Cabot Top Ten Trader Issue: May 1, 2023

Still Tricky and Narrow

For the big-cap indexes, last week was intriguing, with a sharp dip from resistance on Monday and Tuesday leading to an equally sharp snapback—a possible shakeout of sorts. That said, the bullish action remains concentrated in a handful of names; the broad market is still meandering at best, the number of stocks hitting new highs is drying up markedly and there were more than a few air pockets last week (usually following earnings) among potential leaders. All in all, the evidence has worsened a bit, and we’ll drop our Market Monitor to a level 4—that said, there are still tons of earnings reports on tap this week and next, so a bunch of gaps up (and broad market strength) could give us plenty to work with. For now, a generally cautious stance remains best as we wait to see if the big-cap buying pressures can broaden out.

This week’s list has a bunch of recent earnings winners as well as a few that are set to report. Our Top Pick is Las Vegas Sands (LVS), which looks to be resuming its uptrend after a couple months of rest. As with most names, try to buy on dips.

Stock 1

Agnico Eagle (AEM)

Why the Strength
With gold prices nearing record levels, internet searches for the phrase “how to buy gold” have hit their highest levels ever, according to Google Trends data. Rising prices are lifting the outlook for Agnico, a senior Canadian producer with a pipeline of high-quality exploration and development projects in the U.S., Canada, Mexico and Columbia. Agnico is poised to increase its gold production this year and beyond through multiple avenues, including acquisitions and joint ventures with other miners. The company’s cost profile hasn’t been compromised by its expansion efforts, and it boasts all-in sustaining costs (AISC, a key sector metric) of under $1,200 per ounce—well below gold’s current $2,000 price tag. This in turn translates to some very attractive margins for the company despite a rising operating cost environment. Agnico’s strong operating performance and cost containment efforts were on display in last week’s Q1 report, which featured revenue of $1.5 billion that increased 14% from a year ago, plus per-share earnings of 58 cents that beat estimates by nine cents. Total payable gold production of 813,000 ounces (up 23%) occurred at an attractive cash cost of $804 per ounce. For 2023, Agnico expects payable gold production of around 3.3 million ounces (up 2% if realized) with total cash costs per ounce of about $865 and an AISC per ounce of $1,165. And growth should pick up from there: Management sees annual gold production growing 7% through 2025 (compared to last year’s numbers) and is focused on increasing output from its recently acquired assets in Canada’s Abitibi gold belt (potentially half a million ounces per year by the end of the decade), while also reducing capital costs. Wall Street sees a 12% sales increase for Agnico this year, while a solid 2.8% dividend yield helps the cause.

Technical Analysis
After a strong start to 2022, AEM peaked last April at 66 and spent the next five months skidding lower in sympathy with gold prices. The stock bottomed in at 37 in late September—a full month before gold hit its nadir—in anticipation of an improved outlook for the precious metal. The turnaround from last year’s low has unfolded in three stages so far, with the first stage peaking at 58 in late January, followed by a dip to 45 into early March. The next leg higher into April saw a higher high, then a pullback that was stopped by the 25-day line. The post-earnings action was wobbly, but we’re OK with a small buy on minor weakness.

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Stock 2

DoubleVerify (DV)

Why the Strength
DoubleVerify is one of the leading players in the big and growing ad verification field, an industry that’s a natural follow-on play to the boom in digital advertising and programmatic (done via algorithm behind the scenes) ad buying that’s become so popular (think Trade Desk). The company’s various offerings help clients (which include tons of big players) cut back on fraud, which is a huge issue globally; make sure ads are shown in the correct places (avoiding placement near other ads the client could view as brand-damaging); and are actually viewed by consumers for at least a couple of seconds, which is the industry standard. All told, the firm has the only platform that covers all of the top ad-supported connected TV providers (a field that’s growing as more ad-supported streaming offerings are released; the company released a measurement tool for Netflix’s new ad-supported service in March), and it’s also gaining share in retail media ad verification (ads found on a firm’s e-commerce site or app) while moving into the huge social media ad business, too. Clients get a single platform to manage and track their ads, and demand is bound to surge as more money is spent on digital ads and as the need to make every ad dollar count grows. One of the big attractions here is that the sector is just starting to accelerate—DoubleVerify says two-thirds of the deals it inks come from clients that have no ad verification service at all! Indeed, the firm has a 95% customer retention rate, including a 100% retention of its top 75 clients, and current clients are signing up for more offerings as the platform offers a great return on investment. To be fair, growth here isn’t out of this world—probably mid-20% range for revenues while EBITDA grows slightly slower this year (the macro environment isn’t helping)—but DoubleVerifty’s runway of growth should be very long. Earnings are due May 10.

Technical Analysis
DV came public in mid-2021 and proceeded to stink up the joint, falling from 48 to a low of 17 in May of last year. Shares actually had a solid rally from there into October before beginning to form its first real launching pad: DV did dip again (to 21 in January) but has rounded out since then, with the latest rest period looking very reasonable and coming on light volume. The Q1 report is obviously vital (and a risk), but if you want to be aggressive, we’re OK nibbling on a strong push higher from here.

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Stock 3

GFL Environmental (GFL)

Why the Strength
Ontario, Canada-based GFL is the fourth largest environmental services company in North America, focused primarily on trash collection and other solid and liquid waste services as well as soil remediation. Environmental services revenue rose 25% in Q1, reported Friday, extending its run of double-digit organic growth (up 14.6% in Q1) to a seventh-straight quarter. Strength came in part from pricing adjustments after the spike in fuel prices last year; some clients now pay fuel recovery charges while another chunk are now linked to the Consumer Price Index, which provided excess returns beyond GFL’s costs in the quarter. An easing of labor costs is also becoming a tailwind for the company to hit the top end of management’s estimates for 2023. GFL sees revenue coming in for the year at U.S. $5.6 billion, up about 13%, while free cash flow is expected to be in the $700 million range, which comes out to $1.90 per share, well above reported earnings. GFL performs better than peers in part through a focus on efficiency – it’s selling operations in three non-core markets – and by speeding up delivery of new vehicles to cut maintenance costs that were a headwind in Q1. Renewable energy increasingly makes sense for solid waste businesses, too, via the collection of landfill gas and selling it as green energy, making them eligible to receive tax credits from many local governments—GFL’s efforts on this front are starting in Michigan, where transport through its pipeline should start this quarter. At full operations, so-called renewable natural gas (RNG) should produce free cash flow of about $43 million annually. GFL’s adjusted EBITDA margin was 24.5% in the quarter, something management says it can get to the mid-30s long term through the combination of RNG operations and capturing additional margin it sees in its core business.

Technical Analysis
Despite steady results, GFL got hit with everything else last year, falling from 44 to 23 at its lows in October. But shares have been in a relatively steady uptrend since then, with a nice rally into year-end, a sideways phase under 32 and then a push higher in recent weeks. The dip to the 50-day line was met with strong post-earnings buying, too—we like the action but will set our buy range down a bit, thinking a modest dip is likely.

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Stock 4

GXO Logistics (GXO)

Why the Strength
The Covid era highlighted weaknesses in global supply chain management, but it also shined a spotlight on the long-term growth potential of leading logistics specialists that help companies keep their products moving along. GXO is a big player in supply chain management, providing warehousing, shipping, returns and other services. The story here is that the company 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 when it comes to inventory management and shipping. Despite being just under two years old (it was spun off from freight transport company XPO Logistics), GXO is already considered the world’s largest player in the field, and it’s not done growing. Last year, GXO bought U.K.-based Clipper Logistics in order to boost its footprint in continental Europe, and it just launched GXO Direct, a shared warehousing solution that offers immediate access to high-quality space, technology and services at lower cost, which effectively consolidates its Clipper assets. (The company expects this move to create one of the largest and most cost-effective flexible warehouse solutions in the U.K.) In Q4, revenue of $2.5 billion grew 9% from a year ago, led by a 31% increase in e-commerce-related revenue and reverse logistics sales (returning goods from customers to sellers) that rose 19%, while EPS of 83 cents topped estimates by eight cents and was up double digits from a year ago. Looking ahead, the top brass expects to reach $17 billion in sales by 2027—a 10% annual growth rate if realized—and sees adjusted EBITDA growing by an eye-popping 17% annual rate during that time. The Q1 report is due next Tuesday (May 9), with a conference call the following morning (May 10).

Technical Analysis
GXO was spun off in July 2021 at 48.5, and after a couple of good months, the bear got its claws into it, with shares imploding by about two-thirds before finally bottoming last October. The stock reversed from a low of 32 and began moving higher in stair-step fashion before reaching 56 in February—and since then, GXO has built a tidy-looking launching pad and held above its 40-week line. If you’re aggressive, you could nibble here, or just wait to see if the stock can punch to new recent highs after earnings.

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Stock 5

Las Vegas Sands (LVS) ★ Top Pick ★

Why the Strength
It won’t be a straight line, but the reopening of China’s economy is on track, and there’s no question one of the biggest beneficiaries is the travel and hospitality sectors as citizens surely have plenty of cabin fever. That’s the big reason behind the strength in Las Vegas Sands, which, after a few hiccups in February and March, has come back to new highs. The Q1 report was fantastic, with a huge recovery in its Macau operations and continued superb cash flow from Singapore. In Macau, EBITDA for its operations lifted to $398 million, up from a small loss a year ago, yet even that is still just under half of the Q1 2019 (pre-pandemic) level—indeed, total visitation to Macau in January and February was just 39% of the pre-pandemic level, while visitation from outside of the nearest province was only 27% of what was seen in 2019. Translation: While cash flow has improved a lot, chances are Sands’ Macau hotels and casinos have many quarters of boom times ahead, with new EBITDA highs likely down the road (especially true given that the firm has cut plenty of fat). As for Singapore, EBITDA there was $394 million (up from $121 million a year ago), down just 7% from the 2019 level even though passenger volume to the nearest airport (a key visitation metric) was still down more than 20% from before the pandemic. Throw in a few upgrades and improvements coming soon (some new suites in Singapore were finished late last year, with more amenities coming throughout 2023) and there’s every reason to believe demand will continue to surge. The China reopening story isn’t brand new at this point, but we think shares have room to run as investor perception improves.

Technical Analysis
LVS changed character last October, with a shakeout leading to a quick snapback—and that snapback morphed into a persistent uptrend through January. Then came the rest period, which started normally but shook out in March with the market (and bank panic). But that dip was quickly bought, and LVS moved to higher highs after earnings. We’re OK with a small buy here or (preferably) on dips.

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Stock 6

Nvidia (NVDA)

Why the Strength
The fast-growing fields of artificial intelligence (AI) and machine learning require massive amounts of computing power, which is where the current attraction for Nvidia begins. As one of the world’s largest semiconductor companies, Nvidia continues to expand its footprint in AI for data centers, and its graphics processing units (GPUs) are powering some of the world’s most sophisticated AI-based virtual machines—including those used by tech juggernauts like Amazon and Microsoft. In fact, the latter revealed that OpenAI trained its ChatGPT chatbot with thousands of Nvidia’s pricey A100 GPUs, and Microsoft’s AI-optimized Azure cloud platform is architectured with Nvidia’s most advanced data center GPUs. Nvidia has already developed a successor version, H100, which is nine times faster for AI training, while mining data at a rate that’s 30 times faster than the A100. The company wasn’t immune to the sector slowdown of late, but the market is looking ahead to much brighter times: Nvidia’s Q1 sales saw an 11% year-over-year growth in data-center revenue, with management seeing AI adoption at an “inflection point” after announcing several recent partnership announcements with leading cloud service providers to offer AI-as-a-service (which will provide them with direct access to Nvidia’s generative AI platform). Moreover, Nvidia’s GPUs are expected to be in high demand as AI moves away from the cloud and into applications such as autonomous driving, as well as for non-cloud usage of AI in the operation of healthcare, retail and manufacturing facilities. (Indeed, management told investors and analysts at a recent conference that it sees a big opportunity in this area of AI to automate some of the world’s largest industries.) Wall Street’s expectations aren’t high for the upcoming fiscal Q1 report (May 24), but after that the bottom line should accelerate, with earnings likely to rise more than 30% both this year and next.

Technical Analysis
After plunging nearly 70% from its late-2021 highs through last October, NVDA rallied back nicely into the 40-week line, then pulled back to establish a higher low by year’s end. The stock has turned another corner since then and was up strongly in the first three months of this year, with many big, above-average-volume buying weeks. Shares paused after touching 280 in late March, spent the last few weeks tightening and then took off nicely today. We like the action, though advise aiming for a small dip to enter if you want in.

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Stock 7

Ollie’s Bargain Outlet (OLLI)

Why the Strength
Given the persistence of inflation, it’s not surprising that deep discount stores are today’s fastest-growing retail channel, as well as the fastest-growing channel for food sales. Ollie’s (covered in the March 27 issue) is well positioned to benefit from these trends as the nation’s largest retailer of closeout merchandise and excess inventory, including food, housewares, cleaning supplies, clothing, toys and much more, often offering discounts of up to 70% compared to regular stores. The firm had a variety of issues in recent years, but the stock is slowly gaining strength as big investors see a turnaround being underway: A strong Q4 earnings report saw revenue increase 10% from a year ago and comparable store sales jump 3% (compared to a year-ago 11% decrease). The solid performance was in part thanks to new store openings, which included 40 last year (store count up 9% for the year), increasing the total to 468 outlets across 29 states (and a major part of the growth strategy; it should soon have the distribution capacity for 700 locations). The latest strength is courtesy of a share price upgrade from a major Wall Street bank that sees an improving competitive backdrop for Ollie’s, along with a strong closeout deal flow (i.e., more retail firms are suffering), plus better opportunity to expand margins due to supply chain improvements. Collectively, the boost in operating efficiency is anticipated to help the company drastically increase per-share earnings in the next couple of years. Lingering food price inflation is also expected to boost sales for Ollie’s going forward, as even affluent customers are now joining middle-class shoppers in the search for bargains. For 2023, management expects to meet its long-term annual target of 1% to 2% comp store sales growth, with plans to open 45 new stores (less one closure), with 60% of those openings planned in the second half of 2023. Analysts see the growth strategy succeeding, forecasting the bottom line to improve more than 50% this year.

Technical Analysis
After lagging in 2020 and 2021 and then turtling in early 2022, OLLI bottomed ahead of most names last March when the bear was just getting started. From a low of just under 40, the stock managed to rally into the spring before hitting resistance around 70 in July, then faded again for the rest of the year. The calendar flip helped OLLI’s cause, with shares choppily clawing higher over the last four months. This looks like one big launching pad since last summer, and the mid-April buying volume is encouraging. We’re OK starting small here or on dips.

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Stock 8

On Holding (ONON)

Why the Strength
On Holding continues to quack like a new leader in the retail space. The firm’s athletic footwear offerings do have something new and unique, with a better running experience thanks to a softer landing and “springier” take-off (they call it “cloud” running as it’s supposed to feel that cushy); that was the initial reason the firm became popular over in Switzerland (its home) and now all over the world. And the expansion potential here is huge—the firm has already broadened its offerings to tennis shoes and trail running shoes, with expectations for continued new targeted products for different sports and kids down the road (not to mention apparel, which makes up around 5% of revenues). Then there’s the fact that On’s higher-priced shoes (most go for $150 or more) have become something of a lifestyle brand for the upper middle class, with many wearing them on a daily basis for comfort and fashion (the firm has an all-day wear lineup just for this market). Growth has been fantastic on both the top and bottom lines and 2023 is expected to keep that going—the top brass sees revenues up at least 39% (in local currency terms) with a very healthy EBITDA margin of 15%, though analysts think even that will prove conservative. The big idea here is that On looks to be the next big sports retail brand of sorts, hoping to follow the path of a Lululemon or Under Armour, which would help it become much, much bigger over time. Earnings are due May 16.

Technical Analysis
ONON tanked during the first half of last year and spent months holding support in the 16 area before rallying for a few weeks when the calendar flipped. However, shares again pulled back with the market in February and early March, but the Q4 report changed everything, with shares catapulting on massive volume to multi-month highs. The action since then has been choppy, but overall pretty good, with the stock actually nosing higher from that gap. Volatility here is huge, but we’re OK nibbling here or (preferably) on dips of a couple of points.

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Stock 9

PTC Therapeutics (PTCT)

Why the Strength
PTC Therapeutics focuses on treatments for rare diseases by modulating gene and protein expressions. Its most successful treatments are for Duchenne Muscular Dystrophy (DMD): Translarna, an oral drug to combat mutations that lead to irreversible muscle loss, and Emflaza, a corticoid steroid approved for general treatment of DMD. The DMD drugs produced $170 million of PTC’s $220 million of first-quarter revenue, and with a recent approval by the FDA to extend Emflaza to patients as young as two years old, the company is on path to hit revenue guidance of $940 to $1 billion this year (up about 35% to 40% from 2022). Even after nine years selling into the market, DMD growth remains very strong: The Q1 increase of 33% for DMD treatments came from geographic expansion of where the drug is available, advances in earlier detection of the affliction as well as the fact patients using PTC drugs for their DMD are living longer. The company is building a pipeline to produce a therapy every two or three years, and expects to announce results of four clinical trials in the current quarter. One of the most promising developmental drugs is Aphenity, to treat PKU, a disease in which too much of a protein building block accumulates, eventually leading to intellectual disabilities. Other programs include treatments for people with mitochondrial disease associated seizures and Stage 2 Huntington’s Disease, as well as requests to expand the application of Translarna. Maintaining the research pipeline means PTC continues to post net losses, but they should narrow this year to $4.35 from 2022’s $7.79 loss per share. More important will be any good news from the development pipeline, which will set the stage for long-term growth.

Technical Analysis
PTCT had a huge off-the-bottom rally last summer after a horrific year and a half, though shares slid back to a higher low near 34 last October. And since then, the stock has shaped up: There was a mini-retest in December, a strong rally to start the year and then a decent basing period under 50. Now we’ve seen PTCT show some solid accumulation, with many good-volume up days as it pushes above 50, including last Friday’s positive earnings reaction. There’s still some overhead to chew through from last summer, so we’ll set our entry range down a couple of points.

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Stock 10

Watsco (WSO)

Why the Strength
Watsco is the nation’s largest distributor of heating, ventilation, air conditioning and refrigeration (HVAC/R) equipment and supplies, with around 700 locations nationwide. The company’s network supports more than 350,000 contractors, technicians and installers, and sales are split roughly 80/20 between residential and commercial sales, respectively. Both categories are expected to provide huge tailwinds for Watsco going forward, as the federal government has released new environmental rules for 2023 which raise HVAC/R efficiency standards and provide incentives for consumers to transition to more energy-efficient systems. (A similar set of new environmentally-friendly standards also apply to related categories, including heat pumps and refrigerants.) These developments should increase product sales for Watsco as customers begin replacing parts and systems to comply with the new efficiency standards. Additionally, the company expects last year’s green energy bill to provide enhanced tax credits and incentives for efficiency upgrades and electrification in the years ahead. Of course, the housing slowdown will also impact things, though it’s looking like much of that has been discounted—the stock’s latest strength was thanks to a bullish reaction to Q1 earnings, which saw EPS of $2.83 beat estimates by 47 cents. Sales came in at $1.6 billion, led by a 2% increase in both HVAC products and equipment sales. The firm sees the electrification of heating systems (in lieu of gas furnaces) as another growth catalyst going forward, and Wall Street expects low single-digit sales growth in the next few years. Bigger picture, Watsco is one of many firms that saw earnings take a step-function leap higher in recent years—but instead of dipping back to “normal,” the bottom line should hold firm despite the housing weakness.

Technical Analysis
WSO did well after the pandemic crash, motoring into the 320 range in late 2021. From there it entered a jagged decline, winding its way down to 225 last June. The stock effectively built a bottom for the rest of 2022, and then showed some real accumulation into February before building a shallower base near its all-time highs—and the bullish earnings reaction two weeks ago likely kicked off a new upmove. We’ll set our buy range down a smidge, thinking a short-term exhale is likely.

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Previously Recommended Stocks

The next Cabot Top Ten Trader issue will be published on May 8, 2023.