Cabot Top Ten Trader Issue: June 12, 2023

Not Perfect but Pretty Good

If you had written a script of what you wanted to see from the market a few weeks back, most of that has come true. More stocks breaking out? Check. Less failed breakouts and more positive action after the breakout? Check. A broadening of the advance? Check. A dry-up in the number of new lows? Check. Simply put, the evidence continues to improve. Now, of course, things aren’t perfect—we’re seeing a bit of rotation out there that could continue to play out, and there are some potential leaders that are getting wobbly; throw in the fact people are feeling more comfortable (lots of “bull market” headlines now) and we’re not advising anyone to go hog wild. But with the rubber-meets-the-road evidence continuing to impress, we’ll bump our Market Monitor up another notch to a level 7 and see how things go.

This week’s list is heavy on medical and infrastructure-type names, with a smattering of other areas, too. Our Top Pick is Vulcan Materials (VMC), which won’t be the fastest horse but should be a straight-on play on what is looking like a building, construction and infrastructure boom.

Stock 1

Apellis Pharmaceutical (APLS)

Why the Strength
Apellis Pharmaceuticals is enjoying a seamless rollout of its new drug, Syfovre, for the treatment of geographic atrophy (GA), a kind of age-related macular degeneration. And that’s a big deal because the affliction is the leading cause of blindness in the Western world and, until Syfovre, there has been no treatment for the disease! The treatment is injected into the eye by a physician periodically (one shot every 20 to 60 days), with data showing that over two years the loss rate of photoreceptors is more than cut in half. Syfovre began rolling out in March in the U.S. and sold $18.4 million worth before the end of the first quarter, with management saying April and May continued the momentum. About 40% of its market are people who already have vision loss in one eye due to the disease and are eager to preserve the other. Apellis says 98% of retinal doctors know of the drug, boding well for sales; another plus is that, so far, insurance companies are reimbursing the drug with no problems (physicians buy the drug to stock it, then get reimbursed after using it on a patient). Approval of Syfovre in the E.U., Canada, U.K., Switzerland and Australia are expected in the first half of next year, which obviously will expand the addressable market in a big way. Last year Apellis started selling its first drug, Empaveli, which treats paroxysmal nocturnal hemoglobinuria (PNH), another eye affliction; sales of Empaveli were up 69% to $20.4 million in Q1. Both drugs should produce a big jump in revenue, to $304 million this year compared to just $75 million last, with sales growing to over $1 billion in 2025 as Apellis’ inhibitor is seen being the dominant treatment in its fields. Also of note are some buyout rumors surrounding the firm, which could grow louder should the Syfovre launch remain strong.

Technical Analysis
After making no net progress for over a year and a half, the Q4 update in late February caused a huge-volume rally in APLS, and after a short rest, the stock took off on buyout rumors. Impressively, the buyers have kept at it: Shares gapped as high as 94 after Q1 earnings, and since then, APLS has rested normally as the moving averages catch up. If you’re OK with some volatility, a small buy here or on dips makes sense.

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Stock 2

Cameco (CCJ)

Why the Strength
Nuclear energy has become a hot topic lately as nations around the world search for carbon-free ways of generating electricity. A U.S. Senate committee just approved a bill that, if passed into law, would fast-track the deployment of a new fleet of advanced nuclear reactors. The favorable vote boosted shares of Cameco—one of the world’s largest uranium miners—on the prospects that its output will help fill the accelerating demand for the energy. This point was highlighted in Cameco’s Q1 earnings call, in which management indicated “there’s never been a better time to be a pure-play investment in the growing demand for nuclear energy,” especially given the firm’s premier, tier-one assets in Canada. Cameco produced 4.5 million pounds of uranium in Q1—more than doubling the year-ago total—led by a more than three-million-pound production ramp at its McArthur River mine (the world’s largest high-grade uranium deposit). This contributed to revenue of nearly $690 million in the quarter (up 73%) and EPS of 27 cents that beat estimates by 11 cents. The top brass said that recent legislative decisions in five of the world’s G7 nations in support of the nuclear energy sector will provide a significant tailwind for many years that supports “full-cycle demand growth” for nuclear power and the uranium required to run reactors. To that end, the company has been growing its pipeline in the last couple of years, including the addition of 80 million pounds worth of long-term uranium contracts (a record). For 2023, Cameco expects over 20 million pounds of production of the metal (nearly double the year-ago total if realized), while analysts see the bottom line soaring this year and next.

Technical Analysis
CCJ actually avoided the worst of the damage during the bear market—shares hit a new high in early April last year, and while the action after that wasn’t great, the stock hit higher lows over the months. And starting in February, shares set up a nice base, and the big-volume move two weeks ago looks like the start of something meaningful. We’re OK buying a little here and adding if CCJ continues higher.

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Stock 3

DoubleVerify (DV)

Why the Strength
We wrote up DoubleVerify a couple of weeks ago, but the strong market and powerful breakout from the stock meant we missed our buy range—but we’re quickly back at it, as we think the stock has great potential. DoubleVerify is a classic follow-on opportunity that was born out of the movement of advertising from newspapers and inserts to the digital realm; just about every firm out there is placing most of its emphasis on various online ads, be them old-school banner ads or in-app or on ad-supported streaming providers. However, as that shift has occurred, so too has the need for verification, which is where DoubleVerify comes in: It has the industry’s most comprehensive platform that helps clients verify that ads are actually viewed (up to 30% aren’t!), are shown in proper geographies (no east coast firm ads shown in Colorado), aren’t shown next to objectionable content and more—and it does so across all channels (social, connected TV, in-app and so on). The firm gets paid based on the number of ads tracked, so it grows with its clients and industry, and it’s clear the solution works; all 75 of its largest customers have remained on board each of the past four years, with a 95% overall retention rate. And given that two-thirds of new clients don’t have any ad verification offering at all, there’s clearly a lot of potential. To be fair, growth isn’t out of this world (20% sales and EBITDA, give or take), but there’s no reason DoubleVerify can’t grow at those types of rates for many years.

Technical Analysis
DV declined sharply into last spring and then rallied into the fall before again succumbing to the weakness in the market (and growth stocks). But shares spent the next few months building a nice launching pad. And after a shakeout in early May, DV took off, with a persistent breakout in recent days. We’re OK starting a position here or (preferably) on dips.

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Stock 4

GXO Logistics (GXO)

Why the Strength
The pandemic highlighted how fragile global supply chains can be, which set in motion a trend toward supply chain diversification in which shippers use multiple sources in order to prevent future disruptions. Enter GXO, a global supply chain management juggernaut whose platform allows enterprises to outsource their increasingly complex logistics while using cutting-edge technology (like collaborative robots), data science and predictive analytics to provide them with a competitive advantage and prevent supply chain snarls. The company has been on a growth spree of late, starting with a recent purchase of U.K.-based, shared warehousing outfit Clipper Logistics. In a bid to further expand its footprint in continental Europe while improving shipping times, GXO expanded a partnership with cereal giant Kellogg to consolidate its warehousing services in Belgium into a semi-automated facility. GXO also just expanded a partnership with French e-commerce order fulfillment firm Bigblue in Spain in a shared-space facility. And last week, it announced a multi-year plan to expand its operations in Germany. The company’s robust partnership and project pipelines contributed to strong top- and bottom-line results in Q1, led by revenue of $2.3 billion that rose 12% from a year ago and per-share earnings of 49 cents that beat estimates by 14%. GXO’s operational tech was up a record 64%, and the firm sees the favorable trends of outsourcing and automation dramatically increasing. Going forward, the company is accelerating the deployment of artificial intelligence (AI), which it sees offering “significant opportunity” to take share and grow its business. EBITDA should be about flat in 2023 overall, but will resume its growth trend later this year and pick up steam after that.

Technical Analysis
After a post-IPO peak at 105 in late 2021, GXO entered a lengthy decline that resulted in a 70% haircut. Interestingly, there was no bottom-building effort here, with the stock gapping up on Q3 earnings and rallying into the mid-50s by February. Then came the first proper launching pad, with GXO holding its 40-week line in March, breaking out in May and hitting recovery highs last week. We’ll set our entry range down a bit from here.

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Stock 5

Intra-Cellular Therapies (ITCI)

Why the Strength
Biotech stocks have been hit and miss for a while now, but after taking a breather, Intra-Cellular Therapies looks to be resuming its run. The story here is simple and enticing, revolving around Calypta, which was initially approved a couple of years ago for schizophrenia, which led to a steady, solid ramp in sales. Then came approval for bipolar disorder in late 2021, which changed the trajectory in a big way—new patients coming on the drug increased by five- to six-fold, with prescription volume tripling in 2022. A big reason for that is that Calypta is the only drug approved for both bipolar I and II, and both as a stand-alone or adjunctive therapy. All in all, these two markets have north of 13 million patients, so there should be a long runway of growth ahead—but there could be an even bigger market out there for Intra-Cellular: Calypta is now in trials for major depressive disorder (MDD for short, with 21 million people affected!) and for patients with MDD or bipolar disorder with so-called mixed features (which are often the most severe, hardest-to-treat cases)—and trial results in late March showed the drug reduced symptoms (which got the stock moving off its lows) in these patients. The timeline for even an approval submission is up in the air (there’s never been an approval for mixed features), but it’s looking like Intra-Cellular has something big here. As it stands today, analysts see sales up 80% this year and 47% next, with lots more down the road as new approvals hit. It’s a one-drug outfit, which carries risk, but it’s a great story.

Technical Analysis
ITCI topped last spring and fell quickly to the low 40s, an area it tested and held in September, October and again in March of this year. But the trial results got shares moving, with ITCI testing its old highs in May before backing off. But after a test of the 50-day line, the stock has popped nicely—we’re OK buying a little around here with a stop in the upper 50s.

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Stock 6

KBR Inc (KBR)

Why the Strength
Engineering and technology specialist KBR has historically served the energy sector (it’s a former Halliburton subsidiary), but in recent years has shifted more of its focus on the aerospace and specialty chemical markets. KBR’s solutions include defense systems engineering, cyber analytics, global supply chain management, prototyping and development, and counts among its customers police and military branches across the U.S. and Europe. Beyond the defense sector, KBR is also expanding its footprint as a leading player in the clean energy and chemical arenas: The company was recently awarded an engineering and design contract from Chemours to increase capacity and advance technology to support hydrogen power generation, storage and use. KBR increased its reach into both spaces simultaneously when it acquired carbon utilization technology Acetica in March; the technology enables the back-integration of CO2 from carbon capture to produce high-value chemicals such as vinyl acetate monomer (used widely in paints and adhesives). KBR also just launched Sustainable Aviation Fuel (SAF) technology in alliance with Swedish Biofuels AB and won a green ammonia tech project contract in Chile. In Q1, revenue of $1.7 billion was down a smidge from a year ago but crushed estimates, while per-share earnings of 67 cents beat expectations by 9 cents (reasons for the strength). More important was the forward-looking measures: Total backlog of $21 billion jumped 50%, a substantial portion of which is in long-term funded government programs. Bookings in the quarter were in the strategic areas of energy and national security, defense modernization and space and sustainability, which the company said positions it for continued growth. Wall Street sees the bottom line rising 8% this year, then soaring around 25% in each of the next two years as the backlog is worked off.

Technical Analysis
KBR hit a multi-year high last April at 57 and then succumbed to broad market selling pressure in the months that followed. But its correction ended in September with buyers making a strong reappearance and turning the tide the following month. Shares looked ready to go in February, but the market again got in the way, though KBR has been trending higher since March and has shown excellent price/volume action in recent days as big investors pile in. We’re OK nabbing some here or on dips, with a stop under the 50-day line.

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Stock 7

Procore Technologies (PCOR)

Why the Strength
Many cloud software names are in no man’s land, but we’re seeing some strength in firms that have solutions for specific, large industries that are drastically increasing productivity. Procore Technologies is one of them, and it targets the behemoth construction sector, especially with firms that are doing giant, long-term projects—Procore’s platform gets the myriad actors in a big project (from general and specialty contractors to financiers to architects to owners) on the same page, with easily shared information and updates so everyone knows where the project stands and where/when they’re needed. Procore is even moving into some adjacent services, including helping everyone on the project be insured. (It doesn’t insure anything, but acts as a broker.) All in all, Procore addresses a variety of aspects from project management to financials to safety and more, and given that it charges based on the size of the construction project (not on a per-user basis), it encourages everyone involved to get on the platform. The result: Plenty of saved time and money, which is why, even in the behind-the-times construction sector, many are adopting the software. To be fair, growth is slowing a bit here as the economy has wobbled and the firm gets to be a decent size ($850 million revenue run rate in Q1), but management said its clients are still seeing good demand, and Procore is continuing to ink new customers and sell more to their existing ones. We think growth should remain solid, especially if the economy re-accelerates.

Technical Analysis
PCOR bottomed last May, hit a higher low in December and rallied to 69 in February. The market pulled it back down from there, but the result has been a good-looking four-month cup base, with PCOR running up the right side on good (not great) volume. Volatility has picked up, but if you want in, we’re OK snagging a few shares on minor weakness.

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Stock 8

Shockwave Medical (SWAV)

Why the Strength
Shockwave specializes in using sound waves to break apart calcified deposits in blood vessels, especially in the heart. About 90% of men and two-thirds of women over age 70 have calcified cardiovascular disease. Shockwave’s intravascular lithotripsy (IVL) technique uses a catheter that vaporizes fluid around the troubled area, creating a bubble through which sound waves disintegrate calcium deposits in arterial walls without affecting healthy tissues. Shockwave’s revenues jumped 72% in the first quarter, to $161 million, as adoption of IVL technology continues to expand. The company is also seeing progress in new products, one set of which is called L6, which are designed for use in blood vessels in the extremities. The company says the rollout of L6 also benefits its core coronary products because it allows for more facetime with doctors as Shockwave’s support staff camp out in hospitals to assist new product adoption. The U.S. is the best market so far with physicians reporting the IVL results are as good as alternatives such as stents. Because of its success in penetrating the American market, Shockwave is under some pressure to expand internationally to maintain growth. A change in reimbursement rates for hospitals in Germany should finally start allowing sales to gain traction there, while there are high hopes for the 2023 rollout in Japan. Analysts see the top line up 45% this year and 25% in 2024 while profits continue to rise. Shockwave is also a rumored acquisition target; talks with Boston Scientific reportedly broke down a month ago, though J&J and Medtronic may be sniffing around, too.

Technical Analysis
SWAV ran all the way to new all-time highs last summer, but it couldn’t hold the move as the market caved in again. The 46% dip from there wasn’t good, but the stock steadied itself earlier this year, and then buyout rumors produced some upside—SWAV rallied seven weeks in a row to the 300 level, and it’s mostly meandered sideways since then. That 300 area has been a tough nut to crack, but we’re OK (a) nibbling here with a tight (percentage) stop, and (b) aiming to buy more on any decisive breakout above 300.

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Stock 9

Shopify (SHOP)

Why the Strength
E-commerce giant Shopify is in the midst of a giant house-cleaning operation that involves streamlining its workforce, selling its logistics business, raising prices and launching a new systems integration initiative—all of which are designed to turn the focus back on its online selling solutions business. Shopify revealed last month it would be selling its global logistics business, Flexport, as well as its robot fulfillment solutions provider, 6 River Systems, while laying off 20% of its staff across all its divisions. It also recently announced the start of a new initiative, Commerce Components, which allows enterprise retailers to take components of Shopify and integrate them with their own systems. (Mattel is among the companies that will bring its entire portfolio of brands to Shopify using the new service.) After spending billions on its logistics business in recent years, the divestment measures have helped relieve investors’ concerns over the company’s cost structure (a reason for the stock’s strength). The company’s recent embrace of artificial intelligence (AI) is another reason for the strength, as Shopify just announced that Google Cloud’s Discovery Al solutions are now available for integration and use by its platform clients. Also helping the cause was the Q1 report; despite retail sector headwinds, Shopify managed to increase revenue by 25% from the year-ago quarter, to $1.5 billion, while earnings were in the black (analysts expected a bottom-line loss). Monthly recurring revenue, meanwhile, increased 10%, subscriptions solutions revenue rose 11% and gross payments volume jumped nearly 60%. Going forward, the top brass expects the good times to continue, guiding for 25% sales growth in Q2.

Technical Analysis
SHOP hit an all-time apex at 175 and fell to 24 last October, unwinding years’ worth of gains. Shares turned the corner after that and, except for a couple of speed bumps along the way (including a sharp pullback in February), the stock has been motoring higher. Last month’s earnings produced another sharp rally on extremely high volume, followed by some constructive retrenchment. We like today’s action, though we’ll set our buy range down a smidge.

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Stock 10

Vulcan Materials (VMC) ★ Top Pick ★

Why the Strength
A slew of government infrastructure spending legislation—some $2 trillion worth—is expected to increase the demand for the products used to make cement, concrete and asphalt. Vulcan is the nation’s largest provider of these ingredients—primarily crushed stone, sand and gravel—and is a major producer of aggregates-based construction materials, including asphalt and ready-mixed concrete. Although the residential construction real estate market is softening, commercial building demand for Vulcan’s products is still strong, due to a “broad base composition of starts” and with industrial and manufacturing projects accounting for over 60% of those starts. The company’s commercial sector backlog of nearly nine million tons (including 12 major industrial projects) should contribute to a higher top line this year, as should Vulcan’s plans to increase prices 15%. (Peer Martin Marietta is also hiking prices and they’ve been swallowed without an issue.) What’s more, federal highway infrastructure spending is fueling a nationwide boom in highway projects, which should further boost the company’s sales going forward. Indeed, many analysts see infrastructure spending as being early in the cycle with plenty of runway left, including a major Wall Street bank that recently upgraded its outlook for Vulcan (a reason for the stock’s strength). In Q1, Vulcan posted revenue growth of 7% from a year ago, to $1.7 billion, along with a 30% EPS increase, to 95 cents. Aggregate-related earnings increased “sharply” with profit per ton improving 23% and gross margin expanding despite lower shipments and “persistent” cost pressures. In the wake of the solid results, Vulcan raised its full-year earnings outlook to reflect the pricing momentum and expects adjusted EBITDA of almost $2 billion (up 20% if realized), while analysts foresee a healthy 30% bottom-line boost in 2023 and more next year.

Technical Analysis
Like most materials sector stocks, VMC hit a major peak around the beginning of 2022 when the Covid-era housing boom was starting to fizzle; shares dropped from a record high at 210 to 140 last July (down 33%). The next many months were sloppy, with the stock falling to multi-month lows in March during the market’s bank-induced selloff, but VMC held firm, gapped up on earnings in May and has stretched higher since. We’re OK grabbing some shares here or (preferably) on dips.

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Previously Recommended Stocks

The next Cabot Top Ten Trader issue will be published on June 20, 2023.