August 30, 2021

Let’s See if Strength is Sustained

Current Market Outlook

Last week was definitely a good one for the bulls, with the indexes acting well but also many individual growth stocks scoring some great gains (and most of those came after tests of support earlier this month). Interestingly, the strength didn’t come at the expense of the rest of the market, either, which is a pleasant change from the rotational wars of late. If this strength can be sustained, it’ll be time to get more aggressive, but to us, the market still has some proving to do, especially with the chop factor, which continues to lead to some dramatic pullbacks in stocks that have recently pushed higher. All in all, we’re encouraged by what we see, including an increasing number of setups and breakouts—we’re OK putting money to work, but buying dips and starting small continue to mostly be your best bet, along with banging out partial profits on the way up.

This week’s list has a bunch of solid actors, including some that are putting the finishing touches on multi-month launching pads. But for our Top Pick, we’re going with an earnings winner—Palo Alto Networks (PANW) is part of the strong cybersecurity group and just leapt out of its own long rest. Try to buy on dips.

Alkermes (ALKS)

www.alkermes.com

Why the Strength

Alkermes specializes in developing drug delivery technology and owns several proprietary treatments for central nervous system disorders. The company’s pipeline includes nine neuroscience and oncology drug candidates in various stages of testing, and in June, the FDA approved Alkermes’ schizophrenia and bipolar disorder drug, dubbed Lybalvi. The company believes Lybalvi represents the firm’s next major revenue growth opportunity, and the early June announcement was clearly the catalyst behind the stock’s latest strength (the drug is expected to launch in Q4). Additionally, Alkermes reported that Aristada (for schizophrenia) and Vumerity (for multiple sclerosis) each showed strong year-over-year and sequential growth in Q2—the drugs contributed to what management called a “pivotal” second quarter that also saw operational progress for the firm’s Nemvaleukin development program, an investigational therapy for treating cancerous tumors. Elsewhere, the company reported strong sales (up 23% from a year ago) for Vivitrol (for treating alcohol abuse); Alkermes noted 80% of healthcare providers surveyed believe alcohol addiction has increased since last year’s shutdowns, expanding the drug’s potential market and leading the firm to raise guidance for the rest of 2021. On the financial front, total revenue in Q2 was $304 million, up 23% from a year ago and up 21% from Q1, while per-share earnings of 30 cents were 18 cents above estimates, thanks in part to cost controls. Analysts, meanwhile, see the bottom line increasing 44% for the full year and kiting 61% higher in 2022.

Technical Analysis

As biopharmas go, ALKS hasn’t been one of the more exciting names in recent years. After peaking around 70 in 2018, it fell all the way to 12 last March. While that was the bottom, the turnaround didn’t exactly set the world on fire, with shares etching successively tighter launching pads over the next many months. But the change in character came recently, as ALKS has leapt off its 10-week line, rising six weeks in a row. If you’re game, aim for dips.

ALKS Weekly Chart

ALKS Daily Chart

Continental Resources (CLR)

clr.com

Why the Strength

Energy stocks are still getting tossed around by movements in oil prices, which isn’t ideal, but a few appear to be breaking free from that leash, including Continental Resources. Like its peers, the firm has transformed itself from a growth-at-all-costs driller to a disciplined cash cow even at modest oil prices, thanks to solid drilling results (new wells in the Bakken and Oklahoma are producing at better-than-expected rates) and tame CapEx (drilling and completion costs per foot drilled is down 30%-plus since 2018). The firm originally saw $1 billion of free cash flow at $52 oil this year, but it now expects more than double that figure if current prices (mid/upper 60s) hold. Indeed, Continental cranked out $1.3 billion of free cash flow in the first half of the year! And the firm is using that cash in a variety of ways: First, it’s slashing debt much faster than expected (from $5.5 billion to $3.7 billion this year alone); second, it’s boosting its core dividend (now 1.4% annual yield); and third, the company has resumed its share buyback program, which had nearly $700 million remaining earlier this month. Interestingly, Continental doesn’t have many shares in the float (just 62 million), so the buyback is likely to gobble up a chunk of that, and if energy prices stay up here, the sky’s the limit—Continental is unhedged on oil (and also will have no natural gas hedges in 2022), so whether it’s higher regular dividends, more debt reduction (it has a target of cutting its debt load to $3 billion of debt eventually), special payouts or quickly ramping production (if demand really picks up), some or all are likely in 2022.

Technical Analysis

Most energy stocks are still stuck well below their July peaks and haven’t made any net progress since March, but CLR is clearly outperforming—shares did pull back as much as 22% during the recent dip, but held above their prior consolidation (support near 32) and are now back to within a few percent of their prior peak. Granted, volume hasn’t been extraordinary on the rally, so some wiggles are possible, but it’s looking like the correction is over. We’re OK starting small here or on dips.

CLR Weekly Chart

CLR Daily Chart

Horizon Therapeutics (HZNP)

horizontherapeutics.com

Why the Strength

Horizon Therapeutics focuses on drugs that target rare autoimmune and inflammatory diseases, and the big draw has been Tepezza, which is the only FDA-approved treatment for thyroid eye disease, reducing eye bulging and double vision. It’s a blockbuster product (it reached $820 million in sales in 2020, less than two years after launch!), though it hit a snag from last December through this April due to government-mandated vaccine production, which resulted in little supply of Tepezza. Still, that’s in the past, and the top brass sees sales for the drug lifting 50% this year (and bringing in more than half of total revenue) despite the early-year supply issues, with potential peak annual sales in the $3.5 billion range. But Horizon isn’t a one-trick pony—there’s also Krystexxa (the only approved treatment for uncontrolled gout), which cranked out sales of $123 million in Q2 (up 73% from a year ago) and with potential max annual sales north of $1 billion. Plus there are numerous trials underway (two key readouts for Krystexxa are coming in Q4), and an upcoming launch of a drug called Uplizna in Europe early next year for a couple of indications. (All in all, Horizon has 12 drugs on the market now, with a bunch of Phase II and Phase III trials underway.) After the Q1, Tepezza-induced hiccup, sales and earnings easily topped estimates in Q2, and Wall Street sees the growth story being back on track—earnings are expected to lift 16% this year and another 28% in 2022. It’s a solid story.

Technical Analysis

HZNP was a big post-pandemic winner, but it topped out in early October near 87, and even after a decent-looking breakout earlier this year, it again hit a wall in February around 97—long story short, shares didn’t make much progress from the initial October peak through mid-July of this year. But now it’s acting better, with a solid breakout and earning gap, a retrenchment to the 25-day line and a renewed push back toward its highs. It’s not the fastest mover, but we’re OK taking a swing at it in this area.

HZNP Weekly Chart

HZNP Daily Chart

Inspire Medical Systems (INSP)

inspiresleep.com

Why the Strength

Moderate-to-severe sleep apnea is no joke, with an estimated 17 million Americans suffering north of 5 and often more than 30 events per hour, which in turn leads to health risks (including twice the risk of stroke and a five-fold increase in the risk of some sort of cardiovascular-relted death). While there are treatments, they’re far from perfect, with CPAP big, clunky and suffering from low patient compliance (two-thirds or less follow through on usage), and invasive surgery something that no one pines for. Thankfully, Inspire has a better way: Via a two-hour outpatient procedure (just three small incisions), patients have a neurostimulator, a stimulation lead and a pressure sensing lead implanted. When needed, the stimulation lead will send an electrical impulse to the nerve that controls much of the tongue, keeping airways open and oxygen levels elevated. And it works! Snoring is cut by 75%, while sleep apnea events drop 70% and (obviously) sleepiness decreases. As word has gotten out (and as reimbursement expands; 260 million lives are now covered if they need Inspire, including Medicare coverage in all 50 states), business has been rapidly picking up steam, with Q2 sales leaping more than four-fold off a low base a year ago, and with management expecting full-year sales to rise 84% or so in 2021 and another 35% next year (almost surely conservative). Of course, this isn’t a blue chip outfit—sales should come in just above $200 million this year, and the bottom line is deep in the red. But there’s little doubt that Inspire has come up with a better mousetrap in what it believes is a $10 billion market.

Technical Analysis

INSP is still base-building, but after a tough 37% decline, it found support in the 160 area three times and now it looks to have bottomed—the stock gapped up on earnings in early August, and after a quick, sharp shakeout, INSP has pushed back toward multi-week highs. It still has resistance to chew through, but we’re OK starting a position here and adding if shares advance.

INSP Weekly Chart

INSP Daily Chart

Kulicke and Soffa Industries (KLIC)

kns.com

Why the Strength

The semiconductor industry is undergoing a period of dramatic capacity expansion amid a continued worldwide chip shortage. Kulicke and Soffa (or K&S) is a leading provider of advanced semiconductor packaging equipment for the automotive, consumer, communications, computing and industrial segments. Demand for the company’s capital equipment and aftermarket products and services solutions remains high, and K&S sees this supporting average annual revenue of $1.5 billion over the coming years. The company took steps toward realizing this in fiscal Q3, delivering a guidance-beating top line of $424 million, an increase of 182% from the year-ago quarter (and up 25% sequentially). The bottom line of $1.87 per share, meanwhile, sailed past estimates by 51 cents. K&S also sees a huge opportunity in the broadening adoption of 5G, which will increase chip content at the smartphone level as well as demand for new connected devices. K&S is also benefiting from the growing need for advanced packaging as chip architectures become more complicated; management sees systems-on-chips boosting the market for its back-end processing equipment and believes the mini- and micro-LED markets, which compete with the LCD screen market, will further increase revenue growth. The firm guided for Q4 sales of $465 million (up 162%) and per-share earnings of around $2 (up around 600%!), both in line with estimates and—if realized—a third straight quarter of record revenue and profitability. Analysts see earnings remaining elevated at least through next year.

Technical Analysis

After punching through the ceiling of a four-year trading range last November at 28, KLIC ran up to 60 in April before correcting sharply (29% in two weeks!). The stock rallied to marginal new highs before suffering another sharp dip (24%). Earnings finally catapulted the stock to decisive new highs earlier this month, and the dip after that was controlled, with buyers coming back last week. We advise entering on weakness.

KLIC Weekly Chart

KLIC Daily Chart

(MRVI)

Why the Strength

Maravai LifeSciences is a leading provider of nucleic acids for biotech research, and for therapeutic and vaccine programs. Creation of vaccines for COVID-19 in particular is underpinning a surge in business, because using mRNA-based biotech – as most COVID vaccines do – requires a unique set of nucleic acid inputs that Maravai supplies. In particular, mRNA strings need “capping,” the attachment of an enzyme that protects the end of the mRNA sequence from being seen as a foreign intruder that the body needs to attack. Maravai’s version, called CleanCap, is being used by Pfizer-BioNTech’s vaccine and is also seeing increased demand from other mRNA-based vaccines and researchers globally. Surging demand has produced eye-popping results: In Q2, revenue was up nearly five-fold to $218 million, the vast majority from nucleic acids, while EBITDA grew more than 800% year over year to $165 million. Right now, Maravai has agreements to supply 13 biotech firms with CleanCap, with another 12 more agreements in late-stage review and two dozen more in term sheet review. The pandemic will keep demand high, but it’s also clear the success of vaccine programs will encourage biotech players to expand planned uses of mRNA treatments, including for the flu, malaria and cancers. The success of nucleic acids overshadows the fact the rest of Maravai’s business is doing very well too. Management projects that non-COVID business in nucleic acids and in biologics safety testing – needed for gene therapy – will rise 42% this year. EPS should jump to $1.38 this year, from 28 cents in 2020 with revenue tripling to more than $775 million.

Technical Analysis

MRVI went public in December 2019 and made good progress in the months that followed, but with lots of chopping and tedious action along the way. But the recent action looks like a clear change in character—after a shakeout to 36 last month, MRVI went vertical before and after earnings, zooming to north of 60 before finally seeing some selling. It’s extended here, but the first pullback should offer a solid entry.

MRVI Weekly Chart

MRVI Daily Chart

MercadoLibre, Inc. (MELI)

mercadolibre.com

Why the Strength

Latin America is one of the world’s fastest-growing areas for e-commerce, and MercadoLibre, the “eBay of Latin America,” holds the region’s leadership position in digital sales. Mercado stunned the Street with a stellar Q2 report that featured revenue doubling from a year ago, to $1.7 billion, while earnings per share of $1.37 obliterated estimates of 19 cents (the reason for the strength). The latest results were largely driven by a 47% increase in unique active users, pushing the company’s active user base to 130 million e-commerce customers and 76 million active fintech customers. And with an estimated 362 million Latin Americans having internet access, the addressable market is still massive. Management acknowledged this by declaring Latin America the “leading region in the world for e-commerce sales growth,” with the area likely to grow 10 percentage points faster than the rest of the world, while three of the firm’s top markets (Brazil, Argentina and Mexico) are among the top five e-commerce growth markets globally. Meanwhile, the company’s digital payments business, MercadoPago (which many use instead of traditional banks), is also booming. Total payments volume mushroomed 72% and gross merchandise volume (GMV) increased 46% to $7 billion in Q2. Going forward, the firm is focused on quickening delivery times and it just acquired a Brazilian logistics firm, Kangu, to further this goal. Analysts expect the top line to increase 69% in 2021, followed by years of double-digit revenue and triple-digit earnings growth.

Technical Analysis

After last year’s crash, MELI exploded out of the gate and made a giant move before peaking last August around 1,200. A dip below 1,000 followed before the next leg of the bull market began, with shares doubling by January. This was followed by a much longer correction, with MELI rounding out a 38% deep base over the last seven months. Buyers reasserted themselves after the Q2 report, and the stock has set up nicely during the past couple of weeks. The share price is high, but just buy fewer shares; you can start with a small position around here.

MELI Weekly Chart

MELI Daily Chart

NVIDIA Corporation (NVDA)

nvidia.com

Why the Strength

Videogaming is one of the biggest mass markets today, with the number of PC gamers expected to increase from around 1.75 billion in 2020 to nearly 1.86 billion by 2024 (nearly a quarter of the world’s population!). As one of the world’s largest semiconductor companies, Nvidia enjoys a powerful position in this white-hot market, along with an ever-increasing presence in data centers. The fiscal Q2 report showed the extent of Nvidia’s videogame industry dominance, with total revenue rocketing 68% from a year ago, to $6.5 billion, while earnings per share nearly doubled, to $1.04. The superb results were driven by an 85% increase in gaming revenue, which hit a record $3.1 billion, accounting for 47% of the company’s total sales thanks to “exceptionally strong” demand for its Ampere graphics processing units (GPUs) outpacing supply. Encouragingly, Nvidia said that just 20% of its installed base has upgraded to a new Ampere RTX series GPU, paving the way for what management called its “biggest ever refresh cycle” as 80% of clients will need to upgrade in the quarters to come. On the data center front, revenue of $2.4 billion grew 35% from a year ago and 16% sequentially, driven by record sales to hyperscale customers and vertical industries (especially financial services, supercomputing and telecom). What’s more, networking products posted solid results, thanks to upgrades to high-speed products such as ConnectX-6 and new customer wins across cloud, enterprise and high-performance computing. Going forward, Nvidia forecasts $6.8 billion in revenue for Q3 (up 44%), driven largely by accelerating data center demand, a growth rate that will likely prove conservative.

Technical Analysis

NVDA was one of the first names out of the gate after the May growth stock low, and it enjoyed a huge-volume advance to as high as 208 in early July before pulling back. Since then, shares have tested their 50-day line twice (even shook a bit below it two weeks ago), but now the uptrend is resuming—NVDA has galloped to new highs on solid volume following the quarterly report. You can enter here or (preferably) on dips of a few points.

NVDA Weekly Chart

NVDA Daily Chart

Palo Alto Networks (PANW)

paloaltonetworks.com

Why the Strength

An upsurge of cyberattacks globally, while bad news for governments and businesses (the average ransom demand in the first half of 2021 grew an astounding 518%!), is providing a robust growth environment for Palo Alto Networks. This was highlighted in the company’s recent fiscal Q4 report, which showed significant increases in billings, revenue, earnings growth and other key metrics, with Palo Alto’s fourth-quarter revenue lifting 28% as demand soared. Other highlights included earnings per share of $1.60 that beat the consensus by 16 cents and subscription and support sales that increased 36% from a year ago, plus a guidance-beating billings increase of 34%, to nearly $2 billion. Customer accounts increased across all product categories, with 2,500 new ones added in Q4—including 18 new customers spending over $10 million annually. Sub-metrics like deferred revenue (up 32%) also impressed, while full-year free cash flow was up an eye-popping 69% and far larger than earnings. Plus, cross-selling was unusually strong, with 43% of customers now using all three of the firm’s platforms and 28% buying two platforms. Management emphasized the importance of cloud migration to future sales, noting a recent partnership with Google to power its new Cloud IDS with Palo Alto’s VM-Series firewall as an example of the firm’s leadership position in virtual firewalls. Looking ahead, Palo Alto guided for revenue to increase as much as 25% to $5.3 billion in fiscal 2022 (which just started this month), while per-share earnings are expected to jump 18%. A $676 million buyback authorization ties a bow on this package.

Technical Analysis

After breaking out on earnings and pushing above a key resistance at 260 last November, PANW rallied nearly straight up into February before hitting a wall at 400. Shares pulled back into March, then spent the next few months rounding out a nice-looking base. There was one final dip to the 40-week line to shake out the remaining weak hands before last week’s earnings-induced moonshot. We’ll set our buy range down a bit but we’re not expecting a huge retreat.

PANW Weekly Chart

PANW Daily Chart

Sonos (SONO)

sonos.com

Why the Strength

Sonos is a pioneer in wireless home audio – the company began designing its smart speakers before the technology existed for wireless, networked home speakers. Its early focus on the business means it holds one of consumer electronics’ larger portfolio of patents. That collection appears to have gotten more valuable after a federal judge issued a preliminary ruling this month that Google’s smart speakers infringe on Sonos’ patents for its audio offerings. There’s still a lot of litigating to be done around the claim, but it gave a sharp boost to shares, with Wall Street expecting the end result will be a profitable licensing deal with Google, whose speakers, Pixel phones, tablets and Chromecast streaming device all violate patents, according to the lawsuit. Don’t mistake Sonos for a patent troll, though: The company competes well with traditional audio businesses like Bose and big tech like Apple – among professional installers, Sonos believes it’s handily the preferred hardware vendor. The market for smart speakers is still in its early stages, and is getting an additional boost as home theaters continue to extend their popularity from pandemic days. Customers are mainly college-educated, married homeowners, people the company thinks it can sell more product to – most customers, in fact, own four or more Sonos pieces. Among the firm’s new ideas is a new WiFi picture frame with audio in partnership with IKEA and its own subscription audio service. The pandemic definitely helped business, but Sonos is still crushing estimates (Q3 saw a 12 cent profit vs expectations of a 52 cent loss!) and more investors are thinking demand trends will remain bullish for a while.

Technical Analysis

SONO hit all-time highs over 43 in the spring as it crested after a fantastic 2020, but fell through support in May and pulled back into the mid-30s. The stock never really got very bearish, and after testing and holding its 40-week line, found buyers after the Google lawsuit news. There was a quick dip after the news, but SONO is back near multi-week highs as it works to finish up its base. We’re OK starting small here.

SONO Weekly Chart

SONO 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 September 7, 2021.