April 5, 2021

Evidence is Improving

Current Market Outlook

For the first time in a few weeks, we’re seeing some signs of spring when it comes to the Nasdaq and growth stocks, as many found support near or above their early-March lows and have begun to perk up, including some that have rallied back above their 50-day lines. (The Nasdaq itself has done this, too, which is obviously encouraging.) Moreover, we’re seeing many more six- to 10-week structures out there, which are far more palatable than the jagged three-week bases seen a while back. That said, we’re not out of the woods—the major indexes remain divergent (not the healthiest situation) and very few growth names are hitting new highs. For the first time in a while, we do think the market has a chance to kick into gear, but we have to see it to believe it; we’re nudging our Market Monitor up to a level 6, but still think the general game plan (small positions, buying cyclical names on weakness) makes sense for now.

This week’s list is a nice mix of growth and cyclicals, many of which look like either potential breakouts or early-stage pullbacks. Our Top Pick is Amkor Technology (AMKR), which might need a little more seasoning but has held up great during the correction and is now pushing ahead.

10X Genomics (TXG)

10xgenomics.com

Why the Strength

For many years, Illumina was a great growth stock as its sequencing machines served as the picks and shovels for genetic research and advancement. But now 10x Genomics looks to be a powerful follow-on play to Illumina in the genetic field—“the next” Illumina in a sense. The company’s gene sequencing systems and tools (there’s a lot of recurring income here from consumables) are catching on fast as they provide an unmatched level of resolution for researchers, enabling single cell analysis. 10x’s Chromium product is the main driver so far, allowing scientists to partition things into millions of single cells to be analyzed. Then there’s its Visium product, which uses DNA arrays and sequences to allow individual biological substances to be analyzed within its single cell and special context. All of that is helping drive a new era of biology and, eventually, treatments. The market for these machines is massive—there’s north of 15,000 next-generation sequencing systems out there, and 10x is on record saying its opportunity is significantly larger than that (it has an installed base of around 2,400 systems today). The virus slowed growth early on, but business has been humming since, with sales growth reaccelerating during the past two quarters and, in the Q4 report, management said 2021 should be a barnburner—analysts see the top line lifting 66% this year and another 37% next. While earnings are still in the red today, big investors are likely looking ahead to what should be big-margin profits; even in Q4, gross margins were 83%, so as its scale increases, the bottom line should lift. We’re impressed that 672 funds have already taken a stake, including a bunch of sharp operators. We like it.

Technical Analysis

TXG had a big run last year, not just from its lows but from its breakout point near 100 last summer. Shares did form a nice-looking base during the final 10 weeks of last year, but that breakout didn’t last long (resistance near 200), with the market dragging shares down to 140 a few weeks back. While the recent consolidation has been jagged, TXG is showing impressive relative strength—there was good-volume buying off the initial low, and last week, the stock pushed back toward its highs on two days of above-average trade. Weakness should provide an opportunity to start a position.

TXG Weekly Chart

TXG Daily Chart

Align Technology (ALGN)

aligntech.com

Why the Strength

Even after a tumultuous 2020, the market for cosmetic dentistry shows no signs of abating. That’s why Align’s Invisalign braces continue to be in high demand, even as many other elective procedures are still on hold. Invisalign is one of the top choices for patients seeking restorative treatment, while Align’s iTero scanners are widely used within the orthodontic profession. (In 2020, for instance, Align successfully converted more doctors to a digital interface than had ever used that interface, underscoring the firm’s commitment to increasing services revenue.) Align did have a hiccup during the early stages of the pandemic, but the second half of the year came in far better than expected, setting the stage for boom times this year—sales growth accelerated to 21% and 28% during the past two quarters, with earnings growing much faster, and analysts see the bottom line surging 74% in 2021. Cash flow, meanwhile, has been stellar, and the company’s cash holding in the latest quarter was $961 million (up 56% sequentially). The firm has also increased brand awareness by securing a prestigious sponsorship from the National Football League, and it recently rolled out ClinCheck, its software which makes a 3D model of a patient’s bite (which the aligners are based on). Align’s opportunity has been estimated at 500 million potential customers globally, only a fraction of which (around 10 million) are currently reached by the company. Management plans to capture this by aggressively expanding international market operations in 2021 and beyond. All told, this is a solid longer-term growth story that should hit fifth gear in the quarters ahead.

Technical Analysis

After breaking out of a two-year base in October on earnings, ALGN rose steadily from that point to an all-time high of 634 in February. The ensuing pullback took shares down to 500; while it fell seven straight weeks, many of those found support on good volume and ALGN closed four weeks at nearly the same level, which is generally constructive. And now the stock is perking up a bit, though it still has resistance to chew through—you can start here or on a push above 560.

ALGN Weekly Chart

ALGN Daily Chart

Amkor Technology (AMKR)

amkor.com

Why the Strength

The auto industry is undergoing a revolution, with electronics playing a much bigger role in the latest models. At the leading edge of this transition is Amkor (covered in the March 1 issue), one of the largest providers of outsourced semiconductor packaging and test services to integrated device manufacturers, fabless semiconductor companies and foundries. The firm plays in other growth-y areas too, including the computing, communications and consumer products industries, and its chips are ubiquitous within the smartphone ecosystem. In fact, it was better than expected demand for smartphone technology that drove fourth quarter revenue up 16%. But demand for the firm’s automotive solutions was also a big sales contributor in Q4, with sequential growth of around 15%. Indeed, Amkor expects this segment to be a major growth driver going forward, and though auto accounts for just 12% of sales for the broader chip industry, analysts predict semiconductors in vehicles will increase more than five times—from $389 to $2,000 per vehicle—as EV production expands. Amkor isn’t hanging its hat solely on electric cars, though, as the firm stands to benefit from the 5G rollout and the growth of AI and high performance computing (HPC)—all of which necessitate higher semiconductor complexity. Plus, Amkor should see higher sales as more chip companies outsource their manufacturing, packaging and testing needs. Looking ahead, management guided for the Q1 top line to be 15% higher from a year ago, driven by continued recovery in automotive and strong demand for smartphones. For the full year, analysts see earnings up 29%, and the reasonable P/E ratio (16) and token dividend (0.7% yield) put a nice bow on the package.

Technical Analysis

AMKR had a couple of breakout attempts late last year and then again in early January, but both failed to follow through, and the stock was trading south of 16 (not much higher than it was in late 2019) near the end of January. But AMKR’s character changed after earnings in February, with the stock catapulting after the results and generally holding its gains (and 10-week line) during the past seven weeks—it’s in striking range of all-time highs. Near-term weakness wouldn’t be surprising, but we’re OK starting a position here or on dips.

AMKR Weekly Chart

AMKR Daily Chart

Cleveland-Cliffs (CLF)

clevelandcliffs.com

Why the Strength

China’s economy is one of the top buyers of steel, and the boom over there after last year’s pandemic is a big reason why iron ore (one of the key inputs into steel) demand is surging. Meanwhile in the U.S., the likelihood of increased infrastructure spending is boosting prices for hot-rolled coil steel. Both of these are welcome news items for Cleveland-Cliffs (covered in the December 7 issue), as the Ohio-based iron ore and steel producer is positioned for a global recovery. Fourth quarter results provided some insights into why things are rolling for the company—its order book was strong, particularly for consumer goods, while automotive demand increased as automakers struggled to keep up with resilient consumer buying. What’s more, the company is selling more steel to select service centers and manufacturing clients outside the auto sector in a move to diversify. Cleveland-Cliff’s recent acquisitions of AK Steel and ArcelorMittal USA is part of this diversification and contributed to the quarter’s eye-popping 322% revenue increase. The acquisitions also provide a considerable advantage over other domestic producers by making the firm the largest flat-rolled steel producer in North America. The additions are part of the company’s transition from an iron ore miner to a vertically integrated steelmaker, which means its iron ore needs are now met in-house. Best of all, the momentum in the business continues— management just released estimate-beating earnings guidance for Q1 and Q2 and gave an optimistic outlook for the remainder of 2021 (a big reason for the latest strength). Analysts see the bottom line surging to nearly $2.50 this year before backing off in 2021. Earnings are likely out later this month.

Technical Analysis

CLF is another cyclical stock that had a bad couple of years, crashed last March, but got going last November and had a scintillating run. Sellers finally made a stand near 19 in January, which led to a three-month, double-bottom base, mostly between 14 and 19. Last week’s guidance hike caused a fresh breakout; there could be some near-term wiggles, but we’re OK starting a new position on minor weakness.

CLF Weekly Chart

CLF Daily Chart

The Gap, Inc. (GPS)

gapinc.com

Why the Strength

Gap Stores was in the process of revamping its retail brand when the pandemic struck last year, which obviously hit it and other brick-and-mortar retailers especially hard. However, management stuck to its plan to revitalize the company, and those plans (store closures, higher margins and re-focusing on its successful brands) continues to show progress. Plus, the company has been able to successfully pivot to a much greater reliance on digital sales, which is likewise paying dividends. Not surprisingly, the numbers in recent quarters have been poor (Q4 sales were down 5%, earnings off 52%), though even then there were a few enticing tidbits. First off, earnings of 32 cents per share did top expectations by a nickel, which led to a round of analyst estimates hikes. Second, most of the sales decline came from store closures; comparable sales were actually flat and digital sales surged 49%. And third, thanks mostly to the digital boom, the firm’s overall customer base grew 14% (to 183 million), which obviously sets it up well as the world turns right side up. Beyond that, the firm’s key Athleta brand grew 29%, while the company as a whole hiked its market share by a smidge, now accounting for 5.5% of total U.S. apparel sales. Bigger picture, Gap’s focus on e-commerce, which includes the closing of many stores (228 Gap and Banana Republic stores went poof) and the gradual expansion of others (35 new Old Navy stores and 25 new Athleta stores this year), should permanently boost its earnings power. With the renewed focus, Gap could be one of the surprising winners of the economic reopening; analysts see earnings lifting to $1.30 per share this year, which is likely conservative.

Technical Analysis

GPS crashed with everything else last March, but as opposed to many of its peers, the stock actually re-entered a new uptrend quickly after that—shares moved steadily higher along their 10-week line until sellers finally made a stand near 26 in December. That led to a three-month consolidation, but now GPS is running again, with seven weeks up in a row and some supporting action two weeks ago when the stock had a shakeout. We’re OK taking a swing at it here or on weakness.

GPS Weekly Chart

GPS Daily Chart

Lam Research (LRCX)

lamresearch.com

Why the Strength

A pandemic-inspired demand spike for tech products last year has contributed to a global shortage of semiconductors, with supply shortfalls expected to run through 2022. That, in a nutshell, is a big reason for the strength in many chip equipment stocks, including Lam Research, which supplies wafer fabrication and etching equipment to some of the world’s biggest chip companies. As you can guess, the company’s products are in high demand right now as foundries address the chip shortage—management expects this demand to persist through 2021 from several end-use markets, led by the $200 billion video gaming market and augmented by the expansion of artificial intelligence (AI), the Internet of Things (IoT) and the automotive and consumer electronics sectors. The company further sees the continuation of the 5G rollout boosting sales growth for fab equipment due to the need for more capital-intensive, leading-edge semiconductors. But Lam isn’t relying solely on equipment sales; the value-added and data intensive services it offers to semiconductor companies accounted for 33% of the firm’s sales in 2020—a trend which analysts expect will be a key component for Lam’s future growth. Providing an additional tailwind is some massive recent announcements of capacity expansions from some major customers: Intel announced a $20 billion expansion as part of its bid to become a key player in global foundry capacity, while Taiwan Semiconductor plans to spend $100 billion (!) over the next three years to expand its fab capacity, all of which should bode well for Lam. On the financial front, the company guided for a Q1 top line of around $3.7 billion at the midpoint (up 48%), in line with consensus estimates, and per-share earnings of $6.55 (up 60%). Earnings are due out April 21.

Technical Analysis

Semiconductor stocks have spent the past few weeks in a choppy trading range, and LRCX followed suit, hacking between 500 and 600 (ballpark) starting in mid-January. But shares had been nudging higher after the early-March dip, and last week LRCX took off as soon as the pressure came off the Nasdaq—shares bolted higher Thursday and Friday on above-average volume, including a burst to new highs on Friday and today. We suggest aiming for a shakeout to enter.

LRCX Weekly Chart

LRCX Daily Chart

Lennar (LEN)

lennar.com

Why the Strength

There are a few reasons to think housing might be set to cool off going forward, whether it’s rising mortgage rates or people balking at the prices these days. But most homebuilding stocks seem to be telling a different story, with some (like Lennar) beginning their next leg up. And we think the reason for the strength is two-fold. First, as we’ve written before, while rates are headed up and prices are crazy (at least in our part of the country), there are likely larger forces at work here—with firms likely to be more lenient in terms of mobile work, many are rethinking where they want to live (out of cities, into suburbs and warmer weather) and what they want in a house (home office, more space). Plus, as Lennar’s CEO said, there’s been a “housing shortage driven by 10 years of production shortfall.” Lennar is one of the leading homebuilders, building mostly single-family residences for first-time, move-up, active adult and even luxury buyers, with an “everything’s included” approach that makes it easier for buyers to pull the trigger. And the results continue to impress: The Q4 report (released two weeks ago) saw sales (up 18%) and earnings (up 61%) crush expectations, but even more important were the forward-looking measures, with new orders up 31% while the company’s backlog totaled $9.5 billion, up 32% from a year ago! Both of those things, as well as the bullish words from management, have led to a huge uptick in earnings estimates; analysts now see earnings of $11.18 per share this year (rising 42% from 2020), up from $9.44 a month ago! It’s always possible things change in the industry, but we think upside surprises are more likely than not as demand for new housing is clearly outpacing supply.

Technical Analysis

LEN staged a quick recovery from its crash lows, rallying back to 66 by Memorial Day and, after a month-long decline, up to 87 by October. Then it began a three-month rest, with a January breakout attempt failing due to the market. But now the buyers have taken control—LEN has rallied five weeks in a row to new highs, including a huge-volume gain after earnings (up 13% on more than triple normal volume). It’s a touch extended to the upside, but we think a little cooling off should provide an entry point.

LEN Weekly Chart

LEN Daily Chart

Micron Technology, Inc. (MU)

micron.com

Why the Strength

There is nothing like a product in short supply to help boost the business of key suppliers, so the current U.S. semiconductor shortage is a blessing for Micron Technology. Booming sales of personal electronic devices since the pandemic got underway has squeezed the supply of semiconductors in the U.S. As a result, spot prices for many types of memory chips are on the rise, including those supplied by Micron. In early March, Micron raised its sales forecast on stronger demand for its chips that power computers and smartphones, and they just delivered quarterly results late last week that beat consensus estimates. Plus, Micron’s guidance for current-quarter sales and profits was also well above Wall Street expectations. Sales last quarter surged to $6.24 billion up 30% from a year ago, while earnings more than doubled. Micron’s CEO commented that its “technology leadership in both DRAM and NAND places Micron in an excellent position to capitalize on the secular demand driven by AI and 5G.” For the current quarter, the company expects sales of $7.1 billion and EPS of $1.62, up 97% year over year. Most important is Wall Street’s outlook—three months ago, analysts saw earnings this fiscal year (ending in August) of $3.85 per share, but now that’s up to $4.81. And for next year, estimates have been hiked from $7.31 to $9.11! At some point, of course, supply will come online and prices will sag, but there’s certainly no sign of that today.

Technical Analysis

MU topped in March 2018, spent two and a half years in a huge consolidation, and then broke out last November when the broad market kicked into gear. The advance since then has been solid, though it’s gotten choppier due to the market in recent weeks—MU has moved straight sideways for the past seven weeks between 80 and 95. But now shares are attacking their prior highs after earnings. We’re OK starting a small position here, with the idea of averaging up if shares continue higher.

MU Weekly Chart

MU Daily Chart

Scotts Miracle-Gro (SMG)

scottsmiraclegro.com

Why the Strength

A revival of interest in home gardening, along with rapid expansion in the commercial cannabis market, have resulted in a major growth spurt for Scotts. As more U.S. states legalize both medical and recreational cannabis, growers are allocating more crop to the indoor production techniques that Scotts services. Through its Hawthorne subsidiary, Scotts provides nutrients, LED lighting, automated growing systems and related equipment for hydroponic (soilless) production of marijuana and other high-value crops. In fiscal Q1, Scotts posted record revenue of $749 million, which increased 105%—thanks largely to improving inventory levels and consumer market sales. (The company also indicated that shipments remained strong through the first month of Q2.) The cannabis side of the business, meanwhile, contributed to Scotts posting its strongest earnings in Q4 2020 and Q1 2021 and recording its first-ever first quarter profit (usually a seasonally slow quarter). Elsewhere in the lawn and garden segment, Scotts closed a deal in Q4 for a 50% stake in edible gardening supplier Bonnie Plants, while in November Scotts completed the acquisition of AeroGrow International, a maker of hydroponic gardening equipment for the home market. (Sales of AeroGrow’s tabletop herb-growing kits more than tripled to over $31 million in the first six months of 2020!) Going forward, the company is putting more of its chips in cannabis, as evidenced by its recent opening of the world’s first R&D facility in Canada dedicated exclusively to marijuana production. Management also raised guidance for its Hawthorne unit, with the full-year sales expected to be up around 25% (prior forecasts was 18%) based on a “historically strong start” to the year—and even that will likely prove too low. It’s a good story.

Technical Analysis

In line with other cannabis-related stocks, SMG experienced a powerful rally starting in November and peaking in February. Shares also followed the industry-wide stock price decline into early March before finding support near the 40-week line. But unlike many other pot stocks, SMG has shown unusual strength in powering back to its prior high around 250. If you’re game, we suggest aiming for dips of a few points to enter.

SMG Weekly Chart

SMG Daily Chart

ShockWave Medical, Inc. (SWAV)

shockwavemedical.com

Why the Strength

Shockwave Medical is a small company (less than $70 million in annual sales) but it’s set to get a lot bigger as it’s come up with a new standard of care for treating atherosclerosis (the hardening of arteries due to the buildup of plaque), especially when that condition comes with hardened calcium—such a situation makes traditional treatment methods (balloons, atherectomies, etc.) less effective and far more risky. Shockwave’s come up with a better way, and ironically, it’s based on a technique that’s been around for 30 years (to treat kidney stones). It’s called intravascular lithotripsy, which uses a catheter to deliver localized sonic pressure waves to crack calcium without harming soft tissue, hence expanding the vessel and improving stent function. Results have been great (both safety and effectiveness, with a 15% to 25% improvement in success metrics), and from a business perspective, the product is easy to learn so uptake has been rapid. Shockwave believes its initial target segments (aortic valves, femoral, coronary arteries, below the knee, etc.) make up a $6 billion opportunity, with more potential procedures beyond that—peripheral systems have been driving business, but the firm recently launched is coronary system in the U.S. (FDA approved on February 12) and it has a product for valves in clinical trials. So far, the coronary launch is progressing well, which is a big reason for the stock’s renewed strength: Last week, management said it expects first quarter revenues to come in above $31 million, up around 110% from a year ago and well above estimates. While the bottom line is still in the red, analysts see the top line growing at triple-digit rates this year (108%) with another 50%-ish gain in 2022. The valuation is up there for sure, but Shockwave should be cranking out rapid growth for a long time to come.

Technical Analysis

SWAV broke out of a big post-IPO base last August around 50 and soared as high as 140 in January before the market (and growth stocks) hit potholes—seven weeks after the peak, the stock was about 37% off its high. The initial bounce was decent, but the real buying showed up last week after the Q1 outlook was hiked, with shares surging back toward their highs on the heaviest weekly volume since September. There’s still resistance to chew through, so we think starting small on dips is the way to go if you want in.

SWAV Weekly Chart

SWAV 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 12, 2021.