It’s about at this point in a bear phase where investors start to throw up their hands. But it’s important to stay in touch: While the past two weeks brought most stocks lower, the selling was focused on areas that hadn’t yet gotten hit, while some of the “leaders” of this bear phase are actually trying to hold up. If you want to play a bounce, we actually think some of those areas could prove fruitful, though of course we’d keep things small and stay in an overall defensive stance.

This week’s list reflects all of this, with names from a handful of areas that have been forming higher lows in recent weeks (or months) and even showed some solid support (or even upside volume) of late. Our Top Pick is a Chinese EV player that’s showing excellent power and sports fantastic growth.

Cabot Top Ten Trader Issue: June 21, 2022

Some Wheat Separating from the Chaff

It’s about at this point in a bear phase where, after many months, a few false rallies and mountains of bad news, that investors start to throw up their hands, swear off the market and focus on other things—and, to some extent, that’s fine, as the trends definitely remain down despite today’s solid bounce, so more time is needed before the market confirms a fresh uptrend. But it’s important to stay in touch: While the past two weeks brought most stocks lower, the selling was focused on areas that hadn’t yet gotten hit, while some of the “leaders” of this bear phase are actually trying to hold up; Chinese names, biotechs and even some former growth leaders have etched higher lows in recent weeks. If you want to play a bounce, we actually think some of those areas could prove fruitful, though of course we’d keep things small and stay in an overall defensive stance. Our Market Monitor remains at a level 2, though we’ll be watching to see if some of this recent resilient action can continue.

This week’s list reflects all of this, with names from a handful of areas that have been forming higher lows in recent weeks (or months) and even showed some solid support (or even upside volume) of late. Our Top Pick is Li Auto (LI), a newer (and very volatile) Chinese stock that is a big and growing player in that country’s EV market. Try to buy on weakness.

Stock 1

Argenx (ARGX)

Why the Strength

A Belgian immunology researcher, Argenx released its first commercial drug in Q1, generating better-than-expected sales. The drug, Vyvgart (efgartigimod), treats generalized myasthenia gravis (gMG) in adults who test positive for the anti-acetylcholine receptor antibody. It’s a rare chronic autoimmune disease that causes weakness in skeletal muscles controlling the eyes, mouth, limbs and, in potentially life-threatening situations, the throat. It was approved by the FDA in December and in its first full quarter on the market sales tallied $21.2 million from about 350 patients. Wall Street had expected initial sales of about $6 million, so it was obviously a good surprise. Management credits the beat to its experienced sales force and early work with insurance companies. There is some belief, too, that Q1 sales reflect better-than-expected underlying demand. The drug started selling in Japan on May 10 and a ruling on acceptance by the E.U. is expected the second half of this year. Filings for approval were submitted in Israel and are nearing submission in China, too. Studies on dosing strategies, delivery methods and application to related afflictions – such as one sparked by COVID-19 – are underway. One effort, called Vyvgart Adapt-NXT, is a study for continuous dosing that the company expects it can submit for FDA approval by year’s end. On the sales side, the priority for Argenx this year is getting wider coverage for potential patients, from the current level of 62% in the U.S. Long-term, though, this could be a blockbuster, with some analysts seeing $2.5 billion of revenue for the treatment within a few years. The emergence from Argenx into a commercial operation means it’s expected to post losses for the foreseeable future, but the business has $2.9 billion in cash and no debt.

Technical Analysis

ARGX gas been range-bound between 250 and 350 (ballpark) since October but is showing some signs that it’s ready to start a new uptrend, thanks partially to strong buying volume that began in May on good results from current Vyvgart clinical trials. Early access to Vyvgart granted by the U.K. at the start of June helped spur the most recent leg higher, including a couple of big up days late last week. We think dips of a few points would be tempting, but use a loose loss limit.

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Stock 2

CrowdStrike (CRWD)

Why the Strength

When we first started looking at CrowdStrike a couple of years ago, we thought it had emerging blue chip written all over it—and despite the stock’s rough ride this year, nothing has changed our fundamental view. The company’s claim to fame is its endpoint protection platform, which is by far top dog in the industry; basically any device that connects to the Internet or corporate network can be included in the firm’s security blanket, and importantly, CrowdStrike is able to collect data in one place (trillions of events per week!), use it to smarten its AI and machine learning systems, and then update all clients automatically with new threat responses and intelligence. All in, it’s better, cheaper and simpler than old alternatives. There were some worries that the endpoint market was leveling off, but (a) that doesn’t appear likely, and (b) CrowdStrike didn’t sit on its hands, instead bombarding into some new cybersecurity fields (log management, cloud workloads, identity protection, IT operations, etc.), which drastically increased the market opportunity and have been a hit; at the end of Q1, 35% of customers take at least six of CrowdStrike’s “modules” (different security products) and 19% take seven! The result is a firm with numbers that are hard to beat, with sales growing rapidly (61% increase in annualized recurring revenue (ARR) last quarter) at scale (ARR was $1.9 billion!) with massive earnings growth (triple digits many quarters in a row) and free cash flow margins (30%; free cash flow was 74 cents per share in Q1) that management believes can actually grow from here despite big investments. Oh, and let’s not forget that gross retention (98.1% last quarter) and same-customer revenue growth (up 24%) are also impressive, with total customers up 57%. There’s no reason CrowdStrike can’t grow many-fold in the years ahead.

Technical Analysis

CRWD is 44% off its high, so it (like most everything else) has work to do. But a couple things stand out: First, net-net, shares are at the same level as late January, while the market and most growth names have been blown up since then; indeed, the RP line bottomed that month. Second, weekly volume clues show huge support in January-March and again in May. And third, CRWD has held up well during the market’s most recent plunge. You could roll the dice here, or just keep it on your watch list.

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Stock 3

Halozyme (HALO)

Why the Strength

Rapid, reliable sales and earnings growth? Check. A unique offering that’s providing a major benefit? Check. Years of growth potential based on its pipeline? Check. A stock that’s resisting the worst bear market in 13 years? Check. Halozyme should remain near the top of your watch list because it has most, if not all, of the characteristics of a winner. As we’ve written before, the story here is mostly about Enhanze, a technology that allows drugs to be safely delivered via IV in minutes instead of hours—and results in both milestone payments when deals are signed and as drugs progress through trials ($135 million worth last year, with a similar figure expected this year), but more important, royalties (usually mid single digits, lasting a minimum of 10 years from launch), which totaled $204 million last year and should grow 50% in 2022 thanks mostly to two big drugs (one by Janssen and one by Genentech). But management is thinking much bigger, with a $1 billion royalty goal in 2027 as some “wave 3” Enhanze-enabled drugs hit the market during the next couple of years (including a potentially big autoimmune treatment from Argenx, the standard version of which was just released; ARGX is also in this week’s Top Ten). But there’s even more good news, stemming from Halozyme’s recent buyout of Anteres Pharmaceuticals, which brought some commercial products (just launched a new testosterone replacement therapy) and a royalty business (an auto-injecter technology used on EpiPen and other drugs). There are some fears about patent expiration on the firm’s enzyme that is behind Enhanze, but management is adamant there shouldn’t be any issues—and even sees potentially higher royalties from a new enzyme that it’s patenting that has extended room temperature stability. As for the numbers, they’re great, with projected earnings growth low this year solely due to a higher tax burden (about 55 to 60 cents worth). It’s a solid story.

Technical Analysis

HALO is one of the few stocks out there that’s setting up a legitimate launching pad—it started back in February 2021, found a bottom from December through February and has been rallying in recent weeks. The latest action is also encouraging, with a very strong snapback after the market’s low in May and a much higher low last week. We’re OK starting a position here, though keep it small and use a loose leash.

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Stock 4

HealthEquity (HQY)

Why the Strength

HealthEquity is the market leader in consumer-facing web services to help people maintain and use work-related benefit programs. With it, people can make claims for reimbursement, complete incentivized health-related tasks and change their periodic contributions without going through their HR department. HealthEquity specializes in health savings accounts while also providing management of commuter benefits, dependent care benefits, COBRA and other programs. The business has about 20% of the HSA management market, having recently surpassed UnitedHealthcare; it now counts 120,000 company HSA programs as customers, servicing more than seven million people that have $20.3 billion in assets in those accounts. The market for programs allowing employees to manage their benefits is growing, expected to more than double to $11 billion total revenue by the end of the decade. While HealthEquity does make money from service fees it charges companies, think of it like a money manager, holding HSA cash for employees and offering higher-yield products to help them insulate against inflation. While HealthEquity has to pay better interest to customers on those products as interest rates rise, it makes more money on the spread between the interest it earns on custody of client monies and what it pays out. In the recently reported first quarter of its fiscal 2023, the company beat estimates with sales of $206 million, which were up 12%, though earnings of 27 cents were down from a year ago. However, Wall Street is sniffing out much better times ahead: With the Federal Reserve hiking rates, management sees itself making more money – a yield of 1.7% on the customer cash it holds this year, not counting the impact of further hikes. Look for 2022 sales of about $832 million and non-GAAP per share income of about $1.28, both of which should be conservative—and 2023 should see the bottom line lift nicely.

Technical Analysis

HQY has made a strong recovery from a December plunge sparked by a quarterly report that showed no top-line growth. Shares sold off to a five-year low of 39.5 but began a fairly steady march higher again this year until encountering resistance in the low 70s. The market-induced pullback was sharp, but HQY has again fought back, resulting in a nine-week launching pad with some big-volume buying near the end of last week. If you’re game, you could nibble here or on dips.

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Stock 5

Li Auto (LI) ★ Top Pick

Why the Strength

Electric vehicles (EV) are growing in popularity in the U.S., but in China the EV market is on fire and outstripping its nearest rival. (EVs made up 15% of China’s auto sales last year, versus just 4% in the U.S.!) At the forefront of China’s new energy vehicle trend is Li Auto, which manufactures and sells premium “smart” cars and is a pioneer in extended-range EVs, which are more of a hybrid than a pure EV, but it’s proving hugely popular. (The firm uses the phrase EREV, standing for extended range electric vehicle.) A two-month lockdown in China’s major industrial hub, Shanghai, set back the nation’s automakers and hurt supply chains and vehicle deliveries. But Li emerged relatively unscathed from the ordeal; the company reported deliveries of around 11,500 vehicles in May—up nearly 170% from a year ago—despite pandemic-related disruptions for its suppliers. Now that Shanghai is reopening, Li is expected to resume growing at an accelerated pace. Indeed, the company’s Li One SUV (which uses a small gasoline engine to enhance travel range) is now China’s third-best selling SUV as of May, with deliveries of nearly 32,000 vehicles increasing 150% in the first quarter. Q1 also provided stellar results across several metrics, including revenue of $1.5 billion that rose a whopping 176% from a year ago and per-share earnings of 7 cents that beat estimates by 4 cents. Going forward, the company plans to release its second vehicle, the L9, in the third quarter, a smart SUV for families based on Li’s new-generation EREV platform. Management also guided for Q2 deliveries of around 22,500 vehicles—a 28% increase if realized—while estimated sales of nearly $1 billion are conservatively expected (up 30%). Wall Street estimates even higher Q2 top-line growth (up 78%) and, big picture, there’s no reason the L9 and Li One can’t supercharge results in the quarters to come.

Technical Analysis

LI came public in July 2020 at 15 and rose to a high 48 four months later before falling back to just above its IPO price by May 2021. Shares did bounce back for a few weeks after that, but then began a long, slow decline as Chinese stocks went out of favor. Recently, though, the evidence has improved—LI had a huge shakeout and recovery in march, and after retesting the low in May, shares have now rallied six weeks in a row and are approaching key resistance. Shares are extremely volatile, but dips of a couple of points would be tempting.

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Stock 6

LPL Financial (LPLA)

Why the Strength

LPL Financial (covered in the March 28 report) is the nation’s largest independent broker-dealer and the top provider of brokerage services to banks and credit unions, as well the top custodian to registered investment advisors. Like most financial service companies, its fortunes tend to closely follow the tide of asset prices, though it also has a lot of leverage to higher rates, too—that’s a big reason why, unlike most of its peers, LPL is showing resilience in the face of a bear market. An example of LPL’s outperformance despite macroeconomic headwinds was its growth in net new assets in May, with the firm bringing in $25 billion (all of them organically, none through acquisition), raising total assets 2.2% just from the prior month. Total advisory and brokerage assets, meanwhile, grew 4% to just over $1 trillion at the end of May. A big reason for the strength is the firm’s bulging deal pipeline, with CUNA Brokerage Services being the latest addition to its institutional platform and bringing LPL $36 billion in brokerage and advisory assets and around 550 new advisors. Another recent addition is People’s United Bank, which will onboard to LPL’s platform later this year and bring around $6 billion in combined assets. A further testament to LPL’s strength in the face of turbulent conditions was the Q1 report. Total advisory and brokerage assets rose 21% in Q1, to $1.2 trillion, and while revenue of over $2 billion missed estimates, it also came in 21% higher than a year ago, with per-share earnings of $1.95 beating estimates by 15 cents. Going forward, the rising interest rate environment should benefit LPL, as the top brass said the Fed’s first four rate hikes should boost gross profit by more than $300 million annually. Analysts see the bottom line surging through at least 2023.

Technical Analysis

LPLA has had a choppy run in the last six months, but the upward trend has remained intact despite a few shakeouts along the way. The stock leapt from 160 to 195 (up 22%) in the first six weeks of this year before tumbling to 140 in March. An even more explosive six-week move up to 220 followed, with shares peaking at that watershed level in mid-April. Shares turned south again but this time stopped short at the 40-week line around 170 and stabilized, with a higher low last week. We’re going to set our buy range up a bit from here, thinking further strength would be a sign the sellers have left the building.

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Stock 7

Ollie’s Bargain Outlet (OLLI)

Why the Strength

Ollie’s Bargain Outlet is a closeout retailer, operating 439 stores in 29 states that provide customers with (as its motto says) good stuff cheap in a variety of categories ranging from appliances to snacks to sporting goods to flooring to pet supplies and much more. The secret sauce here is the company’s buying team, which because of their scale, often have access to top brands and retailers who need to get rid of overstocked, irregular or older products that may have different packaging or colors. The company had a fantastic growth run a few years ago, but it’s had some ups and downs in recent years, with a slowdown in 2019 (its CEO unexpectedly passed away in late 2018), a surge with the pandemic in 2020 (the horrid retail environment meant Ollie’s buyers could go wild; stimulus payments also helped) and then the let-down as the world turned right side up—indeed, sales and earnings have been shrinking over the past few quarters, and even same-store sales dipped 17% last quarter! But the stock has been bottoming out and is now perking up because the underlying story here is sound; the last two years of huge growth and retrenchment followed the ups and downs of the environment. But now that things are normalizing, investors are looking ahead to better times, both short- and long-term—analysts see sales growth turning positive in the current quarter (ending July), with earnings likely doing the same in the October quarter. Plus, there’s still a strong cookie-cutter story here, with the store count up more than 10% from a year ago, and with the top brass believing there’s room for 1,050 stores down the road. As with every company, cost inflation is a risk, but odds favor the boom-bust pandemic effect is mostly over, allowing Ollie’s solid underlying growth story to reassert itself.

Technical Analysis

OLLI had a great couple of months after the pandemic low as business took off, but shares actually topped out way back in August 2020, meandered sideways for a year and then nosedived into March of this year. But that was the low: Big-volume buying in April turned the tide, and the retest last month held even as the overall market caved in. And now OLLI is flexing its muscles, moving above its 40-week line for the first time in 10 months. If you want in, we’re OK nibbling on dips.

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Stock 8

Pinduoduo (PDD)

Why the Strength

Pinduoduo is one of China’s largest e-commerce sites, which combines online shopping with social media to offer deep discounts on everyday household items to group shoppers (a business model some are calling “gamified shopping”). Pinduoduo was able to keep the growth trend alive in the first quarter during China’s recent Covid lockdowns, with consensus-beating revenue of $3.7 billion increasing 11% from a year ago on the back of higher online marketing services and transaction services sales. Per-share earnings of 47 cents topped estimates by 17 cents. The company’s monthly active users (MAU, a key metric) continue to grow, with north of 750 million users in Q1, up 4% from a year ago. There were also 882 million active buyers in the 12-month period ended March 31, an increase of 7%. Looking ahead, Pinduoduo said it’s focusing on technology and sees a huge opportunity in agriculture; it plans to pursue “longer-term high-quality growth” in ag based on an expected boom in online food product purchases. The company also plans to promote the increased use of precision technology and artificial intelligence (via partnerships with governments and universities) in order to increase productivity and make China’s ag industry more cost effective. On the financial front, management hinted that growth will take a hit due to shutdown-related spillovers, prompting analysts to predict flat sales in Q2, but the main reason the stock is strong today is that investors are looking ahead--Wall Street sees top-line growth picking up in Q3 (up 16%) with double-digit growth continuing for several more quarters to come, while earnings lift nicely both this year and next. It’s not the young buck it was once, but Pinduoduo is an intriguing turnaround situation.

Technical Analysis

PDD had a fantastic post-pandemic run, soaring as high as 210 last February—but, like so many virus winners, the stock gave back all of those gains in the ensuing bear phase. However, like most Chinese names, PDD found massive-volume support in March (note the two gigantic volume up weeks), etched a higher low in May and has pushed higher this month. There is resistance near here (falling 40-week line) and volatility is extreme, so if you want in, we suggest nibbling on weakness.

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Stock 9

SolarEdge (SEDG)

Why the Strength

With conventional energy costs soaring to record levels, demand for solar-generated power is booming. SolarEdge (covered in the March 28 issue) is leader in the renewable energy field, providing power optimizers and cloud-based monitoring systems—as well as energy storage and backup products—that increase energy output for homes and companies. In the past, SolarEdge was all about panels, and its single-phase inverters convert DC power generated by panels into AC power while drastically reducing heavy cooling elements and providing for simplified shipping and installation. But its business is increasingly geared toward solar management solutions that allow users to monitor and control the power its panels collect. Moreover, the firm has branched out into the white-hot electric vehicle (EV) space through its solutions that can integrate with EV charging stations to speed charging times. The recent strength is partly due to SolarEdge signing a global patent license agreement with Chinese tech giant Huawei that settles all patent litigation between the companies, as well as a European Union plan to cut all red tape for solar installations (to reduce reliance on Russian fuel). On the financial front, while EPS of $1.20 missed the consensus by 11 cents in Q1, revenue of $655 million beat estimates and grew 62% from a year ago. The company guided for Q2 revenue of around $725 million at the midpoint—up 51% and 11% higher sequentially if realized. Further out, SolarEdge sees a huge growth opportunity after the federal government estimated that under 3% of all electricity in the U.S. last year was solar. Wall Street shares the sanguine outlook and sees earnings catapulting higher in 2023.

Technical Analysis

SEDG mushroomed from just under 40 two years ago to around 380 in early 2021 before topping out. From there, the stock slid to 200 by May and then rebounded to the old high in November, but the recovery didn’t stick and shares again backslid to 200 by January. The zig-zagging pattern has persisted into June, but while the broad market recently cratered, SEDG held firm around the 50-day line, with a low last week well above both its January and May bottoms. Last Friday’s rally on twice normal volume was encouraging; we’re not averse to starting small here.

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Stock 10

Titan Int’l (TWI)

Why the Strength

With crop prices at or near multi-decade highs, farm equipment makers are reporting explosive demand for planting, harvesting and fertilizing machines. Titan is one of North America’s largest manufacturers of industrial tires, offering a full line of wheels, tires and undercarriage products for off-road equipment for the agriculture, forestry, construction and mining industries. Titan’s farm machine business is showing particular strength, and the company just inked a long-term agreement to supply equipment maker Deere with wheels and tires made in Titan’s North and South American plants. It’s a simple story, but the numbers are enticing, with Titan’s latest financial results underscoring the growth of its ag-related business: Q1 revenue of $556 million soared 38% from a year ago and represented its highest quarterly sales in nine years. The firm’s construction/earth-moving segment also contributed to the strong results, which included per-share earnings of 44 cents that beat estimates by 15 cents. The company cited inventory levels for used equipment at record lows and “robust” demand for new equipment—along with elevated commodity prices, which is boosting farming profits—as reasons for its strong 2022 order book, and said it expects both ag and infrastructure spending to continue increasing globally. Last week, management further guided for Q2 sales to equal or exceed Q1 sales (a reason for the strength), while margins are expected to improve. For the full year, Titan predicts revenue of $2.2 billion and EBITDA of around $232 million which, if realized, will be its strongest performance ever in both metrics. Wall Street, meanwhile, sees sales improving by around 30% in Q2 and 20% for 2022, while earnings take a step function higher, to north of $2 per share.

Technical Analysis

After peaking at just under 12 last May, TWI entered a seven-month decline before bottoming near 7 in December, following a similar trend in crop prices. But TWI turned the corner that same month and, except for some hesitation in January, has been in a relatively persistent uptrend since. Granted, the stock is thinly traded, and the up-down-up-down action last week isn’t ideal (telling you the bears are stepping up somewhat), but we’re not opposed to a small buy around here, with a stop under the 50-day line.

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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 June 27, 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.