We’ve moved into the second half of the year, but the overall picture is still the same for the stock market—there are some positives out there, but we’re still stuck in a downtrend—all indexes and growth funds are below key intermediate- and longer-term moving averages, and the fact that we’re seeing lots of stocks still hitting 52-week lows every day (even on big up days) tells us the broad market remains on the outs. All in all, it’s important to keep your eyes open and to stay flexible; the market can turn up at any time given that it’s looking months into the future, but as we’ve been writing for months, we have to see strength develop first, so defense remains the name of the game.

This week’s list is a hodgepodge of ideas, from big, steady-Eddies to smaller up-and-comers that want to get moving if the market can stabilize. Our Top Pick is an off-the-bottom name whose RP line has turned strong and whose growth is rapid and should accelerate.

Cabot Top Ten Trader Issue: July 5, 2022

The Waiting Game

We’ve moved into the second half of the year, but the overall picture is still the same for the stock market—there are some positives out there, with more names resisting the decline, and we’re even seeing growth-oriented indexes, funds and some stocks show some relative strength (today was another example), which is often a plus for the overall market. However, when looking at the rubber-meets-the-road evidence, we’re still stuck in a downtrend—all indexes and growth funds are below key intermediate- and longer-term moving averages, and the fact that we’re seeing lots of stocks still hitting 52-week lows every day (even on big up days) tells us the broad market remains on the outs. All in all, it’s important to keep your eyes open and to stay flexible; the market can turn up at any time given that it’s looking months into the future, and let’s not forget that earnings season is around the corner, too. But as we’ve been writing for months, we have to see strength develop first, so defense remains the name of the game. Our Market Monitor remains a level 3.

This week’s list is a hodgepodge of ideas, from big, steady-Eddies to smaller up-and-comers that want to get moving if the market can stabilize. Our Top Pick is Global Blood Therapeutic (GBT), which is an off-the-bottom name whose RP line has turned strong and whose growth is rapid and should accelerate.

Stock 1

Alkermes (ALKS)

Why the Strength

An increase of Alzheimer’s cases as the world’s population ages, along with an ongoing opioid crisis, is creating explosive growth in the market for treating central nervous system (CNS) disorders. Alkermes, which develops drug delivery technologies and owns several proprietary treatments for CNS disorders—including schizophrenia, addiction, Alzheimer’s and multiple sclerosis—is a key player in this field. The company’s pipeline includes eight neuroscience and oncology drug candidates in various stages of testing, including its leading candidate Nemvaleukin alfa (for platinum-resistant ovarian cancer), which was recently granted fast track designation by the FDA based on the drug’s potential for anti-tumor activity. (The company has also initiated clinical studies with the aim of soon registering the drug as a therapy for mucosal melanoma.) Akermes’ other approved drugs helped the company deliver a solid first quarter, which saw total revenue rise 11% from a year ago to $279 million and per-share earnings of 12 cents beat the consensus by 11 cents (reasons for the strength). By product, Q1 sales of Vivitrol (used to treat opioid and alcohol addiction) jumped 14% to $85 million, while sales of antipsychotic drug Aristada soared 31% to $73 million and the recently launched oral antipsychotic drug Lybalvi garnered revenue of $14 million. The company emphasized that early use trends and feedback from healthcare providers highlight Lybalvi’s value as a future sales leader in the market for treating schizophrenia and severe bipolar disorder. Going forward, analysts predict a mild sales dip for 2022, but see top- and bottom-line growth resuming in 2023 and beyond. The Q2 report is expected in late July.

Technical Analysis

ALKS hit a two-and-a-half year high at 32 last October, which proved to be the stock’s high-water mark. Shares nosedived by 10 points in November before establishing a low around 22 the next month. From there, a jagged rally carried the stock back up to 30 by the end of April. Two more months of volatility have followed with shares making no headway, yet ALKS refused to turn tail during the latest market sell-off and, today, pushed above some near-term resistance. If you’re game, you can consider nibbling here or (preferably) on weakness.

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Stock 2

Alliance Resources Partners (ARLP)

Why the Strength

One by one, commodity sectors have been taking it on the chin, with copper, steel and other metals getting hit first, then shipping and more recently energy stocks joining in on the downside. And yet to this point, some coal stocks have been relatively firm—sure, maybe they’re next to fall, but the longer they can hold up, the greater the chance they can have another run down the road. Alliance Resource Partners is the second largest coal producer in the eastern U.S., with seven underground mining complexes in Appalachia and Illinois, and it also has a decent royalty business, with nearly 57,000 acres of oil and gas (86% is in the Permian and Anadarko basins) assets. Alliance isn’t a standstill operation, with plans to invest in many newer energy areas (battery metals, EV charging infrastructure, solar power grids, etc.), but there’s no question it’s the firm’s current assets that are keeping buyers interested: Despite rail congestions, coal EBITDA lifted 46% in the first quarter (and made up 84% of cash flow) while oil and gas royalties more than doubled. But more importantly it looks like future results could be even better despite all the economic headwinds—first, the aforementioned rail issues are clearing up, which should boost volumes; second, 94% of coal volumes are committed for the full year, so there’s not a ton of downside even if prices temporarily slip; and given how tight supplies are (partly due to the Russian invasion), management thinks 2023 could see even higher prices and margins. All of that is leading to much higher dividends (7.5% current dividend with solid increases likely for the rest of this year; next ex-dividend date is early August) and plenty of cash to expand its investments in other areas as mentioned above. Analysts see earnings booming this year and up another 16% next. As a heads up, Alliance does produce a K-1 at tax time.

Technical Analysis

ARLP isn’t in the early stages of its advance, having trended higher for over a year, and it did take a hit three weeks ago when most energy/commodity names saw selling. But the overall resilience is impressive, with shares down “only” 16% from all time highs and with the stock well above its lows from two weeks ago. It’s low priced and volatile, but if you’re aggressive you could nibble here with a stop under the recent lows.

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Stock 3

Autonation (AN)

Why the Strength

After a big post-crash run, many commodity- and industrial stocks saw their stocks lag for much of 2021 as investors anticipated their huge earnings rises would reverse as the world turned right-side up—but when that didn’t happen (that earnings stayed elevated or even rose further), those names had another sustained run. We think a similar situation could play out with AutoNation, whose stock “should” be acting poorly; as the country’s largest auto dealership (it also has a good aftermarket business), higher borrowing costs and a possible recession (a big sale from a large holder also took place) should take a huge bite out of business following many quarters of big results (partly due to higher selling prices as chip and other shortages crimped auto supply). But, instead, the stock is hanging in there so far, and we think it’s because more investors are figuring that earnings, even if they do slough off a bit, are going to remain through the roof—despite selling 3.5% fewer cars in Q1 (all on the new car side of the business), revenue rose 14% (used car revenue was up a whopping 47%; new car “only” up 6%) while gross profit lifted 27% and earnings per share more than doubled. The “per share” part of that is key—AutoNation has been using tons of money buying back its stock during the past couple of years due to the low valuation (just 5 times earnings right now), with $381 million spent in the first quarter to buy back about 6% of all shares outstanding. All in all, the share count was down more than 25% year-on-year at the end of Q1 and down nearly 33% from two years before, and AutoNation bought back another chunk in early April and had $376 million remaining on its buyback authorization even after all that. That’s a big reason why Wall Street sees earnings north of $23 per share this year but also well above $20 next year, even after factoring in some business weakness. It’s not a true growth story, but if the firm can get through this economic storm in good shape, the stock is poised to do well.

Technical Analysis

AN hasn’t done much since topping last October, and that’s a very good thing—it came into this week down only 14% from its highs and has been etching slightly higher lows since April (97, 102, 103, 110). Of course, all bets are off if AN plunges toward 100, but at this point it certainly looks like the stock doesn’t want to keel over despite the tough environment. You could nibble here, or just watch it for a decisive push higher.

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Stock 4

Celsius (CELH)

Why the Strength

It’s not easy in any environment to find a growth stock that has great numbers today, is projected to grow rapidly for many quarters to come and whose business should be relatively insulated from any economic potholes—never mind a firm that serves the consumer and thus a huge mass market. But that’s what Celsius offers investors, with a new kind of energy drink that’s proven (according to some neutral studies) to boost metabolism (it turns on thermogenesis, where the body burns calories to generate body heat) and doesn’t have any preservatives, aspartame, high fructose corn syrup and the like. Basically, it looks like the next big thing in the giant energy drink sector—as of April, it was accounting for more than a third of the energy drink market’s growth, leaving it #4 in overall market share with just over 4%, and there should be tons more where that came from, mainly as distribution expands: In March it began a full nationwide rollout into Sam’s Club locations and expanded its presence in WalMart to 4,400 stores, while also starting a nationwide move into 6,000 Circle K locations! The SEC has been sniffing around here in relation to accounting for an international acquisition, and there’s also a class-action lawsuit surrounding its use of citric acid (which is sometimes termed a preservative), and that news can occasionally whack the stock, FYI. That said, shares actually got a more recent boost on rumors that Pepsi or others could make a move to buy Celsius, so you can choose who to believe. Just going with the evidence, it’s obvious the firm has a big selling brand on its hands and is making huge fundamental progress. Analysts see the triple digit earnings growth continuing through at least 2023 while sales romp higher.

Technical Analysis

CELH crashed from 110 in November to 39 in January as the market collapsed and the class action lawsuit was announced, but encouragingly the stock has held firm since—shares have held support near 40 three times, with the last test (in May) finding huge-volume support after Q1 earnings. The June dip was sharp but etched a much higher low, and after five weeks of choppy action, the stock pushed to multi-month highs today. Given that breakouts have attracted short-term selling of late, we advise aiming for dips if you want in.

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Stock 5

Global Blood Therapeutic (GBT) ★ Top Pick

Why the Strength

Sickle-cell disease (SCD) is a historically ignored genetic affliction in which red blood cells become rigid and sickle-shaped, slowing blood and oxygen flow throughout the body. SCD has a tremendous effect on the lives of people with the condition, cutting their lifespans short by 30 years on average. Annual health care costs of $286,000 isn’t unusual for people suffering with associated conditions, such as stroke. About 152,000 people in the U.S. and Europe suffer from SCD – primarily people of Mediterranean and sub-Saharan Africa ancestry. That’s where Global Blood Therapeutics comes in: The firm sells Oxbryta, a once-a-day oral treatment that inhibits the hemoglobin polymerization leading to the sickle shape. FDA-approved in late 2019 for patients 12 and over, and in December for patients over 4, real world outcomes for the drug have been very good, with a 37% drop in hospitalizations and a 52% drop in transfusions. Global Blood Therapeutics sold $55.2 million of Oxbryta in the first quarter this year on 9,200 new prescriptions, a 41% year-over year revenue gain thanks to the pediatric launch and the easing of COVID restrictions, which had prevented potential patients from getting the drug. The company sees a near-term opportunity to potentially reach 350,000 patients, with commercial approval in February for the E.U., and progress toward approval in the U.K., Brazil and elsewhere. GBT’s drug pipeline also focuses on SCD, including Inclacumab, a Phase III treatment for preventing chronic vaso-occlusive crises (tissues deprived of oxygen). The top brass sees sales up 15% sequentially in Q2, while Wall Street estimates sales can lift rapidly (42% this year, 60% in 2023) for a long time to come.

Technical Analysis

GBT has been mired in a huge downtrend for the past couple of years, but the interesting action began last summer, when shares found repeated support in the 25 area. All looked lost when GBT nosedived to new lows for a few weeks in May and June, but that may have been the final shakeout, with shares enjoying three straight weeks of above-average buying volume and with the RP line (not shown) quickly reaching a 12-month peak. There’s resistance above here, but if you want in, we’re OK with a small bite here or (preferably) on weakness.

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Stock 6

Legend Biotech (LEGN)

Why the Strength

The global market for blood cancer treatments was valued at $44 billion last year and is expected to double by the end of this decade. Legend Biotech is a leading commercial-stage biotech that develops novel therapies for these and other types of cancers. While the company has a burgeoning pipeline of solid tumor and hematologic malignancy treatments, its blockbuster is Carvykti, a recently FDA-approved chimeric antigen receptor T-cell (CAR-T) therapy that genetically modifies T-cells so they’re programmed to fight cancer cells for the treatment of the rare blood cancer multiple myeloma. The one-time CAR-T treatment was jointly developed and commercialized with Johnson & Johnson’s subsidiary Janssen and boasts a remarkable 88% overall response rate and a complete response rate of around 78% (where all signs of cancer are removed)! Moreover, four out of five patients showed no detectable cancer in blood or bone marrow at least 18 months after a Carvytki infusion. Johnson & Johnson is sanguine over the results and estimates peak sales of over $5 billion for the treatment, while a major Wall Street bank has just upgraded Legend based on the immense commercial prospects for the drug (a reason for the strength). Additionally, Europe’s version of the FDA just recommended the drug’s approval in the E.U., opening the door for even bigger potential sales. On the financial front, the bottom line is deep in the red and revenue thus far is mostly from milestone payments. But cash holdings of nearly $800 million should provide plenty of cushion for the firm as it focuses on bringing other therapies to market. Analysts see revenues ramping to $300 million next year, which given the way these launches go, will probably prove conservative.

Technical Analysis

LEGN broke out of a post-IPO base last May and, in choppy fashion, eventually leapt to a new peak at 58 by October. A five-month correction followed (down 45%) with the market, but LEGN turned a corner earlier this spring and, after a sharp shakeout in June, has accelerated higher and is almost back to the October peak. Given that stocks have tended to dip after approaching resistance, we’ll set our buy range down a couple of points if you want to take a stab at it.

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Stock 7

Northrop Grumman (NOC)

Why the Strength

2021 was a record year for orbital rocket and satellite launches, and this year is expected to set another milestone in both categories. Meanwhile, the U.S. government is calling for a renewed push into space exploration—factors that are providing fresh prospects for aerospace contractors like Northrop Grumman. The company is well known as an international defense technology firm with a leading position in autonomous systems (i.e. unmanned aircraft such as drones), but space tech is where much of its recent revenue opportunities have come from. Northrop recently noted that while the Pentagon’s budget has increased by around 5%, NASA’s proposed 2023 budget is up nearly twice that amount. The company just secured a $2 billion contract from the United Launch Alliance (led by partners Boeing and Lockheed Martin) to supply GEM 63 solid rocket boosters to propel Amazon’s Project Kuiper satellites (for providing broadband internet) into space. Consequently, Northrop sees space segment sales of over $11 billion this year, and analysts predict that space could account for a third of Northrup’s operating profit in 2022, which would make it the firm’s new revenue leader. Northrup’s defense business, meanwhile, is heating up as the firm just won a $338 million Navy contract to research alternatives and new capabilities for H-1 avionics and weapons, while the U.S. Defense Department recently awarded the firm a contract to continue developing missiles to intercept hypersonic weapons (some of which have been seen in the Russian war). Of course, this isn’t a great growth situation—in Q1, revenue of nearly $9 billion was down 4% from a year ago but up 2% sequentially, while EPS of $6.10 was down 7%. But there’s surety here (Northrop reported a $76 billion backlog that’s over two times annual sales), the valuation is reasonable (21 times earnings; 1.4% yield) and analysts see earnings picking up steam going forward.

Technical Analysis

NOC’s bull market over the last 18 months has occurred in two stages. The first stage began in early 2021 when shares rocketed from 300 at the start of the year to just over 400 in late October. A sharp pullback to 345 followed at the end of the year, then came the second stage when NOC catapulted to 493 (up over 40%) earlier this year. Nearly four months of backing and filling have followed that peak, though resistance has been tough to crack; today’s sharp drop came after the 490 area again brought in sellers. We’ll set our buy range up from here, thinking a quick push back toward today’s highs would be meaningful.

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Stock 8

Perrigo (PRGO)

Why the Strength

Perrigo makes over-the-counter pharmaceuticals for sale in North American and European markets, including cough and allergy medicine, pain and sleep aids, skincare and digestive treatments, as well as nutrition products and contraceptives. A couple of controversial developments have catapulted Perrigo into the headlines, serving as a source of the strength. The first one is the baby formula shortage in the U.S., due partly to a February recall by one of the nation’s largest manufacturers. In May, Perrigo said it expects the shortage to persist “for the balance of the year,” but emphasized its manufacturing facilities are running at 115% of capacity. Perrigo is also working with major retailers like Target and Walmart to keep store shelves stocked with as much product it can provide each week, focusing on four of its main formulas (at the FDA’s request) but also working on others. The other big news development is the Supreme Court’s overturn of Roe vs. Wade, which Wall Street believes will have a material impact on sales of Perrigo’s OTC contraceptives, including its Option 2 emergency contraceptive pill (a generic version of the Plan B morning-after pill). A major institution wrote there is “no company that could benefit more” than Perrigo in the wake of the Court’s decision. On the financial front, the company reported Q1 revenue of just over $1 billion that improved 6% from a year ago while beating estimates. Per-share earnings of 33 cents missed the consensus by 9 cents due to cost headwinds. However, management raised full-year midpoint growth guidance from 4% to 9% in the wake of its acquisition of HRA Pharma, but more important is the potential upside from the factors mentioned above—analysts see earnings lifting 39% next year, and the 2.5% dividend yield doesn’t hurt, either.

Technical Analysis

PRGO hit a major peak back in 2015 and has spent years falling, first on its own and then, more recently, due mostly to the market. But we think the last few weeks could be a change in character—PRGO saw two big-volume buying weeks right off the bottom, and after meeting some resistance near its 40-week line, has pushed above it on another round of good volume. If you want in, you could start small here with a stop near the 50-day line.

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Stock 9

Trip.com (TCOM)

Why the Strength

Think of Trip.com as the Chinese version of Expedia but with a better share of its key market. For that reason, the company has received mixed reactions from Wall Street – China is a massive domestic travel market, and that makes up some 90% of Trip.com’s business, though Chinese travelers going abroad was a significant growth area pre-pandemic. In 2019, the franchise generated sales of $5.3 billion and EPS of $1.54. Unlike other regions, however, China is still is the midst of pandemic-related crackdowns that make business difficult for the online bookings business, with COVID-era sales down more than 40%, and the environment is still weak: China’s Q1 domestic air travel was down about 80% and hotel revenue down 50% compared to 2019. Still, business is improving enough to give investors hope. Management sees some regions in China surpassing pre-pandemic levels of hotel bookings, and rebounds from successive government locks downs happen faster with Chinese travelers eager to get going when restrictions ease. Still, for Trip.com, a full recovery in China seems to be at least a quarter or two away. The Hong Kong-based business isn’t just China, though, and non-China business is booming, with airfare bookings up 270% in the first quarter, and hotel bookings back over 2019 levels, while management has been doing a good job of cutting costs – adjusted operating expenses are 40% lower than 2019. Even with all the struggles, Trip.com should make money this year (it nearly broke even in a tough Q1), and 2023 is likely to hold the real prize as the industry rebounds significantly just like so many other travel-related areas have.

Technical Analysis

TCOM has been going south for a while, and like many Chinese peers, it had a huge shakeout in March that found massive-volume support. There were a couple of retests of the 18 area during May and another near 20 in June, but following Q1 results last week, TCOM took flight, closing north of its 40-week line for the first time since late 2021. We’re OK nabbing some here or on dips with a loose stop.

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Stock 10

United Therapeutics (UTHR)

Why the Strength

United Therapeutics is a biotech addressing unmet medical needs of patients with chronic and life-threatening cardiovascular and infectious diseases. United’s major focus is helping pulmonary hypertension (PH) patients by offering four FDA-approved drugs for relieving PH symptoms, including Adcirca, Orenitram, Remodulin, and its leading drug, Tyvaso. (United also offers Unituxin for pediatric patients with high-risk neuroblastoma.) In Q1, United’s revenue jumped 22% to $462 million, while per-share earnings of $4.71 beat estimates by $1.07. Q1 sales of Tyvaso increased an eye-opening 40% from a year ago. More important, the drug’s potential has increased following an FDA-approved label expansion to include treatment of PH associated with interstitial lung disease (ILD)—a big reason for the stock’s recent strength. The company sees further growth opportunities for Tyvaso based on expanded use and United’s growing prescriber base in the ILD market, with a goal of reaching 6,000 patients on the treatment by the end of 2022. United isn’t putting all its eggs in the Tyvaso basket, however, as its pipeline includes one Phase I and seven Phase III product trials—mainly involving PH treatments—plus eight products in the prototype, registration or pre-clinical phases. (The firm is targeting 25,000 new patients for its other therapies by the end of 2025.) United has also made a foray into the burgeoning area of xenotransplants, recently supplying a gene-edited pig’s heart for a human transplant patient and a xeno kidney for another patient, with plans to further manufacture both organs at a new facility in West Virginia. Sales should lift 12% both this year and next with earnings likely advancing at a faster clip, even as the valuation looks low.

Technical Analysis

UTHR’s upside run petered out last April and kicked off a long sideways phase with multiple tests of the 40-week line along the way. Then came a drop in February on earnings, but that ended up being the bottom, with UTHR slowly making its way back and then exploding to new highs in May. Encouragingly, the breakout has stuck, with shares holding near their highs. If you don’t own any, we’re OK taking a swing at it here or on minor weakness.

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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 bold.

The next Cabot Top Ten Trader issue will be published on July 11, 2022.

About the Analyst

Mike Cintolo

A growth stock and market timing expert, Michael Cintolo is Chief Analyst of Cabot Growth Investor and Cabot Top Ten Trader. Since joining Cabot in 1999, Mike has uncovered exceptional growth stocks and helped to create new tools and rules for buying and selling stocks. Perhaps most notable is his development of the proprietary trend-following market timing system, Cabot Tides, which has helped Cabot place among the top handful of market-timing newsletters numerous times.