August 2, 2021

Top-Down vs. Bottoms-Up

Current Market Outlook

From a top-down perspective, the issues that have surrounded the market are still hanging around—the intermediate-term trend is basically neutral, relatively few stocks are plowing ahead (many below their 50-day lines, fewer names hitting new highs, etc.) and every week or so there’s usually some news-driven rotation into or out of one section of the market. And yet, from a bottoms-up perspective (looking at individual stocks), we’re seeing more to like—more multi-month setups from growth stocks (and even some tidy six- to eight-week structures for cyclical names) and more big-volume breakouts or upmoves, often spurred on by earnings reports. We’re leaving our Market Monitor where it is today, but a good week of earnings reactions will have us extending our line.

Advanced Micro Devices (AMD)

amd.com

Why the Strength

A rock-solid earnings report and upbeat comments from management on the chip industry outlook are boosting Advanced Micro in spite of continued chip shortages. Advanced Micro develops processors for servers, workstations and personal computers, but its increasing dominance in the booming video game market—by way of its custom graphic processing unit (GPU) cards—is its main claim to fame; much of the company’s future growth will come from this market as gamers increasingly switch to gaming laptops. Indeed, last week’s report highlighted strong demand for its gaming chips, along with big demand for its PC and data center products. In Q2, the company delivered its fourth straight quarter of record revenue and free cash flow, with sales doubling from a year ago to $3.9 billion and per-share earnings of 63 cents more than triple the year-ago figure. Leading the charge was the computing and graphics segment, which saw revenue increase 65% thanks to its Ryzen and Radeon processing unit sales. (AMD is also benefiting from the red-hot electric vehicle market through its Ryzen processor sales to Tesla, which uses them in its Model S and X autos.) Desktop and notebook revenue also saw strong double-digit growth as Ryzen 9 processor unit shipments more than doubled in the quarter, and the firm reported multiple high-volume sales with Fortune 500 financial services, automotive and pharmaceutical companies. Going forward, the pending acquisition of Xilinx (likely to close by year-end), a leading supplier of programmable logic devices, is expected to boost the company’s data center business. Wall Street sees 2021’s bottom line increasing 90%, with another solid year in 2022.

Technical Analysis

After last summer’s explosive rally, AMD fell into a lull starting in September and spent the next 10 months see-sawing between roughly 75 and 95. The stock raced back to its high in June, only to slip early month, but the defining event was last week’s earnings-powered rally, which not only brought a breakout (after an initial sour earnings reaction) but has seen three further big-volume days of upside follow through. AMD is a touch extended and could retrench a bit, but we’re not expecting any major retreat.

AMD Weekly Chart

AMD Daily Chart

Alcoa (AA)

alcoa.com

Why the Strength

Materials stocks had humongous runs from mid-November (vaccine announcement) to early May before correcting sharply—but in the past couple of weeks, many saw big-volume buying as commodity prices (and these firms’ earnings outlooks) remain elevated. Alcoa is one of the big boys in the sector, of course; its aluminum segment the main driver these days, with super-strong prices (up 60% from the prior year in Q2!) leading to booming EBITDA for the segment ($743 million in the first half, up from breakeven-ish results the prior two years). And the prospects are getting even brighter, as aluminum prices notched three-plus-year highs last week, partially due to some power-related production shutdowns over in China, which is likely to limit supply even as demand races higher. That’s the big story right now, though Alcoa’s bauxite and alumina segments are also doing good business, with solidly positive EBITDA that easily topped expectations in Q2. To this point, the firm is using most of its cash to slash debt (including pension obligations, net debt is down a whopping 38% just in the first six months of the year!), but the main attraction here is that the recent earnings spike (Q2 earnings of $1.49 per share was up from a loss a year ago and came in 20 cents above estimates) isn’t likely to dissipate anytime soon as analysts race to upgrade their outlook—Wall Street sees around $5 of earnings per share this year (up from an outlook of just $2.55 three months ago!) and for the bottom line to remain close to that level in 2022 (also nearly double the estimates from late April). Of course, a major change in the global economic outlook could change things, but right now the wind is clearly at Alcoa’s back.

Technical Analysis

Two things stand out to us in the AA chart—the first is that the recent pullback (30%) was sharp but certainly not uncalled for given the massive post-November run, and second, the action after a dip to new lows two weeks ago has been powerful, with a huge-volume up week and continued buying last week to the 40 level. We think there will be more volatility, but we also think it’s likely the correction is over—if you’re game, you could start small here and average up if AA heads higher.

AA Weekly Chart

AA Daily Chart

Align Technology (ALGN)

aligntech.com

Why the Strength

Despite the headwinds generated by last year’s Covid lockdowns, sales of Align’s popular Invisalign adult teeth aligners are surging as the firm continues to outpace its nearest competitor (SmileDirectClub), thanks in part to its targeting of younger customers. Invisalign is in high demand globally, and the company just celebrated breaking the $1 billion revenue mark in Q2 for the first time ever, as sales rose 187% from last year’s pandemic-slowed quarter, while per-share earnings jumped to $3.04 (20% above estimates). The company shipped 665,600 clear aligner cases in the second quarter—triple the year-ago number and 12% higher than the prior quarter—driven by strength in both adult and teen market segments. In fact, the latter market is growing at an accelerated pace, with Invisalign volumes for teens up a huge 156% from last year (up 10% sequentially) to 181,000 cases, representing one-third of total shipments in the quarter. Align emphasized that this segment has huge potential and attributed the strength to several recent peer-to-peer events designed to build clinical competence in teen treatment and outreach. Systems and services revenue also grew across all regions with continued adoption of the firm’s iTero next-generation scanners and imaging systems. Align further reported a 33% increase in leads for Invisalign doctors, including a big increase in leads from China as the company continues to make inroads there. Management guided for 2021 sales to come in around $3.9 billion, up 58% on the year, while analysts see the bottom line more than doubling this year and expanding 20%-plus next.

Technical Analysis

After staging a high-volume breakout above 350 last October, ALGN ran up to 624 in February and began what turned into a tedious up-and-down consolidation. For the past many weeks, shares have toyed with getting going, including a breakout attempt in early July that quickly failed as the market turtled. But last week’s earnings report was the kickoff, leading not just to a big-volume breakout but some solid follow-through since. We’re OK starting a position here or (preferably) on dips.

ALGN Weekly Chart

ALGN Daily Chart

ArcelorMittal (MT)

corporate.arcelormittal.com

Why the Strength

Environmental restrictions in China have that country encouraging domestic steel producers to cut output; in fact, the newspaper of record over there said “the country plans to cut crude steel output to ensure it falls year-on-year in 2021.” Given how big a player China is in the global steel market, this is big news and is a main reason for the pricing strength in the sector—especially as infrastructure spending and auto production is likely to ramp. All of this is good news for ArcelorMittal (covered in the April 19 report), one of the world’s largest iron ore mining and steel producers. Its focus is on making “smart” steels—mainly for electric vehicles and renewable energy infrastructure—which are more efficient, use less energy and emit significantly less carbon when produced than traditional steel. A sterling earnings report (its best quarter in 13 years) and the Fed’s assurance that rates will remain low for now (good news for industrial metals) are key reasons for the stock’s strength: Revenue of $19.3 billion in Q2 was 76% higher from a year ago, while per-share earnings of $3.46 smashed estimates by 76 cents. Management attributed the strong performance to continued industry recovery and robust margins and said the supply-demand balance supports continued positive momentum in steel spreads and shipments. The solid results also allowed the company to pare its debt while implementing a new $2 billion share buyback program (to be completed by the end of 2021; nearly 5% of the current market cap). Management, meanwhile, upgraded its full-year global steel consumption forecast to an 8% increase (from a previous growth estimate of around 5%), another sign that prices are likely to remain elevated. Analysts see earnings of nearly $10 per share this year, and even including some slippage, remaining elevated (north of $6) in 2022.

Technical Analysis

MT hit a long-term apex of 38 in 2018, then fell all the way to 7 before bottoming out after last year’s pandemic plunge. Since then, shares have been on the comeback trail and are just a smidgeon under the old high, thanks to the global steel boom. A pullback in June took shares below the 50-day line, but shares found support in the 28 area right quick, and MT has now enjoyed two straight good-volume buying weeks as shares popped to new highs. Some near-term wobbles wouldn’t shock us, but we’re OK buying some here or on minor weakness.

MT Weekly Chart

MT Daily Chart

Atlassian (TEAM)

atlassian.com

Why the Strength

Atlassian (covered in the June 21 report) is seeing explosive demand for its workplace collaboration software as it transitions to cloud-only installations. The company’s Jira, Confluence and Bitbucket products help software developers track projects, share content and manage workflows. Earlier this year, the company ended new server license agreements as part of its strategy to focus on the cloud; near term, that can crimp earnings (hence the 4% decline in the bottom line in the June quarter), but investors are keying off other metrics. In what management described as a “ripper” of a quarter, Atlassian saw that strategy pay off as fiscal Q4 revenue soared 30% from a year ago, to $560 million, and even earnings crushed expectations by a mile. Subscription-based revenue, meanwhile, rose by an eye-popping 50% to $386 million as the firm added over 23,000 net new customers to its total of around 220,000. Cloud revenue grew 47% from a year ago as migration momentum continues to build (large customer cloud migration was up 70% sequentially). Atlassian also announced Forge, its next-generation cloud app development platform, designed to allow app developers to utilize the full functionality of its cloud products. The company has already seen more than 500 apps on the Forge platform, with over 4,000 third-party apps on its Marketplace platform, and expects further growth as the platform becomes widely available. Looking ahead, management sees “massive opportunities” in three core markets: Agile development, IT service management and work management for all teams. Atlassian guided for Q1 2022 revenue between $575 and $590 million, up 27% (and 8% above consensus forecasts at the midpoint). It’s a solid story.

Technical Analysis

Unlike many of its fast-moving cloud peers, TEAM’s long-term uptrend has proceeded in more of a steady fashion, interspersed with long, generally narrow consolidation periods. The latest rest phase started in January, with shares chopping around between 200 and 260, and after nosing to new price highs, it tightened up again just south of 275 for a few weeks. The earnings-induced blastoff last Friday was a bit wild, so we’re going to set our buy range down a bit from here.

TEAM Weekly Chart

TEAM Daily Chart

Dynatrace (DT)

dynatrace.com

Why the Strength

In a world full of ice-cream-headache cloud-related stories, Dynatrace has an offering that’s easy to understand and should drive growth for many years to come. As the digital transformation of business accelerates with or without the pandemic, companies are adopting tons more business applications, putting them all in the cloud (or multi-cloud environments) and using more artificial intelligence to automate many actions and ease complexity. And when you’re talking about massive banks, health care outfits, energy explorers or even government agencies, they have “generations of technology to manage and migrate off of and limited resources and expertise to deal with” such a transition, in the words of Dynatrace’s CEO. The solution: Dynatrace’s platform, which lets medium- to large-sized clients (it focuses on the Global 15,000) get precise answers about the performance and security of their applications and infrastructure, as well as insight into the end-user experience. The customer list is growing (135 new logos in Q2, 50% more new adds than a year ago), reads like a who’s who list of blue chips and those clients continually spend more money (same-customer revenue growth north of 20% for many quarters). Demand is strong and getting stronger—business is subscription-based, and annualized recurring revenue leapt to $823 million in Q2, up 36% from a year ago, while its remaining performance obligations (all money it’s owed under contract) is at $1.3 billion, up 46% from a year ago. The top brass here repeatedly talks about 30%-plus growth being likely for “a long time to come” as it’s garnered just a fraction of its potential market. Earnings are well into the black but flat-ish as the firm ramps investments, but given the recurring revenue, Wall Street is on board with that strategy. We like it.

Technical Analysis

DT isn’t the fastest horse, per se, but it looks as if it’s begun a new advance—shares effectively consolidated for about 11 months before lifting to new highs in June, which was part of a persistent (up 7 of 8 weeks) rally. There was a little shakeout before earnings, and even a minor dip after the report, but the 25-day line has contained all pullbacks of late and DT moved back to new highs late last week. We’re OK starting a position here with a stop in the mid-50s.

DT Weekly Chart

DT Daily Chart

Hilton Worldwide Holdings (HLT)

www.hiltonworldwide.com

Why the Strength

The travel landscape still has plenty of storm clouds overhead, with cruise, international and business travel all well below pre-pandemic levels, while the new worries surrounding the Delta strain of the virus could crimp travel in the near term. But leisure travel has roared back and, with numerous cost cuts, big hotel chains like Hilton are seeing business come back faster than expected. The stock recently popped after Q2 results crushed estimates and hinted at what the next few quarters could look like if the world continues to turn right side up: Sales, earnings and EBITDA were of course up huge vs. last year’s pandemic-induced quarter, but EBITDA of $400 million was miles ahead of the $336 million consensus, and while revenue per available room was down 36% from 2019’s Q2, that was actually better than the 53% decline on a two-year basis in Q1. Moreover, business picked up through the quarter and into Q3; through July 29, revenue per available room was down just 15% from comparable 2019 levels, with room rates equal to those from 2019. Interestingly, management isn’t just trying to survive, but to take advantage of the industry’s hiccup—even as it cuts back on some services (good luck if you want housekeeping to show up every night), Hilton is expanding, with unit growth of 7% in the quarter and expectations of 5%-plus unit growth for all of 2021. Beyond all the numbers, though, is the fact that (a) the recovery is underway, and (b) after such a horrid decline, Hilton and the industry’s cost structure is likely to be much less than it was before, both of which will lead to surging cash flow for a long time to come. Analysts see revenues up 35% this year and 44% next, with even larger gains in earnings and cash flow.

Technical Analysis

HLT got going after the vaccine announcement last November, but the run wasn’t too impressive—shares rallied to the high 120s in February and then went straight sideways for months. The shakeout two weeks ago to the 40-week line was a beauty, likely knocking out some remaining weak hands, after which HLT zoomed to new highs on a good-looking volume cluster before and after earnings. Admittedly, the dip since then isn’t ideal, but there’s lots of support in this area and the downside volume has been tepid. HLT looks buyable here.

HLT Weekly Chart

HLT Daily Chart

Monolithic Power (MPWR)

monolithicpower.com

Why the Strength

The proliferation of electronics – from gaming consoles to LED streetlights – makes for an ever-expanding market for Monolithic, a designer of advanced semiconductors used primarily in power management. The company started as a dotcom-era chip provider for notebook computers, expanding as in-home electronics like TVs and set-top boxes became more sophisticated. Consumer electronics continue to be a positive market thanks to wireless charging and the Internet of Things, but Monolithic’s growth into serving corporate customers is the growth driver these days. Specifically, the proliferation of electronics in automobiles, which use Monolithic chips to run radar and lidar (using lasers to determine the location of objects) as well as more standard electronics like heat and cooling, liftgates and driver displays. EVs, which typically use multiple batteries for different functions, offer fresh opportunities too. All told, the company counts giant automaker original equipment manufacturers Aptiv, Bosch and Magna as customers and the auto segment now makes up 18% of sales (up from 13% a year ago). As for the numbers, they’re outstanding, with sales and earnings easily topping estimates in last week’s Q2 report—analysts see the bottom line taking a big leap higher this year (up 40%) with more gains in 2022, and given its history, both figures should prove conservative. It’s not changing the world but Monolithic is as solid a company as there is.

Technical Analysis

MPWR had a huge pandemic run, breaking out last May near 195 and, with a couple of potholes along the way, running to 400 in January. The double-bottom base that formed after that was tedious, but normal, and the action after the May low was great—MPWR rallied eight weeks in a row, had a little wobble, and then surged to new highs last week after earnings. We advise buying on dips, though we’re not looking for any huge retreat.

MPWR Weekly Chart

MPWR Daily Chart

Old Dominion Freight Line Inc. (ODFL)

www.odfl.com

Why the Strength

As the industrial outlook improves, logistics providers are seeing better days, including less-than-truckload (LTL) shippers that make shorter hauls and run their trucks less than full. Old Dominion offers regional and national ground and air-expedited shipping services nationwide and is one of the world’s largest truck shippers based on total freight. Accounting for the stock’s strength was a record-shattering second quarter that blew past estimates, thanks to accelerated shipping volumes for both industrial and retail customers, as well as service network improvements. Revenue of $1.3 billion was 47% higher from a year ago, including a 28% increase in LTL tons. Per-share earnings, meanwhile, beat estimates by 11 cents and were up 85% from a year ago. While this performance was partly due to easy comparisons, it also reflected an improving shipping backdrop, as LTL shipments per day rose 12% on a sequential basis in Q2 and bested the 10-year average sequential increase of 8% (which excludes 2020). The company also indicated that revenue per day was trending higher by around 35% heading into July, and management was confident that volumes and revenue would continue increasing in the coming quarters. Analysts are equally sanguine and see top- and bottom-line growth of 27% and 37%, respectively, in Q3. Looking ahead, Old Dominion said it would continue to invest in the ongoing expansion of its service center network “regardless of the economic environment” due to the strong returns on capital it provides. Additionally, the firm approved a new $2 billion share repurchase program, to begin after completing its current $700 million buyback program; analysts see earnings soaring 48% this year and expanding further in 2022.

Technical Analysis

ODFL outperformed the market during the pandemic crash last March, with shares falling “only” 20% (compared to the 35% drop in the S&P), and by May the stock was back to new highs. After rising over 80% by September, shares tightened in the next five months before taking flight again in February and rallying to 276 in early May. The correction after that was quite shallow (just 11%), and now shares have perked back up toward their highs post-earnings. We’re OK taking a swing at it here, albeit with a tight stop.

ODFL Weekly Chart

ODFL Daily Chart

Repligen (RGEN)

www.repligen.com

Why the Strength

Repligen makes equipment for use in the production cycle of biological pharmaceuticals, from cell cultures through purification (called chromatography) to the formulation of vaccines. The company’s equipment is used in mainstream pharmaceutical research as well as emerging areas like mRNA; given mRNA is the basis of two of the most popular COVID-19 vaccines (from Pfizer/BioNtech and Moderna), business has been strong for Repligen, with COVID-related orders expected to account for about a quarter of sales this year. But Repligen isn’t just a pandemic play, with management saying “organic” (non-COVID, excluding acquisitions) sales should grow nearly 60% this year as total revenue totals more than $625 million. Its business is in a sweet spot of being very well-situated in its markets while still having lots of share to take in its four segments: Process analytics, proteins, filtration and chromatography, where Repligen has its largest market share, at 20%. Biopharmaceutical researchers are continually looking for ways to make more efficient use of their researchers’ time, and Repligen products fill that need. For instance, its pre-packed columns are sets of resins used in chromatography so lab workers don’t have to pack themselves, speeding up work and providing more consistent results. Repligen has about half that market. Management has been aggressive in buying companies to fill out its product line, making eight significant acquisitions since 2014, including three in the past year that beefed up its fluid management offerings. Longer term, Repligen is targeting $1 billion in revenue by 2024, which would be nearly three times last year’s sales.

Technical Analysis

RGEN has enjoyed a good-sized run over the past couple of years, but ran into trouble earlier this year with most growth stocks. The correction of 29% from high to low was par for the course, but the action improved a lot after the May low, with the minor early-July pullback setting the stage for last week’s huge-volume leap to new highs. RGEN can be a bit thinly traded, so we advise aiming for dips if you want in.

RGEN Weekly Chart

RGEN 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 9, 2021.