August 23, 2021

Back and Forth

Current Market Outlook

The selling in growth stocks spread to the rest of the market last week, with most major indexes finishing lower, led again by growth-y indexes and funds. The good news is that, for now, the worst-case scenario has been avoided—many growth stocks tested key support in recent days (50-day lines, etc.) and almost all held up, with Friday and today seeing some solid bounces. Cyclical stocks have done a similar dance, with many pulling in, but few really cracking, and now the bounce is underway. Ideally, this rebound will develop some power—strong bounces off support often provide low-risk entry points—but, while we won’t wait weeks to see how it plays out, it’s too soon to conclude the recent selling wave is over. We remain more optimistic than not, and the past couple of days are certainly encouraging, but let’s see if some new and potential leaders lift off in classic fashion.

This week’s list is a mix of various different stocks, including a number of names we haven’t written up before. Our Top Pick is Chart Industries (GTLS), an under-the-radar name that’s set to see earnings soar as demand for its various energy infrastructure items (including many that play into the clean energy space) takes off.

Axon Enterprise, Inc. (AXON)

axon.com

Why the Strength

Chart-wise, Axon Enterprises has always been a tricky stock to hold, but fundamentally, the story is straightforward and lucrative, which is why the name makes the cut every now and then. Axon (formerly known as Taser) has transformed itself from a provider of electrified weapons for cops—a business that was solid but very lumpy—to a one-stop shop for law enforcement, offering departments both here and overseas in-car video systems, body cameras and software that allows them to store/edit/share video evidence and more intelligently dispatch officers. More importantly, the software (and, increasingly, even the Taser’s themselves; 55% are now sold via a bundle plan) are sold via subscription, allowing the firm to steadily grow its numbers and backlog. In Q2, the firm’s revenues lifted 55% (50%-plus growth both here and overseas), while EBITDA grew 83%, but more important are the forward-looking metrics: Annualized recurring revenue came in at $260 million (up 42%), while total future contracted revenue grew 52% to $2.04 billion. While expenses are on the rise, that’s mainly for expansion (capacity expansion and automation for Taser cartridges, etc.), with management already saying 2022 looks like another 20%-plus top-line growth year as some of that comes online. One last note: Axon has $704 million of cash and no debt, representing around 6% of the total market cap.

Technical Analysis

AXON has made good progress over time but the overall advance has been filled with numerous corrections that make it important to get in early in an advance and generally sell on the way up. The good news is that the stock appears to be emerging from a deep consolidation now—AXON retreated 43% earlier this year, and while the advance since the May low hasn’t been record-setting, it has been steady, with the latest dip bringing it in touch with its 10-week line. We’re OK grabbing some shares here, albeit with a reasonably tight stop.

AXON Weekly Chart

AXON Daily Chart

Builders FirstSource (BLDR)

bldr.com

Why the Strength

When you think of major nationwide players in the housing market, few minds go to Builders FirstSource—in fact, we’d bet few have heard of the outfit—but the firm is the largest supplier of structural building products to the professional market for new residential construction, repair and remodeling. Product-wise, FirstSource is benefiting from inflation; about 38% of sales (mostly in the lumber and lumber sheet category) are commodity exposed, but management has made a big push into more value-added products (specialized offerings, manufactured products, windows, doors and millwork, etc.), which brings with it higher margins and more stable demand trends. A big part of the story here is M&A—the company has acquired a ton of firms over the years, and two recent ones look interesting. The first is Alliance, the largest supplier of building materials in Arizona, where FirstSource didn’t have a significant presence, for $400 million; and the second is WTS Paradigm, a software outfit that FirstSource believes can help digitize both its own operation and much of the homebuilding industry (through licensing of its software to others, etc.). Overall business is booming, and while a lot of it is due to the acquisitions and commodity inflation, core organic sales lifted 35% in Q2 while EBITDA soared 231%, crushing expectations. All in, the top brass sees free cash flow of around $1.5 billion this year (15% of the market cap!), and while that figure will likely fade in 2022 somewhat as commodity prices ease (analysts see earnings retreating 30%), management is more bullish, announcing a $1 billion buyback plan earlier this month. There will be ups and downs here, but the giant earnings and cash flow figures are hard to ignore.

Technical Analysis

BLDR had a very steady advance over many months, riding its 10-week line higher until it finally hit a pothole in mid-May. The correction brought shares down to the 40-week line a couple of months later, but support appeared where it “should” and the stock popped back to its old highs. Granted, volume wasn’t amazing on the bounce, but the dip last week looks normal to us—we’re OK starting a position here and buying more if you see decisive strength through 54.

BLDR Weekly Chart

BLDR Daily Chart

Chart Industries (GTLS)

chartindustries.com

Why the Strength

Chart Industries is a maker of cryogenic tanks and other equipment used primarily for freezing industrial gases and converting natural gas into more portable forms for easier delivery. It also makes the storage equipment needed to keep coronavirus vaccines supercooled, and its equipment can be used to extract CBD oil from cannabis—all big and mostly growth-oriented industries. Although Chart’s second quarter was somewhat mixed, it featured some encouraging trends, with management raising guidance and revealing a meaningful opportunity ahead (a reason for the strength). While sales were up 11% to $322 million in Q2 and earnings of 76 cents actually missed estimates by four cents per share, forward-looking measures were much more bullish: Both orders ($448 million—133 new customers in Q2 alone) and backlog ($1.08 billion) set new records, with this being the third straight quarter of record-breaking orders. While energy and industrial market sales disappointed (due in part to post-pandemic softness), specialty products revenue rose 120%, comprising 50% of Chart’s total net sales—the highest quarter in its history—while repair, servicing and leasing revenue rose by a consensus-beating 36%. The company further reported strong industrial gas orders, which it regards as an indicator of its customers’ confidence in the year-ahead outlook. Chart’s hydrogen and helium business, meanwhile, is growing and contributing to specialty segment sales, for which management sees an addressable opportunity of around $37 billion by 2030. Plus, demand for liquified natural gas and beverage tanks is also increasing. Bigger picture, the top brass sees the move toward cleaner energy keeping demand for Chart’s unique products on the up and up. With so much business already inked, analysts see earnings up 40% both this year and next.

Technical Analysis

After running up from around 75 last September to 165 this February, GTLS spent the next five months chopping around in a lateral range. It teased a breakout above its high last month before pulling back into the 40-week line, but the release of the latest earnings proved to be the reversal day, and GTLS has been on the upswing ever since, with shares hitting a new high last week. We’re OK starting a position here or on dips.

GTLS Weekly Chart

GTLS Daily Chart

Elastic (ESTC)

elastic.co

Why the Strength

As digitization accelerates, observability tools (which make it easier to monitor overall network health) are becoming a bigger part of enterprise IT spending. Elastic is a Netherlands-based subscription software company that offers self-managed software to help users search large quantities of structured and unstructured data—sort of bringing the cloud to the Big Data revolution. Elastic’s customers include Adobe, T-Mobile, Pfizer and eBay, and its platform is used mainly to facilitate complex searches on apps and websites, as well as other important applications. (Uber, for instance, uses Elastic’s software to help locate nearby drivers, while rail giant CSX uses it to create safer freight train systems.) Beyond searches, Elastic’s observability platform is quickly becoming a growth driver, combining fraud detection and security, along with analytics and performance management, into a single offering to help clients monitor and react to events happening anywhere on their network. In the quarter ending in April, Elastic saw its revenue grow 44% from a year ago thanks to “robust customer acquisitions,” with subscription revenue making up 93% of total revenue. Indeed, the company ended the quarter with more than 15,000 subscription customers—including over 730 with annual contract value of more than $100,000 (the strongest in two years)—as clients continued to make multi-year commitments. Full-year fiscal sales, meanwhile, grew 42%, and the company turned cash flow positive in 2021 for the first time ever. Looking ahead, management predicted it would become a $1 billion-plus revenue company in fiscal 2023. The next big event comes on Wednesday (August 25) when the next quarterly report will be released.

Technical Analysis

ESTC ran up to 177 in January before finally hitting a wall and correcting very sharply (45% by May). The stock did rally seven weeks in a row from there, and like many growth titles, has spent the better part of two months chopping up and down. Still, we’re impressed that ESTC is near recent highs despite the market sloppiness of late. If you want to roll the dice, you could nibble ahead of earnings, or just wait to see the reaction—a powerful gap up could be buyable.

ESTC Weekly Chart

ESTC Daily Chart

(PKI)

Why the Strength

PerkinElmer has been on an upswing as its COVID-19 rapid test kits and testing supplies used for biotech research of COVID and SARS viruses have been in high demand. A version of the rapid test rolled out this summer works at the lowest limit of detection in 15 minutes–suitable for use in non-clinical environments like schools, doctors’ offices and airports to make on-site decisions on access and care. PerkinElmer’s success with COVID tests builds off its market position as a leading provider of products for researchers in the biotech and medical sectors, including molecular diagnostics, pathogen detection and software. About three quarters of its business is “consumables,” including tests, researcher supplies and data analytics, with the balance of sales in equipment such as detection and imaging machinery. The company’s been an aggressive acquirer, making 27 buys since 2015—and the latest, BioLegend, a leading provider of reagents used in biotech research, has excited Wall Street. Last month the companies announced a deal for more than $5.2 billion in cash and stock to bring BioLegend into the fold. The price is a premium at 14 times next year’s BioLegend revenues, but investors seemed thrilled with the addition of 30 cents in EPS this year – consensus is for $9.96 EPS–and beefing up revenue to $4.6 billion, from $3.8 billion last year. BioLegend bolsters PerkinElmer’s own reagent business, making it a leader in the segment and a more efficient one (higher margins), too. Analysts see earnings backing off some next year, but still coming in miles ahead of pre-pandemic levels—and those guesstimates are almost surely too low.

Technical Analysis

PKI had a nice run last year then spent about six months (mid-January to mid-July) building a reasonable launching pad, which finished up with some beautiful tightness, which is usually a sign that the sellers have moved on. The breakout was very solid, and saw some nice follow through, and the past two weeks of rest have offered up a solid entry point.

PKI Weekly Chart

PKI Daily Chart

Rapid7 (RPD)

rapid7.com

Why the Strength

As cloud migration accelerates and sensitive data becomes more exposed, organizations are becoming increasingly vulnerable to cyberattacks, making the sector more important than ever. (The latest revelation of the U.S. State Department’s cyber hack is a case in point.) Rapid7 (covered in the July 12 report) offers an Insight security management platform that reduces risk across an enterprise’s entire connected environment, allowing clients to look for malicious behavior, investigate and shut down attacks or automate operations. Rapid7 saw its key metrics accelerate in Q2, with revenue soaring a consensus-beating 28% from a year ago. Per-share earnings of 7 cents, meanwhile, easily beat management’s guidance and analyst forecasts of 5 cents, driven by strong demand across the company’s Insight platform. Rapid7’s subscription-based model continues to boast high customer retention rates while its growth remains steady, with sales growth averaging around 28% over the last eight quarters. Annualized recurring revenue increased 29% in the second quarter (to $489 million), total customer growth was 13% and recurring revenue per customer rose 14%. Another Q2 highlight was the closing of the acquisition of InSights Cyber Intelligence, a leading provider of threat intelligence, and the company’s launch of InsightCloudSec, a cloud-native security platform that combines the container security capabilities of Rapid7’s offerings into the Insight platform. Management guided for Q3 revenue of around $134 million (up 28%) and full-year sales of around $522 million (up 27%), in line with estimates.

Technical Analysis

After building a year-long base from mid-2019 to last year, RPD’s breakout late last year was welcome, but short-lived, with shares rising from 70 in November to 95 by Christmas. Shares then began a new consolidation, taking RPD down to the 40-week line before a persistent move to new highs. The latest four-week rest looks like a solid entry point if you’re not yet in.

RPD Weekly Chart

RPD Daily Chart

Regeneron Pharmaceuticals (REGN)

www.regeneron.com

Why the Strength

Regeneron is a biotech focused on neurotrophic factors—proteins that support the growth of neurons—and their regenerative capabilities (hence the company’s name). It has a pipeline of 37 drugs in various stages of development designed to treat serious diseases ranging from heart failure to ovarian cancer; it’s conducting one of the world’s largest gene sequencing efforts; and there are seven FDA-approved treatments, too. But where Regeneron is making the most waves right now is in the COVID-19 arena, where it just obtained an expanded emergency use authorization for its “antibody cocktail” COVID therapy (in conjunction with its partner Roche), REGEN-COV—a big reason for the recent strength. (Additionally, the treatment was just approved in the U.K. last week.) Moreover, sales of Regeneron’s antibody drugs have increased nine-fold so far this month as Delta-related hospitalizations soar. The company estimates 30% of high-risk patients are receiving its treatment, compared to under 5% in June. The extent of Regeneron’s strength was shown in Q2, which saw sales rise by a mouth-watering 163% to $5.1 billion, while the bottom line was a healthy $25.80 per share (46% above estimates!). Second quarter highlights also included bullish sales results (up 28%) of its retinal disease medicine, EYLEA, as well as good things from its eczema drug, Dupixent (up 59%). Looking beyond COVID, many of Regeneron’s late-stage trials target new indications for previously approved treatments; plus, some early-stage candidates hold promise (including NTLA-2001, a gene-editing therapy in partnership with Intellia Therapeutics). Earnings should remain elevated even after accounting for some retrenchment as its COVID-related business eases next year.

Technical Analysis

Unlike many of its biotech peers, REGN entered 2020 with a full head of steam and was barely impacted by the pandemic-led crash. It soared through the first half of last year before peaking near 650 in July and beginning a year-long, 34%-deep correction and consolidation. After some tightness in July, REGN broke out and has surged three weeks in a row, helped along by a positive reaction to earnings. Pullbacks should be buyable.

REGN Weekly Chart

REGN Daily Chart

(UPST)

Why the Strength

The market for providing lenders the all-important credit score to price loans has long been locked up by Fair Isaac (FICO), yet 40% of American adults don’t have a credit card or a credit score, and 6% don’t even have a bank. Being able to provide financing to this group of people is an area of great potential for lenders: There’s lots of evidence that many of these people are good credit risks. Upstart Holdings is one of a slew of fintechs using a form of artificial intelligence called machine learning (ML) to provide lenders better risk-assessment of potential borrowers. Traditional credit scores are based on just a few sets of information, like performance on other unsecured credit lines and declarations of bankruptcy. Upstart’s flavor of ML–a math algorithm–allows lenders to weigh dozens or hundreds of additional pieces of information FICO ignores, utility bill payment history and even oddities like mileage on a borrower’s car, allowing them to find statistical correlations hinting as to whether someone’s a good risk. Upstart allows clients like auto dealers and personal loan companies to instantaneously give automated loan decisions on applications, making it easier to sell to a broad base of consumers. It’s a booming business: Upstart’s revenue hit $193 million in its second quarter, about triple its pre-pandemic revenue run rates and up 60% from the prior quarter. Upstart makes money too, turning a $37 million net profit in the latest quarter, or $0.62 EPS. For full-year 2021, management says sales should touch $750 million as its auto lender product is now in 47 states, covering nearly all the country’s population. Analysts see earnings surging nine-fold off a low base.

Technical Analysis

Upstart is a wild child, with massive swings (mostly up, but also down) seen since its IPO late last year. Shares looked ready for another move higher after a giant leap in May, but that only led to a quick, deep (44%!) pullback. But that’s where things get interesting: This crazy stock actually tightened up for many weeks at that time, which is constructive, and then went ballistic after its blowout Q2 report. The 200 level has been sticky, so we suggest keeping it small and looking for a shakeout to enter.

UPST Weekly Chart

UPST Daily Chart

(WK)

Why the Strength

Workiva is an up-and-comer in the cloud software space, offering products that simplify complex work for thousands of organizations by connecting data, documents and teams. Its specialty is coordinating and automating regulatory and financial reporting, enabling companies to have faster reports with fewer errors, and it enjoys a leadership position in SEC-filing software. Workiva is in the process of moving its offerings to a new cloud-based platform, with more than 90% of customer annual contact value (ACV) having already been upgraded to the platform. The company, moreover, boasts a solid same-customer growth rate (up 12%) due to strong cross-selling to existing customers. In Q2, Workiva generated a top line of $106 million (up 26% from a year ago) and a bottom line of 7 cents (6 cents above estimates), led by subscription and support revenue that was 29% higher than last year’s Q2 and professional services revenue that rose 9%. Total customer count of 3,949 rose 12%, including a 33% increase in customers with an ACV of more than $100,000 and a 46% increase in customers with an ACV north of $150,000. The company also closed its acquisition of OneCloud, which will allow Workiva’s customers to automate integrations and unlock data across legacy systems and cloud applications. Going forward, management sees a massive addressable market of $16 billion, leaving plenty of upside ahead. Workiva expects Q3 and full-year revenues of around $108 million $431 million, respectively—both up 23% and in line with estimates—though we think this could prove conservative.

Technical Analysis

After peaking at 64 two years ago, WK spent 15 months rounding out a base before blasting off last November. Shares soared into the February growth stock peak, with the correction taking the stock down from 115 to 80 in just a few weeks. After retesting in May, WK has enjoyed a fantastic run, with hardly any pullbacks of note. A bit of weakness toward (or slightly below) the 25-day line would be tempting.

WK Weekly Chart

WK Daily Chart

Zscaler (ZS)

zscaler.com

Why the Strength

If there’s one sector that is basically guaranteed to grow in the years ahead, it’s cybersecurity—as everything (data, shopping, content, information) goes online and in the cloud, the need to protect it grows, especially as hackers become increasingly sophisticated (and likely sponsored). Zscaler is definitely one of the new-age leaders (Rapid7 looks like another, written about earlier this issue), with a solution built from the ground up for the cloud age: With the old model of protecting information residing in a data center blown away by the cloud, Zscaler’s offerings can connect and secure users, devices and apps using whatever business policies are wanted over any network. The company calls it a Zero Trust Exchange, where users are connected to apps (not the entire network), apps and workloads themselves are invisible to the outside (can’t be attacked) with zero passthrough connections—basically decoupling security from the network itself and decoupling app access from network access (you only use what you’re supposed to use). It’s been a hit, with one-quarter of the Forbes 2000 already signed on as customers (5,000 clients in total with more than 20 million licensed seats), for whom Zscaler claims it blocks seven billion security events or policy violations every day. Revenue growth has been accelerating in recent quarters and ripped ahead 60% in the latest quarter (including 26% same-customer growth), though earnings have been more lumpy as the top brass has stated its willingness to invest big money in order to capture what it sees as a $72 billion opportunity and 335 million potential licensed seats. The next big event will be earnings, which are due out September 9.

Technical Analysis

ZS had a massive run from its breakout last May near 90 to a high of 230 in February before it finally got pulled down with other growth stocks. The 32% correction from there took the stock a bit below its 40-week line, but a positive earnings reaction in June helped the cause, and shares have been pushing higher since, with new price highs in early July and the 25-day line providing consistent support. Volume has been light on the advance, which isn’t ideal, but if you’re game, you can pick up a small position on dips ahead of earnings.

ZS Weekly Chart

ZS 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 30, 2021.