April 26, 2021

Earnings Reactions Will be Key

Current Market Outlook

Earnings season is always important, but it looks even more so this time—many growth stocks have been sitting around for the past two to three months (some even longer), while a decent number of cyclical names have been mostly up-and-down for the past four to five weeks. Thus, a collection of positive, powerful reactions to earnings could result in a bunch of good-looking buying opportunities … but, as always, we have to wait to see that happen before pouncing. Just going with what’s in front of us, nothing much has changed, with a lot of good setups but also a lot of selling in names that approach their old highs. Once that changes (due to earnings reports or anything else), it will be time to get more aggressive, but right now we’re sticking mostly with a buy-on-dips approach and waiting for buyers to really flex their muscle.

This week’s list has a broad mix of names, though most are more cyclical or turnaround plays. Our Top Pick is Steel Dynamics (STLD), which just leapt to new highs out of a tight area on huge volume. You can start a position here or (preferably) on weakness.

Burlington Stores (BURL)

burlingtoninvestors.com

Why the Strength

Burlington Stores is a national off-price retailer of quality branded apparel with around 760 stores in the U.S. Burlington Stores sources its apparel offerings from over 5,000 nationally recognized brands and offers every-day discounts of 60% to 70% off department and specialty stores prices for its clothing and accessories. The company also has a successful e-commerce channel that is rapidly expanding too. Historically, the off-price sector has performed well even in difficult economic conditions such as last year’s pandemic, though ironically, Burlington’s operations were challenged by Covid. But they’ve been able to capitalize on their fast-turning inventory and high-value branded merchandise to begin delivering solid results. The firm’s fourth-quarter results (reported in early March) came in well ahead of expectations, unlike many of its competitors. Total sales rose 3% to $2.28 billion (ahead of analyst estimates of $2.1 billion), and although same-store sales were flat for the quarter, that was far better than analyst estimates for a 10% decline. Meanwhile, the bottom line fell 24% but also beat expectations, and analysts have nudged up their estimates since, anticipating a big rebound this year ($7 in earnings per share, almost back to the firm’s 2019 level). Longer term, the company raised its expansion plan to 2,000 stores, up from a target of 1,000 previously (and compared to 760 stores currently), thanks to smaller store footprints and an inventory-light model; it plans on opening a net of 75 new locations this year alone. It’s a solid story.

Technical Analysis

BURL changed character along with most stocks in November, gapping to multi-month highs and embarking on a steady uptrend. Buying picked up after Q4 earnings in early March, and while there’s been one wobble since with the overall market, BURL has tightened up near its highs. If you’re game, we suggest aiming to get in on dips toward the 25-day line.

BURL Weekly Chart

BURL Daily Chart

Floor & Décor (FND)

flooranddecor.com

Why the Strength

Floor & Décor has a double-barreled growth story that we think can take it far in the quarters ahead. The company has a new retail concept, offering the widest in-store selection of flooring and accessories (25% of sales are tile, 23% are laminates, 18% are decorative accessories and wall tiles and 15% is wood and natural stone) via a warehouse model—whereas competitors generally offer a couple hundred products in the store, Floor & Décor offers something like 1,400, making it a go-to location for professionals and DIY-ers alike. (Long term, there’s also a trend away from carpet and toward hard flooring, which is another tailwind at the firm’s back.) Same-store sales have been bullish for years, and management has traditionally been aggressive in expanding its number of warehouses; it has 133 in operation today, but plans to expand that by 15% to 20% annually and sees the potential for at least 400 in the U.S. (likely conservative). Thus, the big-picture growth story is great, and near term, there’s also plenty to get excited about—one brokerage firm’s indicator of home renovation activity just soared to a multi-year high, while macro housing indicators (new home sales just hit a 15-year high) look bright despite an uptick in mortgage rates. The next big event will be earnings, which are due out May 6; analysts are looking for sales to rise 34% while earnings leap 56%, though a lot of focus will be on same-store sales growth (21.6% in Q4) and the outlook going ahead.

Technical Analysis

FND came out of a big post-IPO base last July and had a great run, advancing from around 60 all the way to the 100 level in mid-December. Then shares began to consolidate, with some up-down action for a couple of months before a big shakeout with the market in March. But it’s been up since then (seven weeks up in a row), including some tightness after the low, a good-volume breakout three weeks ago and modest upside since then. We’re OK buying a small position here or on dips.

FND Weekly Chart

FND Daily Chart

Goldman Sachs Group, Inc. (GS)

goldmansachs.com

Why the Strength

Some financial stocks have begun to wobble a bit, but most remain in good shape, including the so-called Bull Market stocks, whose business is directly tied to the health of the financial markets. Goldman Sachs, of course, is one of the kings of that sector, and its business is going gangbusters with the bullish environment, and perception is that there’s a lot more where that came from in the quarters ahead. Q1 results were fantastic, with the company garnering record investment banking (up 73% from a year ago; underwriting was up 155%), asset management (up 44% from the prior quarter) and consumer and wealth management (up 16%) revenues, while its largest segment (Global Markets) was up 44%. Of course, some of that (like underwriting) is highly variable with the market, though Goldman’s growing asset management and investment business provides a bit more steadiness to the bottom line. Speaking of earnings, Q1’s $18.60 per share was more than $8 over estimates (!), and analysts have been hiking their outlook as a result, now seeing nearly $45 per share this year before a retrenchment in 2022. (Of note, though, even 2022’s down year would still come in miles ahead of 2020’s figure.) Beyond the numbers, Goldman is using this boom to boost shareholder returns, paying a decent dividend (1.5% annually) and buying back a fair number of shares (bought back $2.7 billion of shares in Q1, or more than 1% of the company). Obviously, if the market really keels over, all bets are off, but with the odds favoring this bull market having longer-term legs, we think Goldman will continue to do well.

Technical Analysis

The defining characteristic about GS’s chart was the 13-year breakout (!) last November and the immediate rally of 11 weeks in a row—a decisive sign of a major trend change. Since then, the first dip to the 10-week line (in January) was met with buying, and now we’re in the midst of the second 10-week test, which usually brings in buyers. Indeed, GS reacted well to earnings two weeks ago, and while it’s been up and down, this looks like a good risk-reward entry point.

GS Weekly Chart

GS Daily Chart

Harley-Davidson Inc. (HOG)

harley-davidson.com

Why the Strength

For years, Harley-Davidson (H-D) was plagued by falling sales as baby boomers (its traditional market) aged, while attempts to attract younger customers failed as competitors stole the spotlight with smaller, cheaper motorbikes. But last year marked a turning point for the iconic U.S. motorcycle maker, as bike sales increased on the back of pandemic-driven demand for “distanced” recreational activity. The company unveiled a five-year turnaround plan to increase annual revenue in the mid-single digits and earnings growth in the low double-digits. H-D plans to return its focus on making classic big bikes and selling them to mostly older, affluent U.S. and European customers. The firm has cut its workforce and dealer network, trimmed inventory and eliminated low-selling models, allowing it to charge the full sticker price for its bikes. And it also plans to continue its foray into electric motorbikes (launched in 2019) by building a separate division focused on the development of EVs. A big reason for the strength was last week’s first-quarter report, which provided proof that the turnaround strategy is working. The top line rose 10% from a year ago (the first increase in many quarters), with motorcycle sales roaring to levels not seen in four years (up 12%, thanks to strong demand for touring bikes). Per-share earnings of $1.68, meanwhile, more than tripled and beat estimates by 89%. And analysts foresee further growth, including a 109% Q2 revenue bump, with earnings rebounding back above $3 per share this year. Looking ahead, H-D plans to introduce new bike models in sync with current market trends and aims to launch 100 motorcycles by 2027. It also announced the first certified pre-owned H-D motorcycle program designed to reach new customers. All in all, it’s a solid turnaround story.

Technical Analysis

HOG hit a long-term peak at 74 back in 2014, then headed south for the next six years. It bottomed out around 14 last March, then rode steadily higher in the following months before revving up to yearly highs in November. The base-building effort from there was choppy, but not abnormal, and the stock decisively blasted off last week after earnings. We favor aiming for dips, though we’re not expecting a major pullback.

HOG Weekly Chart

HOG Daily Chart

The Middleby Corporation (MIDD)

middleby.com

Why the Strength

While it may not be the sexiest growth story, Middleby is nonetheless benefiting from the tremendous improvement in the foodservice industry’s outlook. The company (covered in the March 8 issue) is a leading global provider of foodservice equipment for top restaurants and institutions, as well as appliances for the home kitchen market. As economies around the world reopen, restaurants are spending more on replenishing supplies and equipment, while supermarkets and convenience stores are increasing prepared food offerings. The higher demand for food preparation equipment is reflected in Middleby’s order backlog, which stood at a record $523 million at the end of Q4. Middleby’s accretive M&A strategy is another reason for the strength; last week the firm announced that it plans to acquire competitor Welbilt in a transaction expected to close later this year. (The combined company will have an estimated $3.7 billion in 2020 sales, 73% of which will come from the commercial foodservice segment.) Meanwhile, the firm’s residential business is profiting from the red-hot housing market as kitchen equipment sales have expanded at a solid pace in recent quarters—including a 15% increase in Q4 residential kitchen and outdoor appliance sales. The company is also seeing positive results from several new product launches (including PLEXOR, its multi-technology, high-speed cooking platform). But the commercial equipment segment is where the action is, and management anticipates growth will accelerate in this area as the year progresses. Analysts agree, with Wall Street seeing a 43% rebound in the bottom line (more than recapturing last year’s decline) and solid growth beyond that.

Technical Analysis

After falling to a multi-year low of 45 just over a year ago, the post-pandemic recovery in MIDD was a rapid one, with the stock stair-stepping all the way to new highs last November. The stock did etch a nice three-month base after that, followed by a solid breakout in early March. MIDD again tightened up, with last week’s big-volume bounce off the 10-week line looking very solid. We’re OK taking a swing at the stock here or on weakness.

MIDD Weekly Chart

MIDD Daily Chart

Okta, Inc. (OKTA)

okta.com

Why the Strength

Honestly, we thought Okta was done for after it cracked with most growth stocks in early March, but the long-term growth story continues to play out and a bullish Investor Day has brought back some buyers. The company is one of the leaders of the new-age cybersecurity group thanks to its best-in-class identity solutions, regulating workforce access (only the right people are allowed to see certain data and use certain apps), customer identity (logging into your online accounts, etc.) and privileged access management, allowing secure access right quick from any device, anywhere. All in all, more than 10,000 firms are customers as Okta’s solutions are mission-critical for the new mobile work environment—management thinks it’s playing in an $80 billion addressable market as identity touches every part of cloud software and network apps (infrastructure, EPR, CRM, HR, you name it). Plus, while the story has been good, the execution has been even better—last year, revenue was up 43%, same-customer revenue growth was up 22%, remaining performance obligations (all money owed to Okta under contract) lifted 49% and free cash flow came in at 13% of revenue. And the stock has gotten a boost after its Investor Day in early April, which offered some tasty morsels: Okta is only 25% penetrated in the Global 2000, leaving a ton of room for expansion, while new customers become highly profitable for Okta starting in year two. Moreover, it reiterated its 30% to 35% organic annual revenue growth outlook through 2023, with free cash flow expanding rapidly, too. It’s not a new story, but it’s a good one.

Technical Analysis

OKTA has had a monstrous run in recent years, and as mentioned above, we thought a longer-term top could be in place after the massive-volume crack in early March. But so far, that hasn’t played out—shares basically bottomed that week and, more recently, staged two straight good-volume up weeks with shares shooting back toward their highs. To be fair, the relative performance (RP) line still needs work, but we’re OK starting small on dips if you want in.

OKTA Weekly Chart

OKTA Daily Chart

Qorvo (QRVO)

qorvo.com

Why the Strength

Qorvo is a chip company with lots of exposure to Wi-Fi and the internet of things (IoT), but it’s the booming demand for 5G smartphones that’s catching everyone’s attention right now. The radio-frequency chip specialist provides chips for applications that drive wireless and broadband communications, as well as offering foundry services. Qorvo’s particular focus is on ultrawideband technology (UWB), which is a short-range radio technology used to move massive digital data over short distances. Its biggest customers, Apple and Samsung, have recently launched their latest 5G smartphone offerings that utilize UWB technology—the first batch of smartphones to sport the new wireless communication standard—and demand for the phones has been explosive. (The technology can also be used for mobile payments and interacting with nearby connected objects in a store or smart home.) Indeed, the technology is a key growth driver for Qorvo, which expects more than one million 5G base station deployments this year alone. The firm also plays a role in the healthcare sector through its subsidiary, Qorvo Biotechnologies, recently being awarded $24 million from the National Institutes of Health to advance the production and market launch of its Omni diagnostic test platform (designed to achieve rapid and specific COVID-19 antigen results). But smartphones are the main growth engine here, and Qorvo estimates that 500 million 5G smartphones could be sold this year (up 100% from last year), and its supplier relationship with several leading OEMs should allow it to benefit. Wall Street sees growth slowing this fiscal year (began in April), but they’ve typically undershot by a big amount. The next quarterly report is due out May 5.

Technical Analysis

QRVO’s post-crash recovery was more steady than explosive, with the stock mostly riding its 10-week line higher until it hit 190 or so in late January. And since then, shares have effectively been building one big base—the overall correction was mild, but the stock has basically made no net progress for three months. However, we like the new price highs a couple of weeks ago and the tightness of late; overall, we think the next big move is up. Given that earnings are due out in just over a week, we suggest starting small.

QRVO Weekly Chart

QRVO Daily Chart

Seagate Technology (STX)

seagate.com

Why the Strength

Seagate is known for producing hard disk drives (HDDs), which many assumed would be made obsolete by smaller, faster NAND flash technology. But as data storage needs continue to expand—and with hard disks enjoying an eightfold cost advantage over even the most efficient NAND flash drives—it turns out that HDDs still have an important role to play in the memory market, providing Seagate with a good-sized growth opportunity. Indeed, bulk storage and cloud customers still use hard disks since they offer the lowest-cost storage available. And Seagate is keeping its enterprise clients coming back by offering new and better storage options (its cutting-edge 20-terabyte HAMR hard drives were just introduced, and it plans to offer 50TB disks by 2026). The firm also recently unveiled Lyve, a new platform that combines storage, systems and open-source software for fast, secure data transmission from data centers to “edge” sites (network clients and devices) to the cloud. (Seagate predicts the market for Lyve-related products and services could reach up to $50 billion in revenue by 2025.) On the financial front, revenue of $2.7 billion in Seagate’s fiscal Q3 was flat but beat expectations by 22%, while earnings also beat expectations (by 12%), with per-share earnings of $1.48 rising 7% from a year ago. Moreover, a big part of this story has always been returning cash to shareholders—it’s paying a good dividend (current yield 3.0%), while it bought back shares like mad last year; in the recent quarter, the share count was down 10% from a year ago! Looking ahead, management guided for fiscal Q4 sales of $2.85 billion at the midpoint (up 13%) and per-share earnings of $1.60 (up 33%), and analysts see solid growth right through at least the middle of next year.

Technical Analysis

STX hit 69 back in the tail end of 2014—five years later, the stock was still hanging around that area before buyers finally pushed the stock to new all-time highs in January. The uptrend since then has been solid, with one dip to the 50-day line (in March) finding buyers, and in recent days, STX motored nicely higher after the earnings report. We think the upside momentum here (up 13 of the past 14 sessions) bodes well, though we prefer buying on dips of a few points as the stock is extended to the upside.

STX Weekly Chart

STX Daily Chart

Steel Dynamics (STLD)

steeldymanics.com

Why the Strength

Supply shortages, along with a brighter outlook for infrastructure development, is boosting sentiment for steel makers as prices continue to hit new highs. Steel Dynamics (covered in the March 22 issue) is subsequently expected to see higher demand for its products this year in the wake of a $2 trillion U.S. infrastructure spending proposal, and with China reducing blast furnace operations over environmental concerns, Steel Dynamics will benefit by stepping in to fill the global supply gap. The first quarter was a busy one for the company, which saw it achieve record revenues of $3.5 billion (up 38% from a year ago), thanks to near-record quarterly steel shipments, record fabrication shipments and strong product pricing across all operations. Per-share earnings of $2.10 more than doubled from a year ago and beat expectations by 6%. Management indicated that industry-wide steel inventory was lower throughout the supply chain in Q1, and while not offering specific guidance, said it expects “strong steel selling values” in the second quarter as orders continue to be robust across its businesses. Residential construction and related HVAC and appliance product demand is likewise expected to remain solid, boosting demand and prices. The consensus, meanwhile, expects the top- and bottom-lines to jump 87% and 538% (!), respectively, in Q2, vs. an easy comparison to last year. Analysts do expect 2022 to bring a return to normalcy in prices and earnings, but (a) they’re probably too conservative (the $4 per share estimate is up from $2.90 just two months ago!) and (b) even at that level, the stock seems reasonably priced (13 times earnings, 2% dividend yield).

Technical Analysis

STLD crashed last year and had a steady recovery after, though after rallying just above 40 it had a tough shakeout to 34 in January. But the action since then has been special, with STLD surging up to 50 over six weeks, tightening up just above that round number area for a few weeks and then powering ahead today. We’re fine grabbing some shares here or on minor weakness.

STLD Weekly Chart

STLD Daily Chart

Tractor Supply Company (TSCO)

tractorsupply.com

Why the Strength

Tractor Supply’s motto is “For Life Out Here,” and this rural-lifestyle retailer continues to crank out solid growth with help from the home improvement and more-at-home movement that’s going on. The firm operates about 1,900 stores across the U.S. (plus another 200 Petsense locations; overall store growth has been about 5% annually), with livestock and pet supplies (farm and ranch) making up nearly half of sales, and that business is providing the fastest growth today; most of these customers live in areas that were impacted less by the pandemic (rural) and are recovering more quickly. Beyond that, management believes it’s seeing a sea change in a few other factors—18-45 year olds are becoming customers at a faster clip than usual as the pandemic has “shocked” them into more traditional activities (household formation, etc.); pet owners are stampeding to the firm’s doors (75% of customers own a pet); while trends like “backyard poultry” and the overall de-urbanization of where people want to live is boosting demand for the firm’s products. Throw in a booming e-commerce business (four straight quarters of triple-digit growth) and Tractor Supply has been posting some jaw-dropping numbers—in Q1, total sales leapt 43% while same-store sales were up a ridiculous 39% and earnings more than doubled. To be fair, the top brass does see growth slowing as comparisons grow tougher (business actually picked up as the pandemic raged early last year), but it’s also likely that Wall Street’s outlook (earnings up single digits this year and next) is overly conservative given what are likely permanent changes in the life many want to live. It’s a good story.

Technical Analysis

TSCO boomed after the March crash last year, soaring to the mid-150s by August. Then came the base-building phase, with the stock basically making no net progress through early March. But shares have resumed their upmove since then, with the last two weeks showing above-average volume buying before and after earnings. A dip of a few points would be tempting.

TSCO Weekly Chart

TSCO 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 May 3, 2021.