April 18, 2022

The environment remains essentially the same this week, as we have a broad market that continues to struggle, major indexes that are back in intermediate-term downtrends and commodity and defensive stocks about the only two areas that are doing decently. We continue to see secondary signs that are encouraging, including many measures that tell us selling pressures are gradually easing, but as always, we need to see the market and individual stocks prove themselves before changing our stance in any real way. It’s best to remain mostly cautious until the buyers return. Our Market Monitor will remain at a level 5.

Market Overview

The Story Remains the Same (for Now)

The environment remains essentially the same this week, as we have a broad market that continues to struggle (we’ve now seen 21 straight weeks of more stocks hitting new lows than new highs, the longest streak since 2009), major indexes that are back in intermediate-term downtrends (sideways at best if you want to be picky) and commodity and defensive stocks about the only two areas that are doing decently. Now, we will say we continue to see secondary signs that are encouraging, including many measures that tell us selling pressures are gradually easing, not to mention a deluge of worrisome news that has driven sentiment lower. Overall, we’re open to the possibility that the past two and a half months have been a bottoming process—but as always, we need to see the market and individual stocks prove themselves before changing our stance in any real way. In the meantime, we’re OK nibbling here or there, but it’s best to remain mostly cautious until the buyers return. Our Market Monitor will remain at a level 5.

This week’s list has many solid charts, though many are from the medical and commodity areas. Our Top Pick is Royalty Pharma (RPRX), which looks to be getting going after a couple years of lying in wait, with earnings and an Investor Day next month as potential catalysts.

Stock Picks & Previously Recommended Stocks

Stock 1

Box Inc. (BOX)

Why the Strength

Box is a long-established cloud services provider for medium to large enterprises that is pivoting into higher-margin collaboration services. Box’s approach revolves around the idea that cloud-based services have developed to handle raw data, but are weak on all the content companies generate – content publishing, instant messaging conversations, collaborative documents and general workflow. The company just rolled out Box App Center, which showcases more than 1,500 applications that integrate with the latest generation of Box. The system is a secure framework within which users can integrate multiple applications – the average enterprise uses 187! – and offers features such as a virtual whiteboard, allowing teams to visually collaborate remotely. Box needs customers to upgrade to the latest version of the software, since a sizable group of its 100,000-plus subscribers are using older versions of Box on legacy systems, which makes them more expensive to accommodate in the competitive cloud segment. But the big idea here is that the new content focus opens up a market that is potentially six times larger than where Box has been competing in the past. Converting existing users should be a relatively easy sale, since the alternative is paying other vendors piecemeal. Box’ product ‘suites’ – bundles incorporating their broader offering of products – start at $45 a seat, 29% more expensive than their top tier enterprise cloud services. It’s not changing the world, but Box has always done a good business, and the new business focus means sales, earnings and cash flow should grow nicely for at least the next couple of years.

Technical Analysis

BOX has been mostly a nothingburger for the past couple of years, with some downs and some ups, but mostly a lot of sideways trading, such as we saw from last July through mid March of this year. However, that sideways period was a good thing in part (outperforming the market after the November top), and BOX has seen a couple rounds of big-volume buying during the past month, including last week’s stretch to new highs. You could nibble here, though we’d prefer to get in on a pullback of a point or so.

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Stock 2

Cameco (CCJ)

Why the Strength

Cameco (covered in the March 14 report) is one of the world’s largest miners of uranium used to fuel nuclear reactors, which are being widely embraced as a zero-emission energy source. Additionally, as the world moves away from Russia-enriched uranium supplies (and, really, all Russia energy supplies), producers like Cameco are becoming more attractive to fill the sizable demand gap. A recent example of this is the decision by four Canadian provinces to build several small-scale nuclear reactors (beginning in 2028), while the U.K. just announced its intention to triple nuclear power generation capacity by 2050, which would allow that country to generate around 25% of its electricity from uranium. On the supply side, politicians have been calling for even more of Russia’s uranium to be removed from the global supply chain, while the Sprott Uranium Trust (the world’s largest physical uranium fund) has reportedly been removing “significant” spot-market supply from the market, providing Cameco with an additional tailwind. Consequently, a big Wall Street bank just upped its uranium demand forecast by 10% globally through 2035 while upgrading this stock, stating the company is best positioned among major producers to benefit from industry trends. Another major institution also just upgraded its outlook for Cameco based on the firm’s “advantageous” production base along with the heightened need for governments and utilities to achieve uranium supply security. On the financial front, analysts see sales up 22% this year and 27% in 2023, while earnings leap from last year’s loss. Q1 earnings are out May 5.

Technical Analysis

After turning a corner in early 2021, CCJ rode the 50-day line higher into mid-year and peaked at 22 in June. A quick trip lower to 16 followed, with shares rebounding in August and hitting a higher peak at 28 in November. From there, CCJ nosedived into late January, finding support at 18, but has steadily pushed its way back up new highs, including rising 10 of the past 11 weeks (a sign of persistent institutional buying). Daily volatility is high, but the buyers are clearly in control—dips toward the 25-day line should mark a solid entry point.

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Stock 3

Civitas Resources (CIVI)

Why the Strength

Outside of the Permian basin we’re seeing more and more M&A in the energy space (Oasis and PDC Energy are two examples), as these firms are realizing good-sized mergers can drastically boost cash flows from already-large levels, as well as extend their inventory runway for many more years. Civitas, though, saw this potential first, spending much of last year on a buying spree that’s resulted in an entity with one of the best balance sheets and cash flow profiles in the industry: Based in the DJ Basin in Colorado, the firm (formerly known as Bonanza Creek) has combined with two private entities and one public one (XOG Resources) that’s left it with around a half million acres and 1,000 very profitable drilling locations (returning nearly 50% on average even at $55 oil!) that should produce about 45% oil, 30% gas and 25% liquids. The various combinations created a lot of moving parts and uncertainties last year (the firm didn’t even do a conference call after Q3 results), but now that Civitas is whole, investors are seeing the cash flow power here—even at $75 oil and $4 gas, the company should crank out north of $7.50 per share of free cash flow this year (more next year as lower-priced hedges roll off), and through both a generous base dividend and a solid variable dividend, that would likely result in $4.50 or so in dividends, with the rest bolstering an already-solid balance sheet (debt is just 0.2 times cash flow) and possibly allowing for further bolt-on acquisitions. If you’re looking for something to worry about, the state it operates in is one; Civitas said in March that its 2022 drilling plan isn’t fully permitted yet, it’s always possible politics could become an issue in a blue/purple state. Still, the firm doesn’t think it’ll be an issue, and we believe it, especially in a world desperate for more energy supply. All in all, it’s a great (and likely under appreciated) story.

Technical Analysis

When we last wrote about CIVI in March, the stock had just popped back to the top of its multi-month range ahead of its Q4 report—and the good vibes have continued since, with a nice-looking breakout late last month, and after a dip near the 25-day line, a rebound that resulted in new closing highs last Friday. We won’t argue with buying some around here, but we’d prefer to get in on a dip of a couple of points after the recent lift.

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Stock 4

Dexcom (DXCM)

Why the Strength

Continuous glucose monitoring (CGM) systems are getting close to being the standard of care for diabetes requiring insulin, supplanting regular finger pricks. CGM systems involve a sensor being injected subcutaneously, with a connected transmitter on top of the skin; as the name suggests, it continuously monitors blood sugar levels and displays the results on a smartphone. CGMs have been used mainly in Type 1 diabetes, in which the pancreas produces little or no insulin, with about 35% of Type 1 patients in the U.S. now use CGM. DexCom is considered the technology leader and has about 40% market share, even as other companies, most notably Abbott Labs and Medtronic, make similar CGM products. Pending FDA approval, expected in the next few months, DexCom’s new CGM, the G7, will begin rolling out globally (though it will be gradual, with the rollout taking more than a year). It’s the first update to DexCom’s CGM since the G6 debuted in 2018. The new iteration will be cheaper and feature a transmitter that is 60% smaller. The G6 is still selling strong, so G7 timing won’t affect 2022 sales a lot, which are expected to rise 20% to $2.94 billion, with record $3.42 of earnings. The G7 will snip gross margin, though, to 65%, from 67%, on higher costs to make the G7 and marketing for its launch. The bigger challenge for DexCom is getting insurance coverage for the much larger market of Type II diabetes patients; that’s coming along as management focuses on gathering data demonstrating improved health outcomes using CGM. A pandemic emergency authorization for using CGM to monitor glucose level in U.S. hospitals also seems to be quickening acceptance, too. With one in 10 adults globally expected to have some form of diabetes by 2030, the long-term growth outlook remains strong.

Technical Analysis

DXCM hit an all-time high of 650-ish in November and then saw a three-month-long plunge on supply chain concerns, worries about delays of preliminary EU approval of the G7 and, of course, the market itself. However, after hitting 382 in January, the stock has put in a few months of constructive action—DXCM effectively held those lows during February and early March, then rallied nicely to 539 when the market got off its knees. And, importantly, shares have pulled back only grudgingly of late despite the market’s softness. It’s not totally out of the woods, of course, but we’re OK starting a small position here.

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Stock 5

Golar LNG (GLNG)

Why the Strength

Natural gas prices are soaring due to a global energy supply crunch (particularly in Europe) and higher demand for cleaner fuels. And while the White House has taken steps to address this issue by resuming drilling leases on federal lands, experts say it will take up to a year before new supply hits the market. This is where Golar enters the picture. The firm operates marine infrastructure that turns natural gas into liquified natural gas (LNG), and vice-versa, in a process called re-gassification. The company’s flagship, Hilli, was previously an LNG carrier that was converted to a floating liquefication (FLNG) and storage facility—the first of its kind in the world. Golar’s floating plant was first used by the nation of Cameroon to export LNG from one of its gas fields in 2018, and the vessel has since become the company’s top-performing ship, generating revenue of over $56 million in last year’s Q4 (more than the $52 million in sales from all the other ships in Golar’s fleet!). The attraction of Golar’s FLNG technology is that it allows energy firms to explore smaller gas fields that aren’t large enough to warrant installing a major LNG terminal. The attraction here is that Golar plans to expand its FLNG fleet, starting with Golar Gimi, scheduled to come on line in 2023, which already has secured a 20-year contract with oil/gas giant BP. Wall Street sees major potential in FLNG technology as a way for countries to access more gas, with a major bank recently upping its rating for Golar (a reason for the strength). While near-term results should be relatively flat, investors are buying the future, with sales picking up steam next year and earnings soaring by 2024.

Technical Analysis

GLNG drifted sideways in a narrow range between roughly the 10 and 14 levels for all of 2021 and into January of this year. The big turning point came in February following earnings, when shares punched through its chart ceiling and kited as high as 26 by April—the highest level since 2018. We like the fact that shares have held their entire rally, but we’ll set our buy range down toward the 25-day line, thinking a shakeout is possible.

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Stock 6

Halozyme (HALO)

Why the Strength

Halozyme has always had a great story, and after a year in the wildnerness, the stock is getting back in gear on the upside. The company is all about Enhanze, which is its drug delivery technology that breaks down cellular barriers that prevent bulk fluid flow; it’s proven to be safe, results in treatments that can be given in just a few minutes instead of a couple of hours, and thus, can be given in less intensive settings. Halozyme has licensed Enhanze for lots of drugs sold by many big fish in the drug sector, who pay Halozyme milestones and eventually royalties on sales of the Enhanze-enabled drug; Darzalex (by Janssen, for multiple myeloma) is one of the big sellers now, while Phesgo (Genentech, for certain breast cancers) is another huge draw, but there should be more blockbusters coming online during the next couple of years, including a treatment for Myasthenia gravis by Argenx that some think can crank out $2 billion in revenue by 2026. And just last week, the firm acquired Antares Pharma, another drug delivery-focused royalty play, with a unique auto-injector platform (for treatments where medication is needed quickly, but infrequently) that has broad licensing opportunities. Overall, while lumpy milestone payments could fall this year, royalty revenues are expected to rise 50% (on top of a ~100% gain last year), and royalties are expected to rise 25% to 30% annually for years to come, even before any benefit of Antares’ offerings. After a huge gain last year, analysts see earnings relatively flat in 2022 before beginning a multi-year advance after that. A reasonable valuation (21 times trailing earnings) ties a bow on this attractive package.

Technical Analysis

HALO was acting great in late 2020 and early 2021, but the break in growth stocks in general (and biotech stocks in particular) led to a tedious 10-month decline, with shares falling from 56 to 31 during that time. But then came a nice bottoming effort, with shares holding the low 30s area in December, January and February, and HALO has shown strength since then, rallying five weeks in a row. (The RP Line actually bottomed out in early December.) Yes, there’s still overhead to chew through, but we’re OK starting small here and using a loose loss limit.

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Stock 7

Marriott Intl (MAR)

Why the Strength

The coming summer is expected to see vacation travel rebound to its best levels since before the pandemic broke (one tip-off: Delta Airlines just recorded its highest-ever bookings ever over a five-week period!). With 30 brands and nearly 8,000 properties worldwide, Marriott is one of the world’s largest hotel operators, licensers and time share franchisers, and it’s positioned to benefit from the nationwide case of cabin fever. The company’s asset-light model of not actually owning properties has allowed it to maximize sales as bookings growth accelerates during the post-pandemic return-to-normal. Marriott’s revenue more than doubled in Q4 as systemwide revenue per available room (RevPar) increased 125% worldwide compared to a year ago, including rising 144% in the U.S. and Canada and up 83% increase in international markets. And while the top line hasn’t yet returned to pre-pandemic levels, Q4 net income was 68% higher than the comparable 2019 pre-pandemic quarter, and new bookings across all major customer segments have since rebounded to pre-Omicron levels. What’s more, Marriott isn’t putting all its eggs in its North American basket, as shown by its foray into the safari business. The company just signed an agreement with Baraka Lodges to open the first luxury safari lodge in Africa, scheduled to welcome guests in 2023 (Marriott operates 120 properties in Africa across its portfolio). All in all, management is set to expand room capacity by about four percent in 2022 and said it could start returning cash to shareholders later this year. When it releases Q1 earnings (likely in early to mid May), analysts expect stellar top- and bottom-line growth of 83% and 820%, respectively—and earnings for this year as a whole could challenge the 2018 all-time high.

Technical Analysis

MAR is one of many “reopening 2.0” stocks that has tried to get going numerous times in recent months, but the market hasn’t allowed it to happen—after a peak last February, breakout attempts in both November and this February fell flat. But we think the third time could be the charm—after a big shakeout in March, MAR tested its old high three weeks ago, dipped again, but then roared ahead, nearly notching new highs today. We like it, but given the overall environment, we’ll set our buy range down a bit.

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Stock 8

Range Resources (RRC)

Why the Strength

On top of Western sanctions against number-two producer Russia, natural gas has a lot going for it right now, including the clean energy trend, rising power generation needs and lower new production growth. Range operates mainly in the resource-rich Marcellus basin, and it’s a leading U.S. natural gas and especially natural gas liquids (NGL) producer; in fact, it’s the top NGL exporter among independent producers and it’s taking full advantage of booming gas prices. One way that Range has been able to do this is by keeping its capital expenditures in check, which has allowed the firm to reduce debt thanks to higher free cash flows. Consequently, the balance sheet is stronger than it has been in years and has enabled the company to return money to investors through share buybacks (Range recently initiated a $500 million share repurchase plan) and a reinstated dividend (expected to kick in later this year). Moreover, a White House plan to increase U.S. gas exports to Europe should pave the way for more export terminal approvals (another reason for the strength). The company’s latest financials are a clear indication of the good times gas producers are experiencing, with Q4 revenue of nearly $1.6 billion mushrooming 162% from a year ago. And while per-share earnings of 96 cents missed estimates by 2 cents, it was miles above the year-ago level. Range realized NGL premiums that averaged $1.18 per barrel above spot prices in 2021, and expects pre-hedge NGL price realizations to increase $5 per barrel in 2022, providing it with around $180 million in annual pre-hedge revenue. And all of these figures could prove conservative given the massive natural gas and NGL prices seen in the futures market. Earnings are due out April 26.

Technical Analysis

RRC has had a big run in the past year, but there have been many corrections along the way, including a 27% dip early last year, a 29% retreat in the summer and a 37% drop starting last October when the market began its downmove. But each time the buyers have re-taken control, and the latest surge has been powerful, with elevated gas prices causing a wave of buying. Near-term, we’ve seen buying volume taper off, so we advise entering on weakness.

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Stock 9

Royalty Pharma (RPRX) ★ Top Pick

Why the Strength

We wrote about Royalty Pharma back in January, but that didn’t pan out (the stock briefly nosedived in February with the market), but now it looks like the buyers are finally flexing their muscle. As its name suggests, the company is the second royalty-related drug story in Top Ten today, though in this case the company is a source of funds, offering good chunks of money to clients that can use it to accelerate development or commercialization efforts, and sometimes even for drugs that are already on the market. And Royalty Pharma isn’t just nibbling around the edges—it has stakes in more than 35 drugs that are on the market (plus another 10 in the development stage), including a whopping 14 that are cranking out $1 billion of annual revenue (five of which have north of $3 billion in revenue), with Vertex, Biogen, AbbVie, J&J, Gilead, Merck and others all part of the client base. Importantly, Royalty Pharma’s deals are longer-term in nature (still six years left on their big drugs; average contract length is well over a decade), so as it funds more deals, there’s no reason the firm’s high-margin royalties can’t grow nicely. Indeed, the biotech industry’s need for funding is growing ever higher as more treatment are developed, so Royalty is playing in a growing field. (In a sense, the market’s doldrums, which have crimped access for IPOs, should actually help.) In 2021, Royalty funded $3 billion of transactions, up around 25% from the year before, including some big ones like Tremfya (from J&J, a treatment for plaque psoriasis), Orladeyo (from BioCryst, for HAE) and Cabometyx (from Takeda and Exelixis, for advanced renal cell carcinoma). The numbers can be a bit lumpy for a few reasons, but analysts see business reaccelerating nicely after the recent slow patch. A modest dividend (1.7% yield) is an added bonus. Earnings are due May 5, with an Investor Day coming on May 17.

Technical Analysis

RPRX came public back in mid 2020 and has been building a launching pad ever since, with a couple of rallies during that time, but more recently, a long, tedious sideways phase in the 35 to 45 area. Shares appeared in Top Ten back in January due to its relative resilience (the stock was holding firm while the market tanked), though the buyers never showed up, with a shakeout in February. But now it looks like things have changed—RPRX has rallied nicely for three straight weeks on accelerating volume, reaching 10-month highs in the process. We’re OK starting a position here or (preferably) on weakness.

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Stock 10

SSR Mining (SSRM)

Why the Strength

Gold and silver prices are on the rise as investors turn to both metals as a safety hedge against geopolitical and global economic uncertainty. This favors miners that can produce the metals at an attractive cost, such as SSR Mining. The company operates Argentina’s largest commercial silver project (Puna), also producing gold, zinc, lead and tin. While the company is known historically for its silver mining, gold is where it has put the most emphasis in recent years, with a pipeline of high-quality development and exploration assets in the U.S., Turkey, Mexico, Peru and Canada. In Q4, SSR posted revenue of $408 million, which was 10% higher than the year-ago quarter, while per-share earnings missed by 1 cent. However, the company delivered free cash flow of $149 million in Q4 (up 50% from the prior quarter) and $444 million for 2021 (up a whopping 157% from 2020). For gold, the company saw Q4 production of about 212,000 gold-equivalent ounces (GEOs) at an all-in sustaining cost of $961 an ounce—well under the current $2,000 gold price—plus record full-year production of over 794,000 GEOs. Looking ahead, SSR sees its combined properties producing around 740,000 gold equivalent ounces annually through 2024 after increasing gold mineral reserves by over one million ounces last year (up 14%). Management also intends to continue using free cash flow to enhance shareholder returns. Last year, SSR delivered $191 million in capital returns through dividends, including a recent 40% increase in its dividend (0.9% yield), plus one of the industry’s most aggressive share repurchase plans, buying back around nine million shares (around 4% of the float). Q1 earnings are due out May 3.

Technical Analysis

After hitting a multi-year peak in August of 2020, SSRM entered the doghouse—shares quickly fell to 14 last March, retested that level in October and, after an encouraging spike, faded back to 16 in January of this year. But now a turn has come, with accelerating buying volume driving SSRM to 22 in early March, and after some choppiness, a stretch higher last week. Like many names, the latest push has come on just OK volume, so if you want in, we prefer aiming for dips or shakeouts to start a position.

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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 bold.

The next Cabot Top Ten Trader issue will be published on April 25, 2022.