that’s based on an enzyme that safely degrades an acid in the tissue, allowing subcutaneous treatments to be given in bulk and, hence, far more quickly than standard IV drips—in minutes instead of hours, which not only is more convenient but (more importantly) is a huge boon to infusion centers, allowing them to see more patients. Partly because of that, many big firms (Jaansen, Argenx, Takeda, Roche, etc.) have signed up and some big-selling drugs have also been approved for Enhanze-enabled versions; the clients pay Halozyme both milestone payments and solid royalties for the rights. As you can see in the table below, business and growth has generally been very good, but there have been some incessant patent challenges or expiration worries out there. But last week, the firm said it received a new patent in the E.U. concerning Enhanze, extending protection for one of its key royalty drugs out to March 2029, delaying any royalty decline for that big seller. Now, to be fair, the ruling only had to do with that drug, and some are looking out past that point and expecting issues at some point. But the top brass has released (and because of the patent ruling, raised) a very bullish multi-year outlook: Halozyme’s royalty revenues should double from 2024 to 2027 (reaching $1 billion then), while total revenue lifts 65% or so as earnings boom from $2.77 per share last year so well over $7 per share in 2027 and nearly $8 in 2028! It might be not a buy-and-hold-forever name, but Halozyme should have years of solid growth ahead and, combined with a reasonable valuation (13x projection 2024 earnings) that may have discounted most of the uncertainty, is enticing.

Technical Analysis
HALO fell from all-time highs at 60 in 2022 to 30 in the spring of 2023, and despite a generally good market from that point, this stock kept bumping along the bottom, touching 33 in February of this year and still hanging around 38 in April. However, stepping back, HALO’s action tightened over time (usually a good sign), shares saw some good-volume buying after earnings in early May, and after one more test of the 25-day line, erupted on the patent news last week. It’s sure to be volaile, but we’re OK taking a stab at HALO here.

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Stock 5

Howmet Aerospace (HWM)

Why the Strength
Far from hurting suppliers to original equipment manufacturers (OEM) in the aerospace market, raw-material price inflation and a production slowdown in the commercial jet business (mainly at Boeing) are forcing carriers to fly older planes in order to keep up with an increase in flight departures. And this in turn is boosting aftermarket demand for many players, including Howmet (covered in the April 8 issue), and is a big reason for the stock’s strength. The company is a leading provider of engineered metal products—mainly aluminum and titanium—used in aerospace, defense and commercial transportation applications, as well as fastening systems, bearings and forged aluminum wheels for heavy trucks. The stock’s recent jump occurred after Howmet raised its profit estimate for the rest of the year on “robust” air travel demand that has exceeded pre-pandemic levels and, in the company’s words, “supports record aircraft OEM backlogs.” Revenue of $1.8 billion increased 14% from a year earlier in Q1, led by a 27% increase in engineered structure sales (due to growth in the commercial and defense aerospace markets). Additionally, earnings of 57 cents beat estimates by five cents, adjusted EBITDA (excluding special items) shot up 21% and Howmet generated $95 million in free cash flow, a big improvement versus the year-ago negative $41 million. The solid cash flow generation supported management’s decision to repurchase $150 million in stock in Q1 (share count down 1.5% in the past year), with almost $550 million remaining on the buyback authorization. Meanwhile, although ongoing quality issues relating to Boeing’s best-selling 737 Max prompted Howmet to lower its delivery estimate of the plane, the firm’s higher revenue forecast (an overall $200 million increase in full-year guidance) is based on higher demand at its other business segments—and with Boeing and other OEM shipments sure to eventually picking up, Howmet should see things improve further in 2025 and beyond. Analysts see earnings up 30% this year and another 20%-plus in 2025, with more in store after that.

Technical Analysis
After correcting last fall, HWM took off in a powerful fashion in November on earnings, leading to a smooth, accelerating upmove that took the stock up to 70 in March. A multi-week consolidation followed, which served as a launching pad for last month’s earnings-induced leap to record highs and subsequent rally into the mid-80s. Now we’re seeing HWM take a minor breather, pulling back a smidge as the 25-day line catches up. If you want in, we’re OK with a position here or on a bit more weakness.

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Stock 6

Take-Two Interactive (TTWO)

Why the Strength
It’s no secret that video games are one of today’s hottest trends among the younger generations: by one estimate, Gen Z Americans alone spend an average of almost two hours per day on video games, partly because there are so many avenues and devices to play on, from PCs to consoles to tablets to your phone. What’s more, the industry is expected to continue growing at a fast pace in the coming years, with mobile game sales expected to eclipse PC and console game sales for the first time ever this year. Leading video game publisher Take-Two offers top-selling titles through its Rockstar Games and 2K labels, as well as a new internal studio label, Intercept Games, and its industry-leading portfolio includes the Grand Theft Auto (GTA), Red Dead Redemption, Civilization and Borderlands series. But as mobile games played on smartphones increasingly overtake traditional game sales, the company is focused on expanding its digital and mobile platforms. To further this strategy, Take-Two recently acquired mobile game specialist Zynga, and its continued integration of the Zynga mobile platform, led by in-app purchases from titles Toon Blast and Match Factory, was a key contributor to Take Two’s net bookings beating expectations in fiscal fourth quarter (ended March). Although Q4 total revenue of $1.4 billion declined 3% from a year ago, and earnings were cut in half, net bookings of $1.35 billion increased 4% from the prior quarter. Recurrent customer spending (a key metric) declined 2%, but it remained a “significant revenue driver,” accounting for around 80% of bookings and net sales. Further, management said mobile gaming developments in Q4 underscored the monetization potential of Zynga’s mobile platform. The real story is about what’s to come, as Take-Two plans to launch 12 mobile games in fiscal 2025 and 2026, led by the hotly-anticipated GTA IV title (worth billions in annual sales) next year, prompting a major investment bank to upgrade the shares based on pipeline “momentum.” Wall Street sees a modest sales hike in fiscal 2025, followed by a 40% jump (and booming earnings) in 2026 as GTA VI hits the market and the mobile business continues to expand.

Technical Analysis
TTWO’s uptrend from its bear low in late 2022 was extremely smooth into July of last year before finally hitting a pothole, but that led to a fresh base (and a strong snapback off the 40-week line) that eventually took shares up to 170 in February. The selling off the top was harsh, but TTWO has gone on to etch a cup-shaped base, with some persistent buying (seven weeks up in a row) before today’s dip. We think it sets up a rally resumption trade—we’ll set our buy range up from here, looking for to enter if the latest dip turns into a shakeout.

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Stock 7

Teradyne (TER) ★ Top Pick ★

Why the Strength
Autonomous mobile robots (AMR) are being increasingly used in industrial settings to move heavy materials without the complexities associated with guided vehicles, thereby reducing injury risk and increasing shipping speeds and efficiency. Teradyne (covered in the May 20 issue) is well known for its automated test equipment for some of the world’s biggest electronics firms across multiple industries—including semiconductors, storage and defense/aerospace—but its growing footprint in producing industrial collaborative robots and AMRs has been getting more attention lately. Indeed, the latter category has been a catalyst for Teradyne’s most recent action, as robotics contributed $88 billion, or 15% of total revenues in Q1, but it’s growing nicely and should accelerate going ahead. Teradyne’s Universal Robots subsidiary recently announced a partnership with Nvidia to bring new AI capabilities to its automation applications, including an autonomous inspection solution; both companies also just released a new offering that enables streamlined material handling and efficient transport in industrial environments via advanced AI. The recent moves are part of Teradyne’s focus on making its Mobile Industrial Robots (MiR) segment a “one-shop stop” for autonomous material handling at factories and warehouses; it grew its OEM business in that category nearly 60% from a year ago in Q1 (it also received its single largest order in MiR’s history from a strategic customer). And this is all happening while the broad chip sector downturn is showing signs of turning up, with Teradyne’s base business likely to return to growth in Q2 and accelerate markedly from there. On the ratings front, Teradyne’s stock got a recent boost when a major investment bank raised its price target based on a “cyclical recovery” in the robotics franchise, as well as strength in the firm’s System-on-Chip (SoC) Test category. Wall Street sees revenues increasing sequentially from here while year-over-year earnings growth turns positive in Q4—and then booms from there. And the way these things go, that should prove conservative now that the cycle has turned up.

Technical Analysis
We missed getting into TER last month as the stock never pulled back into our suggested buy range—though, in a sense, that strength (five straight weeks up, including four on above-average volume) serves to solidify our view that the stock has turned up and is early stage. Now we see TER chopping sideways for a couple of weeks, giving up none of its gains as the 25-day line catches up. We’re OK taking a swing at it here or (preferably) on dips with a stop in the mid 120s.

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Stock 8

Trade Desk (TTD)

Why the Strength
Trade Desk (covered in the April 15 issue) is the largest aggregator of connected TV (CTV) advertising impressions across every major content provider, allowing advertisers to buy ad space across various platforms while helping them quantify the value of each ad and make real-time adjustments. More recently, Trade Desk has been integrating more artificial intelligence into its platform to ensure clients can further maximize the value of their ad spending, specifically through the AI tool Koa, a powerful predictive engine that leverages data from over a trillion daily inquiries (over 100 times the volume of traditional search engines). And integrated into the platform Kokai, the combined AI systems can increase ad reach by an additional three-fold and reduce costs by 20% by making real-time recommendations and optimizations, and it’s a reason why Trade Desk has been able to take share in the overall digital advertising market. Meanwhile, CTV is still the main media platform focus for Trade Desk going forward; it remains the company’s fastest-growing channel, as evidenced by recent partnership expansions with major CTV players like Roku, Disney and NBCU, and it contributed to the company’s bullish financial results in Q1. Revenue of $491 million increased 28% year-on-year, while EBITDA boomed 49% and earnings of 26 cents beat the consensus by 18%. Management highlighted as reasons for the strength the continued growth of CTV, the “growing ubiquity” of UID2 (a privacy-conscious alternative to third-party cookies), greater deployment of first-party data and retail data and significant AI advances in the Kokai platform. In the wake of the solid earnings, at least three major Wall Street institutions placed “outperform” ratings on the stock based on the firm’s above-95% customer retention rate and CTV monetization (which one bank said should “sustain revenue growth of more than 20% over the next couple of years”). Analysts also see 20%-ish earnings growth this year and next.

Technical Analysis
TTD rallied off its bear lows last spring and early summer before running into a wall in the low 90s—leading to a tough (34% deep) correction over the next eight months. The Q4 report in February was noteworthy, causing the stock to surge right back to prior resistance on huge volume, and while there were another couple months of choppy action after that, TTD perked up to recovery highs on good volume last month and has tested round-number resistance at the century mark. If growth stocks get moving, we think this one will, too; for now, we’re OK starting small here-ish, albeit with a relatively tight stop.

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Stock 9

Twist Bioscience (TWST)

Why the Strength
Twist Bioscience produces cell-free DNA (cfDNA) that’s used by biotech clients for a wide variety of approaches in testing and in the development of medical tests, vaccines and therapeutics as well as moonshot-style research in fields such as data storage and agriculture. The business mainly makes its money from researchers doing next-generation gene sequencing (NGS), generally a non- or mildly invasive way of examining patient blood for diseases, often rare cancers, as well as for expectant mothers for possible complications in a fetus. In its fiscal Q2 reported last month, Twist saw revenue rise 25% to $75.3 million, with gross margin rising to 49%, miles ahead of the 31% it was at a little over a year ago. Of course, the bottom line is still deep in the red, but investors are focusing on the firm’s progress and other opportunities. Recently Twist has made a push to meet demand for mass-produced clones of genes used by researchers in academia and pharma. Called Express Genes, the company opened up its entire cfDNA portfolio in January to be available for rapidly delivered bulk orders, which take about five to seven days to get to the customers—much faster than normal and also for a much higher price. In Q2 Express Genes accounted for 15% of all clonal gene revenue. Management is targeting signing up large biotech and academic consumers of cfDNA clones for subscription Express Gene programs, which will combine fixed pricing for the customer. It’s also launching a new gene fragments offering that caused some excitement that week. Analysts see 20%-ish revenue growth ahead as losses gradually shrink, with many analysts thinking the firm has a leading position in this new field that could lend itself to much bigger sales over time.

Technical Analysis
TWST is as hectic as you’d expect from a money-losing biotech stock, with big moves up and down during the past year. The initial rally that changed the stock’s character came soon after last October’s market bottom, bringing the stock up to 40 by year-end, though that was eventually followed by a 37% dip in April. But TWST spiked from there thanks to the Q1 report, with another big-volume surge last week. It’s not for the rent money, but if you’re game, dips of a couple more points would be tempting.

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Stock 10

Woodward (WWD)

Why the Strength
It’s not getting half the headlines of AI or chips, but aerospace stocks remain in good shape, driven by some very bullish near- and longer-term factors that should result in many quarters (or years) of rapid, reliable growth. Woodward has its hands in a couple of different cookie jars, but aerospace is the main driver, making up about 60% of total revenues, and two-thirds of that is commercial jet-related (the rest being defense), which is growing nicely thanks to both new plane deliveries and aftermarket sales—the firm’s offerings are found on every current jet out there (narrowbody, widebody or regional) and more of its content is being placed on the newer models that are being cranked out (often 3x to 7x as much); all told, the firm is prepped for the ramp in new jet production, and the firm’s aftermarket sales are expected to grow at twice the market rate going forward. Woodward also plays in the industrial space mainly via transportation (natural gas-powered trucks, especially in China) and power generation, both posting decent growth as they ride the clean energy theme. As for the company itself, it’s made investments into automation and simplifying the supply chain, which, combined with the increased business, is pushing margins nicely higher. And what’s getting big investors involved is that this is very likely a multi-year story: The top brass sees high-single-digit revenue growth through 2026, with earnings lifting in the mid/upper teens and cumulative free cash flow totaling $20 per share during the next three years (and $15 per share in 2025-2026 alone), with more buoyant results after as the businesses continue to expand. It’s a solid story.

Technical Analysis
We wrote up WWD at the start of May, as the stock lifted off its 50-day line following earnings, flashing a very good-looking volume cluster (many days in a row of big-volume buying) that usually bodes well. The only problem: It never dipped into our buy range, so we’ve been watching it in recent weeks as it moved into the upper 180s before hesitating a bit of late as the 25-day line has caught up. We’re not ruling out a bit more weakness, but if you want in, we’re OK entering here or on a retreat of a few more points, with a stop near the 50-day line.

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Previously Recommended Stocks

The next Cabot Top Ten Trader issue will be published on June 17, 2024.

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