August 16, 2021

Growth Back to Important Levels

Current Market Outlook

Last week was generally one of rotation back out of growth and into the broader market, and today, that trend accelerated, with growth-oriented funds and indexes (like ARKK and IWO) gapping below multi-week support and longer-term moving averages, while many recent leaders tested their 50-day lines. This sets up a key test—if a lot of stocks go down the drain, it’ll clearly be a sign of cut back on growth titles, though if we see a strong bounce from here, it could actually set up some decent pullback/resumption entry points. Meanwhile, we’re seeing an increasing number of setups in the cyclical areas, which are coming to life after two-plus months of rest. Right here, we’re not making any dramatic changes, but be sure to honor your stops. The next few days could be telling.

As for this week’s list, it definitely has more of a turnaround/cyclical feel to it as those stocks find buyers. Our Top Pick is Paylocity (PCTY), a leader in what’s looking like a new group upmove for HRM stocks.

Avis Budget Group (CAR)

avisbudgetgroup.com

Why the Strength

A nationwide vehicle shortage, strong demand from leisure travelers and robust pricing have allowed the rental car market to put last year’s Covid-related losses in the rearview mirror. A case in point is Avis Budget, which reported its best quarter ever during Q2. Among the eye-opening metrics were a vehicle utilization rate that more than doubled, to 71%, and an expansion of its fleet size in the Americas to 378,000 vehicles (up 28% from Q1), and after a 67% plunge in revenue during last year’s Q2, Avis saw the top line surge 212% in the latest quarter compared to a year ago, while per-share earnings of $5.90 walloped the consensus forecast of $3.34. All told, the firm delivered the best revenue, EBITDA and margins in its history during the quarter. An increased number of U.S. states lifting Covid restrictions this summer, particularly in the West Coast, also helped with volume and fleet utilization (which was higher than it was in 2019’s Q2). And with nearly $2 billion in available liquidity, management said its capital structure is in the “strongest position” it has ever seen it, with balance sheet strength combining with a “robust earnings trajectory” to put Avis in the enviable position of deciding how best to deploy its free cash flow. To that end, the company recently announced a buyback authorization of a whopping $1 billion, or 15%-ish of the current market cap. What’s more, the firm thinks it has a shot to crank out $1.5 billion in EBITDA this year (nearly twice the 2019 rate). Analysts see the Q3 top and bottom lines skyrocketing 80% and 450%, respectively.

Technical Analysis

The turnaround in CAR was a long time coming but has been well worth the wait. After peaking at 70 in 2014, shares spent the next five-and-a-half years in a long, grueling decline before bottoming out around 10 after last year’s crash. CAR spent the next several months gathering strength, then blasted off in January, rallying a ridiculous 18 of 19 weeks (!!) to 90 by the end of April. The correction after that was sharp (31% deep) but reasonable, and now big-volume buying has reappeared after earnings. We’re OK taking a swing at CAR here.

CAR Weekly Chart

CAR Daily Chart

(CPRI)

Why the Strength

Capri Holdings is a multinational fashion holding company which owns the well-known luxury brands Jimmy Choo, Michael Kors and Versace. After a disappointing 2020, Capri is one of many turnaround firms whose earnings recovery is proving to be far stronger than initially thought. Beyond the turnaround, though, is a real growth story: The company recently outlined strategic “pillars” for achieving long-term growth, including maximizing the potential of its three fashion brands, creating the most innovative and exciting luxury products, creating compelling communication to deepen consumer engagement and leveraging its omnichannel capabilities to accelerate sales growth. Revenue in fiscal Q1 2022 rose 178% from the pandemic-crushed year-ago quarter, beating estimates by 13%, while per-share earnings of $1.42 blew past consensus expectations of 79 cents. By brand, Versace revenue increased 158%, as both women’s accessories and footwear sales more than doubled from the prior-year period. For Jimmy Choo, revenue was up 178% thanks mainly to robust sales of women’s handbags and footwear (with the latter having a strong showing among celebrities on the red carpet at recent award shows). While women’s wear dominated the former brands, men’s accessories is one of the fastest-growing categories for Michael Kors, up 300% in the latest quarter due to strong demand for watches and jewelry. Kors’ store sales, moreover, increased in the triple digits thanks to re-openings, with the Americas the best performing region as revenue increased 480%. Importantly, management sees multiple years of revenue and earnings growth ahead, with analysts expecting earnings to lift to $4.57 per share this year (up 17% from two years ago) and another 17% next year, both of which are likely low.

Technical Analysis

CPRI got going last November with most other turnaround stocks; a rapid advance over the first few weeks played into a steadier move that rode the 10-week line higher for many months. A correction finally came in May, but at 24%, it wasn’t too bad, and the 40-week line offered solid support. CPRI gapped up on earnings a couple of weeks ago, and while there’s some resistance near 60, we’re OK starting a position here and adding on decisive strength.

CPRI Weekly Chart

CPRI Daily Chart

Colfax (CFX)

www.colfaxcorp.com

Why the Strength

Colfax is an intriguing special situation, and the firm is set to split into two companies early next year: A medical implants business and a welding and cutting equipment manufacturer. Going back, Colfax’s strategy has been to grow by acquisition and improve the businesses through productivity enhancements, but around 2015, the approach faltered. Management jettisoned underperforming businesses in 2019, and this March, Colfax announced the remaining two business lines would separate; investors are clearly thinking the move will unlock some value. The medical technology arm, which is anchored by DJO Global, has been facing headwinds from delayed elective surgeries due to the pandemic. But those are dissipating, with its latest quarter seeing sales leap 73% from a year ago, with cash flow solidly positive. DJO does well in reverse shoulder implants, a fast-growing surgery, and its specialty in reconstructive surgery is generally less cyclical. Meanwhile, the welding segment, ESAB, is one of three companies offering a full package of welding systems, from equipment to data systems that manufacturing clients use to boost reliability. For a long time, ESAB was an also-ran in its segment, but no longer—ESAB’s revenue was up 54% in its latest quarter to $630 million, with $113 million in cash flow. There are a lot of moving parts here, but we think the catalyst will keep investors interested.

Technical Analysis

CFX had established a ceiling of 40 from 2015 into this year, finally cracking it after earnings in February. The March announcement of the split rallied shares up to a multi-year high of 50, before easing back into the low 40s. CFX’s base since then looks solid, with some good-volume buying during the last three weeks. If you’re game, you can start a position around here.

CFX Weekly Chart

CFX Daily Chart

Dexcom (DXCM)

dexcom.com

Why the Strength

Dexcom has a history of long, tedious consolidations followed by sustained uptrends, and now it appears to be starting a fresh rally. The company is a leader in continuous glucose monitoring systems (CGMs)—yes, there’s competition (mainly from Abbott), but the firm’s G6 CGM has long been a hit, being the first to allow users to ditch fingersticks. Importantly, the sector as a whole is still in the middle innings of a major growth wave—less than 50% of Type 1 diabetics and less than 25% of intensive Type 2 diabetics currently use a CGM, not to mention the giant non-intensive Type 2 segment that has huge potential down the road. Dexcom is poised to get more than its fair share from direct use and integrations (it’s used in many leading insulin pumps, including those from Omnipod (which has a new device coming out soon) and Tandem Diabetes), and thanks to its own upcoming product launch: Later this year, Dexcom’s G7 will be released, which offers many advantages, including a 60% smaller size, a combined sensor and transmitter, a quicker warm up time and greater accuracy. That’s a big reason for the stock’s strength and the anticipated earnings growth next year, but business is doing just fine in the here and now–Q2 sales leapt 32%, with strong growth in the U.S. (up 26%) and internationally (up 58%). Earnings have sloughed off a bit due to greater investments, but Wall Street sees that paying off down the road. We like it.

Technical Analysis

DXCM effectively topped out in May 2020 near 430, cracked badly later that year and was up and down for many months after that. But the stock is showing some very bullish traits since this year’s May low—shares advanced 12 weeks in a row right off that bottom, including a good- (not amazing) volume push to new highs. DXCM finally saw some selling last week as growth stocks were reeled in, but we think the dip is buyable if you’re not yet in.

DXCM Weekly Chart

DXCM Daily Chart

Five Below (FIVE)

fivebelow.com

Why the Strength

We’re all for revolutionary new tech or biotech-type stories, but if we had to choose, we’d go with a retail cookie-cutter story any day of the week, as they’re easier to have conviction in, allowing you to hold on through the inevitable bumps in the road. Five Below isn’t just our favorite cookie-cutter story right now, but it’s one of the better ones from a fundamental perspective that we can remember—operating as a pseudo dollar store, it offers customers (mostly younger, but I’ve found good stuff there too; average household income of a shopper is $73K) a ton of cool items from party supplies to sporting goods to clothing to cheaper electronics (think speakers etc.) to décor to snacks to beach stuff and more. As the name suggests, nearly all items are $5 or less, though the firm is moving ahead with its Five Beyond concept, offering some “higher-end” goods for up to $10 as well. The secret sauce for any cookie-cutter story is the store economics, and Five Below’s is the best we’ve seen—the initial investment needed to open a new store is paid back in around one year on average, allowing a rapid expansion plan (15% to 20% hike in stores per year), and there’s a long runway of growth ahead (1,087 stores at the end of April; long-term store target of at least 2,500). Throw in a history of consistent same-store sales growth (generally low single digits) and a much improved e-commerce operation due to the pandemic (including a broad deal with Instacart) and the upside is obvious. Indeed, while growth did hit a snag during the trade war and then the pandemic, everything is back on track now—sales, earnings and margins have ramped, with analysts seeing this year’s earnings up 60% from 2019 and up another 18% next year (likely conservative). It remains a great story.

Technical Analysis

After a long drop and consolidation, FIVE lifted off from a two-year launching pad last September and had a very solid run from round 120 to 200 by the middle of January. Then began a long, tedious chop phase; shares never corrected more than 15%-ish from high to low, but they also were repeatedly rejected by the 200-205 area. But the test of the 40-week line a month ago now looks like the final shakeout, with FIVE pushing to new price highs on good (not amazing) volume last week. You could nibble here, though we prefer to target dips given the environment.

FIVE Weekly Chart

FIVE Daily Chart

HubSpot (HUBS)

hubspot.com

Why the Strength

HubSpot’s pivot to software-as-a-service (SaaS) has been a resounding success based on its strong performance in the first half of the year. The provider of single-platform sales, inbound marketing and customer relationship management (CRM) software (mainly for small- and mid-sized outfits) has always had a good story, but the pandemic has supercharged results and any fears of a slowdown were put off by Q2 results. Revenue mushroomed 53% in Q2 from a year ago, to $311 million, thanks to 40% growth in HubSpot’s total customer base to over 121,000 and an 8% hike in average subscription revenue per customer. Meanwhile, earnings of 43 cents beat the consensus by 11 cents. The quarterly report highlighted a number of encouraging trends, including multi-product adoption among over half its customers, plus the company reported strong adoption of programmable automation among larger companies looking to leverage their data and deliver personalized experiences to their customers. The average subscription revenue per customer improved thanks to a “positive mix shift” toward professional- and enterprise-tier plans and strong installed-base selling (and management expects both trends to continue through the second half of 2021). Meanwhile, calculated billings of $334 million grew 65%, partly due to easy comparisons but they did grow faster than revenue. The top brass guided for Q3 revenues to around $326 million (up 43% at the midpoint) and a bottom line of around 43 cents (10% above consensus). Analysts concur, with earnings expected to rise 28% this year and 44% next.

Technical Analysis

HUBS isn’t thought of as a huge pandemic winner like Zoom or Peloton, but its chart has been superb for over a year now—shares hit new highs by last June and since then have nearly ridden their 50-day line higher, with just brief dips below that support level. Interestingly, the latest dip was shallower than ones seen earlier this year, and the earnings reaction and refusal to give back any ground since is encouraging. If you want in, we suggest aiming for minor weakness.

HUBS Weekly Chart

HUBS Daily Chart

(LTHM)

Why the Strength

It has been a hot year for lithium-dependent electric vehicle (EV) sales, which has boosted the battery metal’s outlook. Now the White House is calling for 50% of U.S. new car sales to be electric by 2030, which has lit an even bigger fire under the lithium industry. In order to meet this ambitious goal, miners will have to dramatically increase production many times above last year’s average despite limited available supplies. Livent is the largest U.S. lithium-only miner, providing a range of lithium-based products and serving the EV, chemical, aerospace and pharmaceutical industries. It’s benefiting from rising lithium prices, as shown by its latest earnings report. In Q2, revenue of $102 million flew past expectations, rising 57% from the year-ago quarter (and 11% sequentially), due to higher volumes sold and increased pricing power across its main products. Per-share earnings of 4 cents doubled the consensus forecast, but it was the company’s bullish guidance that accounts for the stock’s latest strength. Full-year sales are expected to average around $380 million (up from prior midpoint guidance of around $350 million), which represents growth of around 32%, while EBITDA is expected to increase north of 150% (possibly more than 200%). Livent isn’t just hanging its hat on EV sales growth; it expects that “increased support for electrification from OEMs, governments and consumers” will create “substantial” long-term lithium demand growth. As for capacity, the company plans to complete its lithium hydroxide addition in North Carolina and a lithium carbonate expansion in Argentina, with commercial production expected by Q3 2022 and Q2 2023, respectively. Analysts see sales growing 30% this year.

Technical Analysis

LTHM came public in November 2018, quickly rising to 20 and then falling to 6 by the following August. An attempted turnaround later that year was halted by the 2020 crash, which saw shares bottom out at 4 in March. This time, the turnaround was successful as shares broke out on giant volume in October on accelerating EV demand. Following a rally to 24 in January, LTHM entered another base-building phase that ended earlier this month. It’s a hot potato, but we’re OK starting small on today’s dip.

LTHM Weekly Chart

LTHM Daily Chart

Nucor Corporation (NUE)

nucor.com

Why the Strength

At this point, most investors know about the inflation theme in general, but fewer are aware of the degree to which it’s boosting some firms’ fortunes, especially in the metals space—and as they begin to perceive that these elevated prices aren’t going to completely turn tail in another month or two, metals stocks are shooting higher once again. Nucor certainly looks like the one of the leaders of the move, and there’s many reasons for that—it’s one of the dominant steel players in the U.S., with either the #1 or #2 market share in a variety of steel products (structural, merchant bar, rebar, plate, etc.), with 25 scrap-based steel mills. It’s always been one of the better-run operations out there, cranking out solid earnings and cash flow even when the industry is struggling thanks to a variable cost structure and little leverage (it’s paid and raised its dividend 48 years in a row). And now that the sector is soaring, Nucor is raking in ridiculous amounts of profit: It’s $5-plus per-share profit in Q2 was larger than any prior year except 2008; management is on record saying Q3 should be even better and that, based on order books, it expects strength “well into 2022.” Indeed, analysts are having trouble keeping up with what’s going on—earnings estimates, which were already beefy two months ago, have doubled since then, with $19 per share likely this year and, even after some expected retrenchment, nearly $10 in 2022! With all that cash, the top brass is both embarking on some M&A (its $1 billion purchase of an insulated metals panels business will boost its reach into the high-end architectural market) and rewarding shareholders—the 1.3% dividend is nice, but even better is the buyback plan that has swallowed up 3% of outstanding shares in the first half of the year! Obviously, the good times will end at some point, but that time looks to be a while down the road.

Technical Analysis

NUE actually hit an all-time peak back in 2008 (!) and had a horrid 2018-2020 as well. But that all changed in February, when the stock broke free from a multi-year base and enjoyed a fantastic run from around 60 to 110 in May. The correction after that wasn’t too bad given the move (21% deep), and after a shakeout a month ago, NUE has been very strong, with three straight big-volume buying weeks, including last week’s moonshot. We suggest aiming for dips, though given the volume, odds favor pullbacks will be short and/or shallow in the near term.

NUE Weekly Chart

NUE Daily Chart

Paylocity (PCTY)

paylocity.com

Why the Strength

The disruption of the pandemic resulted in an unexpected benefit–new businesses were started at great clip, with entrepreneurs launching 4.3 million startups in 2020, a million more than in 2019. More companies means more demand for Paylocity, a provider of cloud-based human resources and payroll software for businesses, especially small ones. For its fiscal Q4, (results announced last week), Paylocity’s sales jumped more than 28%, powered by business start-ups joining the fold. Gains were helped in part by referrals from its existing 25,000 client-base–nearly a quarter of new clients come from word-of-mouth. Paylocity charges a fee for every employee in a company’s headcount, so the return of furloughed workers is helping too. Management expects to continue to deliver 20% annual sales growth by expanding beyond HR basics like employee onboarding and payroll functions into things like Community, a Slack-like channel where employers can convey information quickly and workers can ask questions; Paylocity Modern Workforce Index, which helps companies track how they’re doing engaging with employees; and a video channel, where clients offer online learning courses. All of this has resulted in the strongest customer retention (north of 92%) Paylocity has seen in years. Expectations are rising that the recent momentum will continue in the coming year, with management seeing sales up 24% this year and analysts expecting earnings to accelerate going ahead.

Technical Analysis

PCTY spent the past eight months building a base and consolidating after rebounding from the pandemic plunge to new highs by the end of last year. Q4 earnings enthusiasm helped shares bust out on good volume, gapping up two weeks ago and seeing follow-through buying that set new all-time highs. Impressively, even today’s growth stock selling didn’t hit the stock much, though we’re still going to set our buy range down a bit, thinking there could be a little hesitation after the recent move.

PCTY Weekly Chart

PCTY Daily Chart

Saia Inc. (SAIA)

saia.com

Why the Strength

Widespread materials shortages have created boom times for shippers that can quickly transport smaller loads on demand. Saia is one of the nation’s oldest trucking companies, providing less-than-truckload (LTL) shipping and logistics services via 174 owned and leased facilities across North America. In the second quarter, Saia’s revenue reached a record $571 million, surpassing last year’s Q2 sales by 37%, while per-share earnings of $2.34 beat estimates by 29 cents. Among key metrics, tonnage per workday increased 23%, reflecting silicon wafer shipments for the semiconductor industry that were 7% higher from the year-ago quarter. The strength in Saia’s shipment count was seen across all regions and was achieved despite supply chain disruptions and labor shortages that are facing all freight companies. (Saia is actively recruiting and hiring across its network.) Revenue per shipment, meanwhile, increased 13% in Q2, benefiting from pricing gains, as well as a 4% increase in haul length and a 7% increase in weight per shipment. Contract renewals averaged a very strong 11% in the quarter (up from 9% in Q1). And while the firm’s fuel expense was significantly higher compared to the year-ago quarter as diesel prices rose 32%, this was offset somewhat by an 85% increase in fuel surcharge revenue. Saia will increase the size of its tractor and trailer fleet in the coming months in anticipation of rising shipping demand. Management also plans to expand its addressable market by accelerating the pace of its expansion by 10 to 15 locations per year. Analysts see earnings taking a big leap this year (up 54%) and double digits in 2022.

Technical Analysis

From a pre-pandemic peak around 100, SAIA fell to 60 by the March bottom and spent just a few weeks consolidating before revving to new highs. Dips along the way were short-lived, but after reaching a peak of 250 in May, shares finally entered a deeper (and needed) correction which ended last month at 187, just under the 40-week line. The latest rally was sparked by earnings and brought strong-volume buying. We’re OK picking up shares on weakness.

SAIA Weekly Chart

SAIA 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 August 23, 2021.