August 9, 2021

Same Story: More Good than Bad, but Plenty of Chop

Current Market Outlook

We continue to see more good than bad in the market as an increasing number of growth stocks move into new high ground, many other growth stocks set up nicely and even some cyclical names are getting into the act, rounding out nice launching pads. Still, there’s no question the chop factor is still real, as the vast majority of names that pop higher generally attract sellers for at least a couple of days, with more than a few sinking right back to where they started. Overall, we are encouraged by the rising level of leadership, so we’re nudging our Market Monitor up to a level 7, but the game plan remains generally the same—we favor starting small and/or buying on dips or consolidations, while focusing on stocks showing outsized accumulation.

This week’s list is another chock-full of recent earnings winners and other names showing excellent action. Our Top Pick is Alnylam Pharmaceuticals (ALNY), which has lifted off nicely and has a great story.

Albemarle Corporation (ALB)

albemarle.com

Why the Strength

Albemarle makes additives and intermediates for plastics, polymers, agricultural chemicals and pharmaceuticals, but it’s the firm’s exposure to lithium that’s boosting shares. The metal is a key input into batteries for electric vehicles (EVs), which is an industry that should be booming for a long time to come: Already, growing demand and tightening supplies are pushing lithium prices higher, and Albemarle’s 20% control of the global lithium mining market—coupled with annual spending of around $850 million on its operations—put it in a leadership position. The White House’s ambitious proposal for EVs to comprise 50% of all new car sales by 2030 is another bullish factor, perception-wise. To meet this goal, miners will need to produce an estimated five million tons of lithium per year, up nearly 13-fold (!) from last year’s total production. It’s an admittedly tall order, but even if things don’t go exactly as planned, the direction is clear: Demand is going to surge in the years ahead, and Wall Street is betting that Albemarle can rise to the challenge. While second-quarter revenue of $774 million was just 1% higher from a year ago, per-share earnings of 89 cents beat estimates by 7%, prompting Albemarle to raise full-year guidance due to higher lithium sales. Lithium net sales rose 13% in Q2, thanks to a 17% sales volume bump related to increased orders under long-term contracts. The company expects lithium volume growth in the mid-teens for full-year 2021, driven by productivity improvements and North American plant restarts. At this point it’s really about the big-picture story, which should begin to kick into gear in 2022, when analysts see the bottom line leaping 42%, which will likely prove conservative.

Technical Analysis

ALB was cut in half by last year’s pandemic crash, and it took the better part of 2020 for shares to reach the pre-crash peak of 100. It wasn’t until December that ALB was finally able to make new highs as shares soared on EV-related optimism. The stock peaked at 185 in January and pulled back to 135, then spent the next few months rounding out a base. Lift-off came in July after some high-profile upgrades, with last week’s earnings accounting for additional strength; ALB has now surged on four straight weeks of big volume. We suggest buying dips, though we’re not expecting a major retreat.

ALB Weekly Chart

ALB Daily Chart

Alnylam Pharmaceuticals (ALNY)

alnylam.com

Why the Strength

Biotech and medical stocks haven’t been in favor for a while, but some are beginning to pop, and Alnylam has the look of a fresh leader that’s just starting a multi-year period of rapid growth. As we wrote in late June, the company has notched the first and only RNA interference (dubbed RNAi) drugs to win FDA approval. (RNAi is where drugs silence specific genes that cause diseases.) The big attraction now is Onpattro, which treats a disease that messes with peripheral nerves; the drug is steadily picking up steam, with 1,750 patients using it at the end of Q2 (up from 1,050 a year ago) and bringing in $114 million (up 12% from the prior quarter). Givlaari, which treats a family of diseases, is next up, with just 270 patients (up from ~100 a year ago) and with revenues of $31 million (up 24% from Q1); the top brass thinks the drug could eventually bring in $500 million annually! And then there’s Oxlumo (treats a disease that overworks the kidneys), with just $16 million in Q2 revenue (100 patients now on it), up 79% from the prior quarter. Alnylam has many other irons in the fire (including a few in Phase III studies), has a good chunk of collaboration revenue (from Regeneron and Novartis) and even royalties (Leqvio is the only RNAi cholesterol-lowering drug approved in Europe; Novartis is selling it), but product revenue is the big driver these days. And on that front the future is very bright: Product revenue more than doubled in Q2 and the top brass sees that metric up 80% this year; longer term, it thinks it can achieve 40%-plus annual revenue growth through 2025 as up to 500,000 patients use its treatments. The bottom line is still deep in the red, but there’s no question this is a big growth story.

Technical Analysis

ALNY actually popped to new highs a few weeks after last year’s crash, but it’s been very choppy since, with a couple of good weeks pushing it to marginal new highs every few months, followed by long, tedious consolidations. But ALNY looks like a different animal since May, with a strong move back to its high, a late-June shakeout, a few weeks of tightness and then a strong-volume move to new highs last week. The 200 area could offer some resistance, but we’re OK starting a position here or (preferably) on dips.

ALNY Weekly Chart

ALNY Daily Chart

Datadog (DDOG)

datadoghq.com

Why the Strength

Datadog remains a leader in the application performance management (APM) sector, thanks in part to the pandemic-driven digital evolution that’s still accelerating. Its real-time monitoring and analytics platform helps app developers solve problems faster while boosting customer service. Rock-solid second-quarter earnings, along with a sharp increase in full-year guidance, are responsible for the latest strength, with the company reporting “robust” trends surrounding new and existing clients. Revenue grew 67% from a year ago and was up 18% sequentially, driven by 600 new large customers in Q2, up a mouth-watering 59%. (These customers generate $100,000 or more in annual recurring revenue (ARR), accounting for more around 80% of the firm’s total.) Moreover, 28% of its customers are using four or more products (up 15%), which, combined with modest churn, led to yet another quarter of 30%-plus same-customer revenue growth. The company also just announced the launch of a new cloud security management platform with partner Arctic Wolf, and management is planning for more module rollouts going forward. Looking ahead, the company boosted its guidance ($940 million revenue this year, up 56% from a year ago and up from an $886 million estimate before Q2 results), causing analysts to do the same (earnings up 23% this year and 41% next). Long story short, with cloud migration and digital transformation continuing, Datadog still has a huge runway of growth ahead of it.

Technical Analysis

DDOG had a big post-pandemic run, but it effectively topped out in October and had a tough correction, falling 42% from top to bottom and making no net progress for the better part of a year. But the sellers really haven’t been here for a while now—there were many super-low-volume weeks in July—and last week’s report caused a good-looking breakout. DDOG is a bit straight up from the bottom, which can often lead to a short-term wobble; we advise aiming for dips if you want in.

DDOG Weekly Chart

DDOG Daily Chart

Goldman Sachs Group, Inc. (GS)

goldmansachs.com

Why the Strength

Bull Market stocks (and financial stocks as a whole) broke free from multi-year bases last November and enjoyed great runs—and now, after nine-ish weeks of rest, some are beginning to perk up again. Goldman Sachs will never be confused for a young upstart, but it’s one of the most direct plays on the health of the financial markets, and sure enough, its business is booming and crushing estimates. The stock has begun to come back to life after a solid Q2 report: Earnings of more than $15 per share topped expectations by nearly $5, with business driven by surges in investment banking (revenues up 36% from the prior year, led by big increases in financial advisory services) and asset management (up 144% from last year’s pandemic-depressed quarter, with equity investment-related revenues quadruple that of a year ago). Yes, some of that increase is driven by the stock market, but Goldman’s equity portfolio is mostly private entities, including a good amount of real estate and senior and student housing. Of course, if you dig too deep into Goldman’s (or any other investment firm’s) balance sheet and income statement you’ll go cross-eyed, but it’s no secret that a period of rising asset values and money flowing all over the place (capital raises, new issues, etc.) is super-bullish for the company—after a few years of earnings in the $20 to $24 per share range, the bottom line is expected to jump to $52 this year and hold north of $37 next, both of which are almost surely conservative. Management significantly hiked the dividend last month as well (2.0% yield), putting a cherry on top of this solid story. As far as blue chips go, we like it.

Technical Analysis

GS got moving with the vaccine news in early November, breaking out around 225 and running all the way 392 in early June. The initial pullback was fairly sharp (down 11% in just two weeks), but shares quickly found support near 350; there was another test of that support area during the mid-July market shakeout, but since then GS has pushed higher, nosing to new price highs last Friday. We actually think there could be some near-term curveballs, so we advise starting small here or on dips and buying more if the stock kicks into gear.

GS Weekly Chart

GS Daily Chart

Lending Club (LC)

Why the Strength

Fintech has revolutionized more than just the way people do business; it has also made accessing credit easier for small borrowers while lowering their monthly payments and improving credit scores. LendingClub runs the world’s largest peer-to-peer online lending marketplace, but has also branched out into traditional banking through its recent acquisition of Radius Bancorp, making it the only full-spectrum fintech marketplace bank in the U.S. For customers, this means having access to new products and services that will help them pay less when borrowing and earn more when saving. For LendingClub, the pivot to traditional banking means it can fund loans to its 3.5 million members with cheaper capital, namely the low-cost deposits brought in through Radius. The market couldn’t help but be excited by the evident success of the firm’s new hybrid bank model, especially after last week’s earnings report. LendingClub’s first full quarter of operating as a digital bank was the most profitable one in its history and showed the Radius acquisition is paying off. LendingClub’s Q2 loan originations were 84% above the prior quarter, crushing forecasts of 25%-ish loan growth. Even more eye-catching was the 93% sequential rise in revenue (up 406% from a year ago), which obliterated consensus forecasts, plus a 49-cent earnings beat of 11 cents per share. As part of its new business model, LendingClub plans to hold 20% of all originated loans, which is inspiring more confidence for investors. Moreover, the average yield on its loan portfolio jumped from around 5% in Q1 to nearly 7%. Obviously, there’s risk here if the economic outlook dampens, but the hybrid model looks like a winner; analysts see sales and earnings lifting nicely from here.

Technical Analysis

For much of its trading history, LC has failed to live up to investors’ expectations, nosediving all the way to 5 by last year’s panic low. The recovery from there was big, but extremely wild, with a few massive downturns, but we think there’s a chance the Q2 report changed the landscape—LC gapped to new highs on record volume, moved higher after, and the recent dip has been modest at best. It’s not for the faint of heart, but nibbling on some shares here or on dips sounds fine by us.

LC Weekly Chart

LC Daily Chart

Lightspeed POS Inc. (LSPD)

lightspeedhq.com

Why the Strength

Lightspeed (covered in the June 14 report) provides cloud-based, omnichannel point-of-sales (POS) and e-commerce software solutions for retail, hospitality and jewelry merchants. The company is benefiting from a summer rebound among U.S. and European brick-and-mortar retailers and restaurants, and its recent pivot to a digital sales model is also bearing fruit. In the latest quarter, Lightspeed delivered consensus-beating revenue that was 220% above the year-ago quarter, including an organic software and payments revenue increase of 78% and gross transaction value (total items sold multiplied by the price collected—GTV for short) that was 203% higher, to over $16 billion, and hospitality GTV that rose 380% higher as partner channels roared back to life as Covid restrictions have eased. The company scored some notable customer wins in the quarter, including SpaceX and Telluride Ski Resort, and there were was plenty of expansion, including in the U.K. and five European countries. Lightspeed also closed its acquisition of Vend, a cloud-based retail management software company, and established a partnership with leading restaurant reservation platform OpenTable. Combined with the buyout of B2B platform NuORDER and online shopping cart provider, Ecwid, Lightspeed is now the technology partner of choice for over 150,000 merchants, and management sees it transforming the firm into the premier one-stop commerce platform. Further out, the firm believes its merchant financing arm, Lightspeed Capital, can become a “very meaningful” driver of growth and profitability. Wall Street sees full-year revenue rising 138%.

Technical Analysis

LSPD experienced a meaningful rally from last year’s crash low to the growth stock peak earlier this year, before correctly sharply and doing a lot of backing and filling during the next few months. A pullback to the 50-day line in June set the stage for last week’s rally to new highs, including last Thursday’s earnings pop. The firm did announce a secondary offering this morning, but the dip looks normal to us.

LSPD Weekly Chart

LSPD Daily Chart

ON Semiconductor (ON)

www.onsemi.com

Why the Strength

Semiconductors remain a high-growth business, with the global industry seen expanding 12% a year in the middle of what researcher IDC says is a super cycle of demand, thanks to the Internet of Things and electrification. But that doesn’t mean all chips are created equal. When the sector isn’t in a pandemic-induced global supply crunch as it is now, some chips are commodities. ON Semiconductor makes thousands of circuits, many of which have been “fab fillers,” selling into products that tend to surge and decline with the economic cycle. But new CEO Hassane El-Khoury took over in December (leaving Cypress Semiconductor) with a focus on shifting ON toward higher-margin pieces that should see steadily rising demand, such as those for autonomous and electric vehicles and renewable energy. The early signs of the strategy are promising: As the firm shifted capacity into making more profitable chips, ON’s second quarter sales grew 38% year over year. That included a 69% jump in sales to automakers, who feature an increasing number of computing-heavy features in their models, from blind-spot sensors to big driver displays. Revenue for Q3 should be more than $1.6 billion, a 23% gain, with EPS of 67 cents (more than double a year ago). Some of the growth stems from pricing power that should abate as global supply chains come back to normal, but the firm should make up for that with expanding its manufacturing capabilities—the company recently opened manufacturing in a New York facility that will fabricate 300 millimeter chips, a size in demand these days for cloud computing and other applications. Even better, after the Q2 report, the top brass hosted a bullish Analyst day, saying it expects margins to surge over the next four years with free cash flow likely to reach $2 billion annually by 2025.

Technical Analysis

ON had a big run during the pandemic, effectively topping around 42 in February (though it did make one more modest new high in April). The correction after that was tedious, like so many stocks, though there were some signs of support along the way (including two big-volume support weeks in mid-May). After tagging the 40-week line, shares began to bounce, but it was last week’s Q2 report and Analyst Day that launched ON to new highs. We’re OK starting a position here with a tight stop.

ON Weekly Chart

ON Daily Chart

Paycom Software (PAYC)

paycom.com

Why the Strength

Paycom has been a great long-term growth outfit, and after hitting a speedbump last year, looks to be back on track. Paycom offers small- to medium-sized companies a platform for human resources functions, and its pitch is simplicity: One database in which companies as small as five people can manage payroll, timecards, benefits, new hires and terminations. In a competitive segment with much larger competitors, Paycom makes sure every client has a dedicated sales representative who can guide them through technical issues as well as make frequent check-ins to ensure satisfaction. After a string of earnings gains, Paycom’s earnings were flat last year (certainly not a bad showing given what was going on), while adding to its customer base, which now stands at over 31,000. Investors are excited about a new offering called BETI, which allows clients’ employees database access to craft their own paycheck instead of going through HR. Workers like it because they can see the effects of payroll deductions on their take-home pay before making changes, and companies like it because it puts most of the payroll work onto workers. Paycom just started selling it in July and more than 1,000 clients signed up. Management has also increased its target company size from a maximum of 5,000 employees to 10,000, which both broadens the potential client base and should bring more revenue, since companies pay a base fee for Paycom’s services plus a per-employee cost. Q2 results easily topped expectations (97 cents per share beat by 14 cents), and Wall Street sees 20%-plus sales and earnings growth going ahead. The fact that the job market could be heating up doesn’t hurt, either.

Technical Analysis

PAYC was a leader before the pandemic but really wasn’t one during the past year; indeed, after topping near 470 late last year shares sunk as much as 36% during the next five months. The rebound from the low was just OK, but last week’s earnings reaction looks definitive, with shares gapping back toward their 2020 highs on the largest weekly volume since October. We like the fact that PAYC enjoyed three straight days of buying, though we suggest aiming for dips as it tests resistance.

PAYC Weekly Chart

PAYC Daily Chart

Under Armour, Inc. (UAA)

underarmour.com

Why the Strength

A major turnaround that began last year continues to gain traction for footwear, activewear and casual apparel maker Under Armour. This was seen in an estimate-smashing second-quarter report, a big reason for the stock’s latest strength, along with recent upgrades by some big-name Wall Street institutions. In Q2, Under Armour saw revenue rise 91% from last year’s virus-depressed quarter, to $1.3 billion, and reported per-share earnings of 24 cents which beat estimates by a jaw-dropping 18 cents. But a more salient point was made when the company finished the first half of 2021 with 12% more revenue than in the first half of pre-virus 2019—along with a 26% inventory reduction compared to 2020—which let everyone know the company’s restructuring efforts are succeeding. Wholesale revenue rose 157% to $768 million, while direct-to-consumer revenue expanded 52% to $561 million, led by 105% and 99% increases in apparel and accessories sales, respectively, and an 85% jump in footwear revenue. Under Armour expressed confidence that the bulk of its internal transformation is behind it, setting a “robust foundation” for the company to focus on full-priced premium product sales, which it views as a key earnings growth driver. Management also sees the global sportswear market growing at an annualized rate of 8% over the next four years and plans to take advantage of this opportunity by doubling down on new product development and expedited go-to-market strategies. For fiscal 2021, the company expects revenue growth in the low-twenties percent range (compared to prior guidance in the high-teens), and analysts see earnings north of 50 cents per share this year and a 20% gain in 2022; both are almost surely conservative. Under Armour looks like both a solid reopening and turnaround play.

Technical Analysis

UAA rallied to 23.5 in February, which effectively marked the end of its post-October rally. There was a breakout attempt in May but that fell flat, with shares then dipping all the way to their 40-week line. The initial bounce attempt was rather weak, but last week looks decisive, with UAA surging back toward its old highs on a few days in a row of massive volume. We think any minor weakness is a chance to start a position.

UAA Weekly Chart

UAA Daily Chart

ZoomInfo (ZI)

zoominfo.com

Why the Strength

We’ve been keeping a distant eye on ZoomInfo for months because it has all of the characteristics of a winning stock—strong sales growth, surging earnings and a great, long-lasting growth story. The story here revolves around sales reps and the huge amount of time (some estimate up to one-third of their time) they spend either gathering, entering and/or tracking data when it comes to potential clients; in other words, time spent not doing what they’re hired to do, which is sell. Enter ZoomInfo, which has what it calls the leading go-to-market intelligence platform: It offers a comprehensive, dynamically updated view on over 100 million companies and 130 million professionals, telling salespeople not just who works where, but if the firm is a high-priority target, if a person is a key decision maker and, of course, contact information, too. (It also ranks the best targets and allows users to track deal progress and see lots of analytics.) The barriers to entry here are big given the scale of what ZoomInfo looks at (100 million contact record events daily; monitors 50 million web domains; 300 human researchers, not to mention a proprietary engine to crunch and verify all the data), and the fact that it’s integrated into many of the top CRMs (Salesforce, HubSpot, Marketo) is another plus. Given all of that, it’s no surprise that the platform is a hit and ZoomInfo is growing rapidly—customers are beating a path to its door (north of 20,000 paying customers, including 1,100 with more than $100,000 in annual payments), sales have been consistently growing at 50%-ish rates and earnings growth is triple digits. As the firm expands its offerings (more intelligence, insight and automation), there’s no reason growth can’t remain rapid and reliable for a long time to come.

Technical Analysis

ZI came public last June and, after a good couple of weeks, entered what turned into a 13-month post-IPO launching pad. As with many growth names, shares began to perk up in May (six weeks up in a row), and a tighter five-week rest (including a super-tight area two weeks ago, a clue the sellers had left the building) paved the way for last week’s massive-volume breakout. A second share offering priced today (all closely-held shares, no dilution) knocked the stock lower; we’re OK entering here, but use a loose leash.

ZI Weekly Chart

ZI 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 16, 2021.