April 19, 2021

Still Positive Despite Cross-Currents

Current Market Outlook

Growth stocks are still in mostly good shape, which is the good news. And while we see reasons for continued optimism, it’s also hard to be a raging bull right now. There’s quite a bit of rotation underway, and sentiment is still elevated. On top of that, the number of Nasdaq stocks making new lows is more than we’d like to see, which means cross-currents could become a factor in the near term. Still, the weight of evidence prevents us from being overly cautious; plus there are a fair number of nice-looking setups in individual stocks across several industries. With this in mind, we’re leaving our Market Monitor at level 6 for now.

This week’s list includes a mix of growth and cyclical themes, most of which have a solid story.
Our Top Pick is Nvidia (NVDA), an established semiconductor name with a growing presence in the soaring high-performance computing (HPC) market, and which has just broken out to new highs on strong volume.

ArcelorMittal (MT)

corporate.arcelormittal.com

Why the Strength

Hot-rolled steel prices are soaring as buyers have struggled to find supplies, thanks to strong markets like construction, automotive and infrastructure. This has been a major boon for Luxembourg-based ArcelorMittal, the world’s largest steel company. Its focus is on making “smart” steels—mainly for electric vehicles (EVs) and renewable energy infrastructure—which are more efficient, use less energy and emit significantly less carbon than traditional steel. With steel prices at their highest point in over a decade, Arcelor has been able to increase the prices for its product seven times since November—a big reason for the strength—with further hikes likely ahead as supplies remain tight. (A recent upgrade from a major ratings firm is another reason for the strength.) On the financial front, though Q4 revenue was down 8% from a year ago, it was an 8% sequential improvement. Per-share earnings of $1, meanwhile, beat the consensus estimate by 63 cents. And despite a challenging market that saw steel shipments decline 18% last year, the company also finished 2020 with its lowest debt level in 14 years, allowing it to initiate a shareholder return policy (beginning with a $500 million share buyback, followed by an additional $600 million authorized buyback program to be completed this year). Looking ahead, analysts expect sales to improve 20% this year as steel remains in high demand. Arcelor is also pushing ahead with a $1 billion cost reduction plan which should be complete late next year, with a goal of generating 40% of the plan’s targeted benefits from productivity gains. It’s a cyclical story, but with global steel consumption increasing, the potential for growth is huge.

Technical Analysis

After hitting a long-term high at 38 in 2018, MT swooned to 7 by last year’s panic low. But the March bottom proved to be a pivotal turning point for MT, as steel demand recovered on the back of China’s manufacturing rebound. Shares spent the next seven months basing before blasting off in November. After testing the 50-day line in February, the stock has trended higher on accelerating volume in recent weeks. You could nibble here or (preferably) on dips.

MT Weekly Chart

MT Daily Chart

Brooks Automation, Inc. (BRKS)

brooks.com

Why the Strength

Brooks is an established semiconductor manufacturing company with a unique biotech component. The circuit side of the company’s business provides contamination control equipment and robotic handling systems, while the life sciences segment offers genomic services and tissue sample management to pharmaceutical and research customers, along with storage and transport of lab materials. Brooks’ robotic and automation systems move semiconductor wafers during the production process, and there’s currently heavy demand for its equipment—driven by large-scale networking, smartphones and semi fabrication companies. On the life sciences end, what started as mainly a sample storage business has since expanded into genomics analysis (Brooks’ GENEWIZ division is a leading provider of gene sequencing/synthesis services). The company’s fiscal Q1 report showcased the strengths in both its major businesses; the top line rose 19%, with product revenue in the life sciences segment increasing 53% (largely due to Covid-related demand) and service revenue rising 28%. Semiconductor solution sales, meanwhile, were up 7%, led by a 41% increase in robot system sales. Other metrics were equally strong, with gross margin showing notable improvement for both businesses. Management believes the semi business is on the verge of a “long and strong” growth period due to accelerated communications and computing demand. Consequently, when Brooks reports at the end of April, it’s expected the top line will increase 24% with the bottom line increasing an estimated 102%, led by the firm’s chip segment (TSM’s $100 billion capacity expansion plan will likely contribute). All told, it’s a solid double-play story.

Technical Analysis

BRKS spent several years bouncing in a range between 20 and 50. Then came last year’s pandemic, which sent shares skyrocketing as the outlook for both the company’s segments dramatically improved. BRKS has been in consolidation for much of this year before moving higher in early April on TSM’s capacity plan announcement. We’re OK taking a swing at it here or on a minor dip.

BRKS Weekly Chart

BRKS Daily Chart

Jabil Inc. (JBL)

jabil.com

Why the Strength

Jabil is one of the world’s largest electronic manufacturing service providers, producing printed circuit-board assemblies and full system assemblies using a highly automated manufacturing process. The company provides electronic manufacturing services (EMS) to large customers (like Apple, which accounts for nearly 22% of JBL sales), but also has exposure to industries as diverse as healthcare, life sciences, defense and aerospace, automotive, consumer products and telecommunications. Recently Jabil has been diversifying away from EMS and building its diversified manufacturing services (DMS) that is focused on higher-margin engineering solutions in more growth-oriented consumer electronics. And the shift is paying off. Jabil has beaten consensus estimates on both the top and bottom line the past three straight quarters. Its most recent results posted in March delivered revenue of $6.83 billion, up 12% from a year ago and above estimates. Per-share earnings of $1.27, surged 154% from just 50 cents in the year-ago period and likewise beat the consensus forecast of 32 cents. Expanding profit margins in DMS (up 26%) were the largest contributing factor to the top- and bottom-line beats. Demand was especially strong for its customers in health care, automotive and mobility markets. For fiscal 2021 (which ends in August), Wall Street expects a bottom line of $5.09, up 75% from just $2.90 in fiscal 2020. With Jabil’s increasing exposure to multiple growth industries, we think this forecast will provide conservative. (Shares that trade at just 11 times fiscal 2021 earnings estimates are an added bonus.)

Technical Analysis

Like many cyclical stocks, JBL really started moving higher last November as vaccines became more widely available. Shares recently broke out of a two-month base and jumped more than 20% over the past five weeks to a recent high above 54, yet the shares remain close to the 25-day line. We’re OK taking a stab here, though pullbacks would be preferable.

JBL Weekly Chart

JBL Daily Chart

JetBlue Airways Corporation (JBLU)

jetblue.com

Why the Strength

In the market, things go to extremes, and we saw that last year as the pandemic wreaked havoc on airline firms; JetBlue’s revenues in Q2 of last year fell 90%! But more and more, investors are thinking that, for leisure travel anyway, we’re going to see the opposite extreme play out in the months ahead as we see pent-up demand unleashed in the travel sector as vaccinations continue (north of 81 million fully vaccinated now in the U.S.) and savings rates have soared (partly due to unprecedented stimulus). Obviously, this is set to be more of a sector move, but JetBlue should be among the leaders, thanks to its lower cost structure and growth-oriented approach that should benefit it as people get out of the house. Just in the past couple of months, the company has launched a handful of new routes (mostly connecting the Northeast to Florida or South America), has begun to execute on a strategic alliance with American Airlines (more flights to and from Boston and New York) and begun a code sharing agreement with Qatar Airlines to give customers more options overseas. Of course, the numbers have been a horror show, and analysts see the company in the red for 2021, too. But we think that will prove conservative given how much costs have been slashed (operating expenses should be down 25% or so in Q1) and given how bookings across the travel industry have been coming in gangbusters. (JetBlue’s initial Q1 outlook was for a 65% to 70% decline in revenues, but Wall Street is now looking for “only” a 55% decline.) The Q1 report is out next Tuesday, April 27; bookings will be a key indicator. All in all, we see many quarters of strong growth going forward.

Technical Analysis

JBLU ended up etching three basing areas after its crash last year, each one tighter than the prior—the last of those came in December-January, when shares meandered between 14 and 16 for a couple of months. Then came the kickoff, with the stock rising seven weeks in a row, and while it’s chopped around since, JBLU has avoided any major distribution in our eyes. With the 50-day line approaching, this is a good risk-reward setup, though it’s best to keep it small this close to earnings.

JBLU Weekly Chart

JBLU Daily Chart

KBR Inc. (KBR)

kbr.com

Why the Strength

KBR Inc. is big engineering and construction outfit, providing a variety of services to firms in a bunch of different industries around the world. In just the past couple of months, KBR has inked deals to integrate its new propane conversion technology into a Pakistan plant; delivery infrastructure services to the U.K. navy; revamp three ammonia plants in Russia; perform base operations for the U.S. military in the Middle East; deliver cutting-edge unmanned air systems to the U.K. and much more. Business has always been solid, but growth has been lacking, which capped the stock. Now, though, a long-term bullish outlook has the buyers pouring in: KBR has transformed itself from an energy-centric firm to one focused on government contracts (especially military, space and technology advancements, where growth is strong) and so-called sustainable energy solutions, which has made business more service-based with longer duration deals, leading to higher margins and less lumpiness in the results. All in all, after years of earnings hovering in the $1.50 to $1.75 area, the top brass sees the bottom line lifting 15% to 25% annually through 2025, lifting earnings into the $5 per share range. And along with that, of course, will come a growing amount of free cash flow, which will be used to boost the dividend (recently hiked by 10%; annual yield 1.1%), buy back shares and engage in some accretive M&A. It’s not changing the world, but this is a solid company that has transformed itself into a growth operation for the next few years at least, and big investors are taking notice.

Technical Analysis

KBR historically made some progress over time but it was extremely lumpy and returns really weren’t anything to write home about. Business got hit a bit during the pandemic, but the stock was participating in the market’s up move, nosing to new highs a month ago. But the real action has taken place since, with KBR exploding to new highs on massive volume after its raised longer-term outlook, and it’s actually built on those gains a bit in recent days. A dip of a point or two should be buyable.

KBR Weekly Chart

KBR Daily Chart

Levi Strauss & Co. (LEVI)

levistrauss.com

Why the Strength

Levi Strauss is an iconic name in the apparel industry, but it’s a relatively new name in the stock market (public in early 2019) and is positioned to be a key winner in the economic recovery boom. A lot of that, of course, has to do with macro factors—traffic to its 40 stores and 200-ish outlets has been crippled by the pandemic, so more people heading out should help revenues perk up. But as we’re seeing with other select retail success stories, Levi is also playing offense, looking to expand as opportunities arise and boosting the digital side of its business. The Q4 report, released two weeks ago, showed slippage from a year ago but easily beat expectations (earnings of 34 cents per share topped by 10 cents), and some sub-metrics really impressed, with gross margins actually improving and digital revenues up 41% (and making up 26% of revenue), with pure e-commerce making up 10% of revenues (up from 7% a year ago). Moreover, the top brass has made it known that they’re looking to take advantage of a dreadful commercial real estate market to expand its store base, with digital-heavy stores and small outlets (2,500 square feet). Analysts keep hiking their outlook, now looking for $1.12 per share of earnings this year (up from an estimate of 98 cents before the recent report) and $1.37 in 2022, both of which should prove conservative.

Technical Analysis

LEVI fell from 23 after coming public to below 10 after last year’s crash and was still sitting at 12 in late September when the buyers came in. The advance since then has been excellent, with one rest period (eight weeks in December-January) and a brief dip to the 10-week line three weeks ago. The post-earnings buying power has been very impressive, taking LEVI to new all-time highs. We suggest aiming for dips, though we’re not expecting a major retreat.

LEVI Weekly Chart

LEVI Daily Chart

NVIDIA Corporation (NVDA)

nvidia.com

Why the Strength

The pandemic may have slowed the economy, but it accelerated the scale and pace of innovation in the high-performance computing (HPC) industry. A case in point is Nvidia, which designs graphics cards for the gaming and cryptocurrency mining markets, as well as semiconductor chips for the mobile computing and automotive market. Nvidia unveiled plans to make its own data center central processing unit (CPU), called Grace. The announcement (a reason for the latest strength) is making sizable waves in the HPC and artificial intelligence (AI) worlds and puts the firm in direct competition with industry leaders Intel and AMD. Grace is scheduled for launch in 2023, and already the Los Alamos National Laboratory and the Swiss National Computing Centre plan to order Grace-based supercomputers. Also contributing to the strength was a high-profile upgrade last week from a major Wall Street firm. Analysts further believe that this year’s economic reopening, along with the return to work, will boost sales to large customers, while the launch of its A10 GPU bodes well for Nvidia’s data center business. The company’s leaderships position in AI should also benefit from the booming cloud computing market. Nvidia posted a record fourth quarter with revenue exceeding $5 billion—up 61% from a year ago—while full-year revenue rose 53%. Gaming revenue for 2020 was up 41%, driven by the firm’s new GeForce RTX 30 Series products. And management said Q1 revenue should exceed (bullish) guidance due to high product demand. Going forward, Nvidia sees gaming as a massive continued sales driver, along with its cutting-edge solutions for self-driving car manufacturers. It’s an exciting story.

Technical Analysis

Coming off last March’s crash low of 180, NVDA mushroomed all the way to just under 600 by September before hitting the wall. It then spent five months consolidating in a narrow range before a “head fake” rally in February failed. Shares then spiraled 25% lower before bottoming last month. A series of bullish news from the company, coupled with analyst upgrades, pushed NVDA to new highs on high volume. A dip or resting period until the moving averages catch up wouldn’t surprise us, but pullbacks should be buyable.

NVDA Weekly Chart

NVDA Daily Chart

Snap-On Inc. (SNA)

snapon.com

Why the Strength

Founded in in 1920, Milwaukee-based Snap-On is a leading global manufacturer of tools, storage equipment and diagnostics for professional users. Snap-On’s main customers are found in automotive repair and auto dealerships, but it also does business in a variety of industries including aviation, agriculture, government and the military. The company currently operates in over 130 countries worldwide and generated $3.9 billion in 2020 revenues, selling its products through a franchise of mobile tool vans as well as a network of distributors and a direct sales channel. The pandemic led to a sharp decline in demand from automotive dealership customers, which is now improving. Meanwhile, Snap-On is benefiting from positive tailwinds in its core tools business. The story here is that since Covid has led to a population shift out of cities and into suburban areas, this will translate to fewer mass transportation options and a greater reliance on personal transportation, in turn resulting in greater demand for auto repair work. What’s more, Snap-On is well positioned to benefit from an overall aging of cars on the road in the U.S.—trends that should benefit Snap-On in the coming years. On the financial front, a 17-year streak of growing profits was halted in 2020 as the pandemic caused a 4% revenue decline and a 5% drop in earnings. But the bottom line is expected to rebound to $12.38 in 2021, up 6.5% from a year ago. Snap-On profits are further expected to expand 12% per year over the next five years. Shares trading at just 19 times estimated earnings provide a nice fundamental backdrop to an otherwise enticing story.

Technical Analysis

SNA broke out of an eight-week base in early February and have moved 33% higher since then, making a series of new highs. Shares have also found support atop the 25-day line since the February breakout, and while a near-term pullback is certainly possible, we’re fine taking a stab here or on minor weakness.

SNA Weekly Chart

SNA Daily Chart

Square, Inc. (SQ)

squareup.com

Why the Strength

Digital wallets could be a $4.6 trillion opportunity by 2025, based on industry estimates. In China alone, mobile payment volumes have increased more than 15 times in the last five years—to nearly three times the size of China’s current GDP! A leader in this space is Square, which offers cutting-edge software and hardware payments products aimed primarily at small businesses, including business debit cards, mobile card readers and micro terminals. Square is positioning itself to be the go-to company for digital payments and took another step in that direction when it announced a new automated clearing house (ACH) feature, a cost-efficient way for businesses to invoice customers. Analysts view this as a potentially disruptive technology in the financial sector since the new ACH significantly lowers transfer fees for Square customers (from 3% to 1%). The firm also has a cryptocurrency component, and Square foresees huge growth in this area. Its popular Cash App is frequently used to make Bitcoin transactions (in January alone, more than a million of its customers bought Bitcoin for the first time). Square’s recent results underline its rapid growth in the payments market; Q4 revenue surged 141% from a year ago, while Cash App profit rose 164%. But what really stood out was the jaw-dropping 894% increase in Bitcoin revenue. Square also announced a $170 million purchase of Bitcoin in February on top of the $50 million it bought in Q4 (based on the company’s belief that the Internet needs a native currency, and Bitcoin is it). Analysts see continued solid growth for many years, including a predicted 138% top line bump in Q1 followed by 78% higher sales in Q2. Earnings are due out May 6.

Technical Analysis

SQ exploded 760% from last year’s March low to this year’s February peak of 283. A long-overdue correction followed which saw shares plummet to 190, breaking some key moving averages in the process. But the shake-out was badly needed and SQ bottomed out last month before commencing a new up move in April. It hasn’t yet pushed above the old high, and some near-term weakness is possible, but dips should be buyable.

SQ Weekly Chart

SQ Daily Chart

Vale S.A. (VALE)

vale.com

Why the Strength

The price of iron ore has risen over 100% in the past year, reaching decade highs, as steel demand has exploded on the back of China’s economic rebound. Riding the leading edge of this wave is Vale, one of Brazil’s biggest companies and also the world’s second-largest iron ore manufacturer, as well as a diversified producer of industrial and precious metals. But the big story here is iron ore (85% of Vale’s revenues), a key input for the red-hot steel market. Total iron production last year was 300 million tons, and the company expects this number to increase to 400 million tons (up 33%) by the end of 2022. A testament to the intensity of the global demand for iron ore is the $10 billion in free cash flow the company generated in 2020—up 18% from a year ago—and the highest level in Vale’s history. The company’s earnings also showed drastic improvement in 2020; revenue was 7% in Q4, beating the consensus by 9%, while the bottom line improved by a mouth-watering 164%. The improved cash flow and earnings have prompted management to increase shareholder returns via buybacks (which it views as “one of the best investments available” for it). This is in fact a big reason for the latest strength, as Vale recently approved a repurchase plan of up to 270 million shares covering 5% maximum of shares outstanding. Going forward, analysts foresee revenue increases of around 90% in the next two quarters. And with big buyer China’s GDP expected to grow 8% this year, its need for iron ore will also likely increase. In view of this, Vale should be able to continue delivering solid growth in the coming quarters. Earnings are estimated to be out April 27.

Technical Analysis

VALE was the dog’s dinner from 2008 until 2016. But those disastrous years gave way to a solid recovery followed by a correction in 2019, then a bottom at a higher low last March. The turnaround in VALE since then has been steady, as strong rallies have been interspersed with multi-month tightening periods that have kept shares from becoming overheated. The latest tightening phase was followed by a breakout to a new high last week. You could nibble here, though aiming for dips is preferred.

VALE Weekly Chart

VALE 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 26, 2021.