April 12, 2021

Another Step in the Right Direction

Current Market Outlook

It certainly hasn’t been a buying panic, but last week was another step in the right direction, with growth stocks avoiding selling pressure even as they approach (or in some cases, sneak out to) new highs—a marked change in character from the prior few weeks. There’s still some iffy pieces of evidence out there, including sentiment (complacent), volume (extremely light) and even some of the broad market (materials and energy stocks are beginning to lose some steam), but overall it appears that the sellers have run out of ammunition for the time being. If the buyers can really show up, we could see some solid breakouts going ahead. For now, we’re leaving our Market Monitor at a level 6, but another good week may change that.

This week’s list has a bunch of good-looking charts, most of which have a solid growth story. Our Top Pick is United Therapeutics (UTHR), which recently staged a big-volume breakout on news.

Acuity Brands (AYI)

acuitybrands.com

Why the Strength

Acuity is North America’s leading provider of lighting and building management solutions for industrial, commercial and residential applications. Although the work from home trend has resulted in lower demand for brick-and-mortar and industrial-scale lighting systems, higher demand from residential customers has filled this gap. The fiscal Q2 2021 report showed that while revenue was 6% from a year ago, per-share earnings of $2.12 were a respectable 15% higher and beat the consensus by 38 cents (analysts predict an additional 15% per-share increase for fiscal Q3). The company also reported a gross profit margin (which it regards as a key metric) of 43%, an expansion 170 basis points, calling it an “outstanding achievement” resulting from product and productivity improvements. Acuity indicated that demand for lighting products is rebounding, and though cautioning that the global semiconductor shortage could serve as a headwind, expressed optimism for the year ahead. It recently introduced EvolAIR with UV Angel technology that disinfects air in occupied and unoccupied spaces, developed for education, office and healthcare settings, and sees it as a future growth driver. And it views the cloud-based Atrius IoT solution—which uses occupancy data and analytics to control a connected lighting platform—as a meaningful recurring revenue driver from big customers down the road. Management further reaffirmed its commitment to returning to capital to shareholdings, announcing plans for more buybacks—the share count in the most recent quarter was down 9% from the year before, and Acuity still has four million shares left on its repurchase authorization (compared to just 36 million shares outstanding). Analysts see steady growth ahead.

Technical Analysis

AYI had been underperforming for years and crashed with everything else last March—and even after that, the stock was no great shakes, meandering mostly below 110 as it struggled to get going. But the post-election rally helped, with a quick pop to 120 and a relatively tight multi-month basing effort near that level. And now the buyers have really shown up, with the stock breaking out in early March and surging on earnings two weeks ago. Dips of a few points should be buyable.

AYI Weekly Chart

AYI Daily Chart

ASML Holding (ASML)

asml.com

Why the Strength

ASML controls around 90% of the lithography systems market, which uses lasers to etch tiny circuits on the silicon wafers used in electronic devices and where unit sales are expected to increase dramatically in the coming years as everything becomes digitized. Plus it’s the world’s only producer of extreme ultraviolet (EUV) lithography machines used to make leading-edge semiconductors, both of which position ASML to play an outsized role in the hi-tech economy. It recently inked a $4 billion, five-year procurement deal with SK Hynix (the world’s third-largest chip firm) to produce around 30 EUV machines, marking a significant increase in ASML’s yearly deliveries. ASML also boasts a lucrative equipment partnership with chip giant Intel, which has increasingly adopted EUV lithography in its attempt to become a major provider of foundry capacity for U.S. and European customers. In recognition of the growing embracement of EUV technology by leading chip makers, a major Wall Street firm recently upgraded ASML—a key reason for the latest strength. As for the numbers, earnings soared last year thanks to the accelerating demand for all things digital, and analysts see more of where that came from—in Q4, ASML sold nine of its new EUV machines and received orders for six more worth $1.3 billion, leading to a revenue gain of 15% while per-share earnings of $3.95 were up 31% and crushed estimates. When the company reports Q1 earnings on April 21, analysts expect the top line to rise 79% (due to the easy comparison), with a predicted 203% bottom line bump; analysts see earnings up north of 20% both this year and next. The valuation (64 times earnings) is up there, but this is a unique, high-margin (32% after-tax profit margins) story.

Technical Analysis

ASML’s post-pandemic recovery brought the stock up to 400 last July before shares began a nice, sideways, four-month rest. The post-election kickoff brought a breakout, with shares getting to 600 in February before the growth stock selloff pulled it down for a bit. But like many chip equipment makers, ASML has recovered beautifully, pushing to new highs on very nice volume. Given that earnings are due soon, we suggest entering on weakness.

ASML Weekly Chart

ASML Daily Chart

Boot Barn (BOOT)

bootbarn.com

Why the Strength

Boot Barn has always had a solid growth story, and after a pothole during the pandemic, the company is back on a solid growth track. Boot Barn is the leading seller of western-style apparel and accessories, including blue collar work wear, a trend that’s accelerating across the country. All in all, about half of sales are footwear (boots and other rugged footwear), one-third apparel (western shirts, denim, outerwear) and the rest hats and accessories; work-related wear across these categories makes up about 30% of the total. What’s neat about the product line is its lack of fashion, which reduces markdown risk as these offerings rarely go out of style. (The firm actually has many exclusive brands that are among its most popular sellers, leading to higher margins.) Plus, like most retailers, the firm has upped its e-commerce game of late, with online sales now making up 16% of the total and rising at mid-double-digit clips (up 16.3% in calendar Q4). Boot Barn was working on a string of solid growth years before the pandemic hit, with led to sales slippage in the last three quarters of 2020, but Q4 saw a return to growth (sales up 6%, same-store sales up 4.6%, earnings up 22%) and analysts see the bottom line booming 40% in the current (started April 1) fiscal year. Longer-term, the firm has around 274 stores today, but has historically expanded its store base by around 10% annually, and management sees room for faster growth in the wake of the pandemic. (New stores pay back the initial investment in three years, which is solid.) All in all, we like it.

Technical Analysis

BOOT is a bit thinly traded, which led to some dramatic virus-related moves, with a crash from near 50 to below 10, followed by a big rebound to 30 and another pullback to 18. But shares mostly rode their 10-week line higher after that before the recent rest period. Again, there’s been some wild action, but BOOT hung around the 60 area for 10 weeks before stretching higher last week on so-so volume. It could use a bit more seasoning, but picking up a few shares on today’s dip is OK by us.

BOOT Weekly Chart

BOOT Daily Chart

Boston Beer Company (SAM)

bostonbeer.com

Why the Strength

Look at an 18-month chart of Boston Beer Company and you would never know the Covid-19 stock market plunge ever happened. Thanks to its strong brands and renewed growth strategy, shares notched a remarkable string of new highs throughout 2020, and that’s continuing in 2021. Being one of the largest and most established craft brewers in the U.S. gives Boston Beer Co. significant advantages of scale to compete against fast growing microbreweries, especially during the uncertain times of the past year. The pandemic did dent the firm’s restaurant-based sales, but that was more than made up for by the “home drinking” trend, and the company was in perfect position to take advantage of it thanks to its newer products, especially the Truly Hard Seltzer and Twisted Tea brands. (Truly increased its market share in non-bar locations to 26%, the only established national hard seltzer to increase share last year.) Plus, the company’s acquisition of rival Dogfish Head expands its craft beer offerings by adding a fast-growing brand that is popular with craft drinkers. Looking ahead, Boston Beer should benefit from the reopening trends as well as its newer, growth-oriented brands, so it should be firing on all cylinders in the quarters to come. Indeed, analysts see sales and earnings up 42% and 56% (respectively) in 2021, with another 28% earnings bump next year, all of which will probably prove conservative given the underlying trends here. The next big event will be earnings, which are due out April 22.

Technical Analysis

SAM was one of the first names to burst to new highs after the pandemic, which is always a good clue as to future leadership—shares ran from around 450 to near 1,100 by late October before finally taking a rest. And that rest was a prolonged one, which we think is a good thing, with no net progress for five full months. Now, though, SAM is pushing ahead again, rising to new highs on decent volume. Given the upcoming quarterly report, we suggest starting small and looking for dips if you want in.

SAM Weekly Chart

SAM Daily Chart

The Goodyear Tire & Rubber Company (GT)

goodyear.com

Why the Strength

Manufacturing plant shutdowns and a dry-up in auto demand negatively impacted the U.S. tire industry last year, but with the economy rebounding and auto sales surging, tire demand has revived, boosting Goodyear’s outlook. Beyond the red-hot auto market, this stock’s recent strength follows Goodyear’s move to acquire long-time rival Cooper Tire for $2.5 billion. Announced in late February, the acquisition will expand Goodyear’s product offering and increase its distribution and retail channels, while combining both companies’ strengths in the SUV category and likely lead to a lot of synergies. When the deal closes (later this year), analysts expect the result to be a combined outfit with nearly $18 billion in annual revenue with double Goodyear’s current presence in the highly profitable China tire market (where car deliveries are expected to increase 8% this year). The Q4 report provided additional support for the bullish outlook: While the top line of $3.7 billion slid a bit (down 2%, due mainly to unfavorable FX factors), it also boasted earnings of 44 cents per share (up 132% from the year before and 25 cents above estimates). Plus, the company reported a surprising 3% increase in revenue per tire in the quarter despite lower tire volumes. Additionally, Goodyear delivered its highest fourth quarter free cash flow since 2011, thanks to cost management and improved earnings. Analysts expect sales to increase 13% in Q1, followed by even bigger growth in Q2 (up 65% thanks to easy comparisons). Goodyear guided for the strong momentum to continue well into 2021 and plans to expand its service network and broaden its reach with small and medium truck fleets. Upcoming roll outs of fuel-saving tires for the light vehicle and long-haul markets should provide an additional boost. Analysts see earnings north of 80 cents per share this year and double that in 2022.

Technical Analysis

After peaking at 37 in 2017, GT entered a steady decline which ended last year when the stock hit a nadir of 4. The turnaround that followed was slow to gain traction at first, as GT spent several months stuck in a lateral range between 8 and 12. But in February, shares broke out of that range after a string of analyst upgrades, followed by the huge-volume rally on the Cooper acquisition news. The five-week consolidation since then looks normal to us, allowing some moving averages to catch up. We’re OK taking a swing at the stock here.

GT Weekly Chart

GT Daily Chart

Pinterest (PINS)

pinterest.com

Why the Strength

The pandemic-inspired everyone-at-home trends persist in the U.S. despite the easing of virus restrictions. In other countries, meanwhile, shutdowns are still in place. This adds up to plenty of people still turning to Pinterest for recipe, crafting, home decorating and shopping ideas. After a rocky start to 2020, Pinterest saw third quarter sales skyrocket by 58%, and an even stronger 76% in Q4, thanks to a surging user base and a rush of ad providers to the platform. Even with a gradual return to economic normalcy, Pinterest is seeing a notable increase in revenue as companies up ad spending following last year’s uncertainty (with retailers accounting for most of the ad spend). Moreover, the firm’s stellar growth in monthly active users last year (over 100 million!) and 60% sequential increase in catalogs added give it plenty of opportunities for monetizing content and expanding its global outreach. In fact, much of Pinterest’s future growth is expected to come from outside the U.S., and management plans to prioritize content and expand shopping options for its users and advertisers in 2021. Bigger picture, Pinterest’s one-of-a-kind offering allows advertisers to engage potential buyers earlier in the process than traditional e-commerce sites, which is attracting more and more ad dollars. When the company reports Q1 results next month, analysts expect per-share earnings of 8 cents—up considerably from the 10-cent loss a year ago. For the full year, analysts see the top line up 49% while earnings double, with a lot more growth beyond that.

Technical Analysis

PINS broke out of a huge post-IPO base last September and ran from 40 to 75 within a couple of months and then as high as 90 before the growth stock selloff took hold. The correction from there was sharp (33% or so), but PINS found support, hit a higher low three weeks ago and has since surged back to within a few percent of its highs. Upside volume has been tame, so more of a near-term dip wouldn’t shock us, but we’re OK starting a position here or on dips of a few points.

PINS Weekly Chart

PINS Daily Chart

Sally Beauty (SBH)

sallybeautyholdings.com

Why the Strength

Among the first and hardest hit retailers from last year’s pandemic were personal care stores such as hair and nail salons, and Sally Beauty suffered due to that trend. Still, as the nation’s largest distributor of professional beauty supplies with more than $3.5 billion in annual sales, the company weathered the blow and the shares have recovered nicely in recent months. The company caters to both professional stylists as well as individual consumers with about 5,000 stores nationwide plus international locations. The company’s Sally Beauty Supply segment (accounting for 60% of revenue) sells beauty products, including hair care & coloring, skin and nail care, styling tools and other products to retail customers, beauty salons and salon professionals. The Beauty Systems segment (the other 40% of revenue) sells its products directly to salons and salon professionals through its professional-only stores. Long term, this isn’t a great growth story, but management has done a great job of controlling costs and transitioning to a digital world (it recently launched a nationwide buy online, pick up in-store program) which has paved the way for a big earnings rebound—business was hit hard early in the pandemic (a combined 12 cents of earnings in the first half of calendar 2020 vs $1.11 the year before), but the bottom line inched higher in Q3 and Q4 (thanks in part to a 69% boom in Q4 e-commerce revenue) and analysts see a near-40% leap in the bottom this year. It’s not changing the world, but Sally Beauty looks like a solid, cheap (12 times estimated earnings) turnaround story.

Technical Analysis

SBH was the dog’s dinner for years, with the stock grinding sideways-to-lower for a long time; even after last year’s crash and bounce, shares sagged again into the fourth quarter and were sitting under 10 when November began. But the stock has been a different animal since then, partly due to the broad market rally, but also thanks to the Q4 report and 2021 outlook. Better yet, after a big run to nearly 22, SBH has calmed down nicely, tightening up as volume tapers off. It might need a bit more time to gather strength, but we’re OK taking a swing at it here or on dips of a point or so.

SBH Weekly Chart

SBH Daily Chart

SiteOne Landscape Supply (SITE)

siteone.com

Why the Strength

SiteOne Landscape isn’t a well-known stock, but it remains one of the better rollup stories we’ve ever come across. The underlying business is solid, and should get a boost from the boom in all things construction—SiteOne is the largest and only national distributor of landscape supplies, more than five times the size of its nearest competitor, with 130,000 individual products and more than 570 branches in 45 states and Canada. Over time, that should lead to mid-single digit growth as businesses and prices lift. However, the real growth comes from acquisitions, which SiteOne is taking on at a torrid place; the company still only has about 13% market share as the landscape business remains highly fragmented. Indeed, the company only has a full product line offering in about 20% of its 225 target markets, so it’s engaging in small, bolt-on acquisitions left and right—over the past three years, it’s averaged taking over 11 firms that brought in $170 million of net sales and 43 branches annually. And if anything that pace could pick up given the havoc so many small businesses. (Through Q1, SiteOne has bought out two outfits with 10 total locations, and the top brass says its M&A pipeline is big and growing.) As for the numbers, sales growth has reaccelerated and EBITDA (the more useful profitability metric for SiteOne) lifted 29% last year. For 2021, management sees mid-single digit sales and 10%-ish EBITDA growth, but that doesn’t include the benefit of any acquisitions, which should be meaningful. Overall, SiteOne looks like a long-term 15% to 20% grower as it continues on its rollup path.

Technical Analysis

After crashing with everything else last March, SITE had a choppy recovery, with plenty of shakeouts and dead periods as it worked its way higher. The latest consolidation began in late January, and so far it looks constructive: SITE did suffer some distribution early on, but found big-volume support near the lows (along with tight weekly closes) and now shares have perked back up to their highs. We wouldn’t argue with a nibble here, but we’ll set our entry range down a bit given the lack of upside volume.

SITE Weekly Chart

SITE Daily Chart

United Therapeutics (UTHR)

unither.com

Why the Strength

Pulmonary hypertension (PH) is a rare (and sometimes fatal) disease that forces the heart to work harder to pump blood to the lungs. There’s currently no cure for it, but United Therapeutics is devoted to finding one. In the meantime, United is focused on improving the lives of PH patients by offering four FDA-approved drugs that relieve PH symptoms, including Adcirca, Orenitram, Tyvaso and its leading drug, Remodulin. (The company also offers Unituxin for pediatric patients with high-risk neuroblastoma.) United’s bustling pipeline includes one Phase 1 and four Phase 3 product trials—mainly involving PH treatments—plus seven products in the prototype, registration or pre-clinical phases. The firm has been highly profitable for a long time, but the worry is that Remodulin is seeing slipping sales due to generic competition. But now there’s reason for optimism: Fourth-quarter revenues grew 24% from a year ago, thanks to substantial organic growth from Tyvaso (the drug’s sales for the year as a whole were up 16%), and there should be more of that coming. United just got approval for an expanded label for Tyvaso to include interstitial lung disease; analysts now believe this fresh label expansion will double Tyvaso sales in the coming 18 months! Looking further out, results from a Tyvaso study for PH associated with chronic obstructive pulmonary disease (COPD) are expected out next year and, if positive, could add more than 100,000 additional Tyvaso customers, which would be triple its current market! Finally, the firm plans to revive sales of its flagship drug with the recent launch of the subcutaneous Remunity Pump for Remodulin patients. Analysts see earnings slipping this year before perking up in 2022, but with all the positive happenings, those numbers should prove too low. The low valuation (14 times trailing earnings) puts a nice bow on the package.

Technical Analysis

After hitting a lifetime high of 190 in 2015, UTHR spent the next four years grinding its way down to 75 in mid 2019. While it had some violent ups and downs after that, the real action didn’t start until late last September—shares ripped from 100 to 175 over three months, then built a 10-week launching pad that went straight sideways. And now the buyers are back, with UTHR popping to all-time highs on two straight weeks of big, accelerating volume. We’re not opposed to buying here, though we’d prefer to aim for dips of a few points.

UTHR Weekly Chart

UTHR Daily Chart

Yeti Holdings (YETI)

yeti.com

Why the Strength

As the weather gets warmer, more and more people are starting (or adding to) their Yeti collections—whether it’s Yeti’s coolers, tumblers or outdoor products (chairs, outdoor wear, cargo, accessories, etc.), people see these as affordable luxury goods that they’re willing to pay up for to keep their beverages cold (or hot) and to stay comfortable when lounging around the beach or on a hike or hunt. Drinkware makes up nearly 60% of revenues, while coolers and equipment make up the rest, and the customer base has broadened in a big way (women now make up more than a third of customers, up from 9% in 2015; two-thirds of buyers are under 45) as the firm continually broadens its offerings. While you’d think the pandemic would hurt business as people stayed mostly shut-in (wholesale revenues were indeed down), it turns out that people were eager to get together with a few others in the neighborhood and enjoy a good cocktail or two—Yeti’s sales grew 19% last year thanks to a 50% surge in e-commerce revenue (now makes up more than half of all revenue) while earnings and margins surged. Looking at 2021, analysts see a slowdown in bottom line growth (there’s uncertainty as to how the end of the pandemic will play), but (a) Wall Street still sees sales and earnings rising in the 15% to 18% range, which isn’t too shabby, and (b) a lot of the attraction with a brand like this is the possibility for years of solid expansion as the company expands its reach both in the U.S. and overseas. (Yeti is already selling into Canada, Britain, Australia and Japan, yet international revenues make up just 6% of the total—tons of room for expansion). It’s not going to be a super-hot growth stock, but Yeti is a unique company that’s going to get a lot bigger over time.

Technical Analysis

YETI was one of the first names to reach new highs after last year’s crash, rallying as high as 55 in August before finally taking a break. That three-month rest led to another, tamer upmove that took the stock to 80 in mid January before the buyers and sellers began fighting it out. Now, three months later, YETI is in position to resume its advance—shares popped back toward their highs on solid volume last week and broke out nicely today. You can start a position here or on dips.

YETI Weekly Chart

YETI Daily Chart

Previously Recommended Stocks

Below you’ll find Cabot Top Ten Trader recommended stocks. Those rated HOLD are stocks that traded within our suggested buy range within two weeks of appearing in the Top Ten and still look good; hold if you own them. Stocks rated WAIT have yet to dip into our suggested buy range … but can be bought if they do so within the next week.

Those stocks rated SELL should be sold if you own them; they will no longer be listed here. Finally, Stocks in the DROPPED category are those that failed to trade within our buy range within two weeks of our recommendation; that’s not a bad thing, we just never got the price we wanted. Please use this list to keep up with our latest thinking, and don’t hesitate to call or email us with any questions you may have. New recommendations each week are in green.

The next Cabot Top Ten Trader issue will be published on April 19, 2021.