The market’s evidence continues to take steps in the right direction and, by our measures, the intermediate-term trend is now on the fence—a couple of decent days from here could produce a green light. Of course, even if we do turn up, it doesn’t mean it’ll suddenly be 1999 again, but we’re not taking anything away from the action: The market has put together a few positive steps in a row, now let’s see if it can continue in the days ahead.

This week’s list again picks up on a few names that are already testing key resistance even as the indexes are just a couple of weeks off their lows. Our Top Pick is a nuts and bolts type of firm that’s seeing a huge upmove in earnings and sports a dirt cheap valuation.

Cabot Top Ten Trader Issue: June 6, 2022

Intermediate-Term Trend Close to Turning Up

The market’s evidence continues to take steps in the right direction, with the broad market showing some strength (the broader indexes are actually testing their 50-day lines while the number of new lows is drying up) and, by our measures, the intermediate-term trend is now on the fence—a couple of decent days from here could produce a green light. Of course, close doesn’t cut it (we still need to see it actually flash), and even if we do turn up, it doesn’t mean it’ll suddenly be 1999 again—there are plenty of damaged stocks that will need time to repair the damage. Still, we’re not taking anything away from the action: The market has put together a few positive steps in a row, now let’s see if that can continue in the days ahead. Right now, we’re not changing our Market Monitor, but we should know by Friday’s update (Movers & Shakers) whether the bulls continue to take control.

This week’s list again picks up on a few names that are already testing key resistance even as the indexes are just a couple of weeks off their lows. Our Top Pick is Atkore (ATKR), a nuts and bolts type of firm that’s seeing a huge upmove in earnings and sports a dirt cheap valuation.

Stock 1

Alkermes (ALKS)

Why the Strength

It’s month eight of the roll-out of Alkermes’ new treatment, Lybalvi, for schizophrenia and bipolar 1 disorder, the latter a manic episode so intense it requires hospitalization. About 1% of the U.S. population suffers from schizophrenia and perhaps 3% of people had a bipolar 1 episode in the past year. Lybalvi is seeing good prescription trends for both illnesses as physicians appear to be switching from a competing treatment, olanzapine (made by Eli Lily), which has weight and metabolic side effects. Lybalvi 1Q sales this year were just $13.8 million, but that was 40% ahead of management’s expectations, which has fed expectations it can contribute up to $75 million of $1.3 billion overall sales in 2022. Lybalvi also benefits from doctor familiarity with Aristada, an injected schizophrenia treatment made by Alkermes that releases medicine consistently over two months. It’s about a quarter of the firm’s sales and hasn’t really been harmed during the pandemic. Vivitrol, a treatment for alcohol and opioid dependency that’s 30% of sales, has been slowed by the pandemic’s effect on patients being able to see doctors, but it’s expected to rebound strongly given the sharp rise in heavy drinking the past two years. It’s not all clear sailing for Alkermes. In February, Johnson & Johnson began cutting payments for licensing NanoCrytsal technology for long-acting treatments. That clipped royalty revenue to $37 million in Q1 from about $62 million a year earlier. Alkermes has taken JNJ to binding arbitration over the cuts. Still, the existing drug slate plus Lybalvi’s rollout has investors expecting an 11% rise in sales this year. Shares likely will swing to a loss of two cents from the heavy focus on promoting Lybalvi, but estimates are on the rise in the out quarters on high hopes for its drugs.

Technical Analysis

Traders priced in the Johnson & Johnson licensing fee cuts in November, slicing nearly a third off ALKS to a 12-month low of 21. Shares worked back over the 200-day line by March, with some volatility, but appear to be firming up in the 28 to 31 area—it’s a big-picture cup-with-handle, if you’re into that sort of thing. If you’re game, you can nibble here and consider adding on a big-volume push above 31.5 if the market turns healthy.

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Stock 2

Atkore (ATKR) ★ Top Pick

Why the Strength

It’s not a flashy story, but Atkore is quietly generating lots of free cash flow through its exposure to multiple growth industries. The company offers electrical and mechanical products (including conduits, cables and tubing) as well as safety infrastructure solutions (metal framing, perimeter security and more) under several brand names to end markets that include construction, diversified industrials, alternative energy, healthcare and data centers. Atkore delivered outstanding results in Q2, led by revenue of $983 million (up 54% from a year ago) and EPS of $5.39 that beat estimates by $1.67 and nearly doubled from a year ago. Its business is divided into two segments, Electrical and Safety & Infrastructure, with the former posting a 36% sales increase in Q2 and the latter increasing sales by 47%. The upbeat results were due to a combination of factors, including rebounding residential construction demand, electric utilities putting more lines underground and higher data center construction rates. Atkore expects these trends to continue as the building season is just getting into full swing, prompting management to predict higher sales volumes going forward. The company also expects to deploy over $1 billion in cash over the next two to three years, mainly in the form of mergers and share repurchases (Atkore recently doubled its stock buyback authorization to $800 million). On the M&A front, the company just acquired Talon Products, a provider of injection molded cable cleats used in power distribution applications. Atkore has also launched a new line of components used in utility-scale solar power plants as it expands its solar footprint the Southern U.S. Granted, next year should see some of this year’s massive earnings explosion given back, but (a) those estimates keep rising and (b) Wall Street says the bottom line should remain elevated for a long time to come.

Technical Analysis

ATKR blasted out of a multi-month base in November 2020, advancing many-fold during the following year as earnings took off. Since then the stock has been locked in a choppy holding pattern, gyrating between 90 and 120 in the last six months. But last month’s earnings changed the stock’s character, with a big gap up in early May, a quick market-induced dip into the recent low and a quick snapback (nearly to new highs) as the pressure has come off the indexes. We’re OK starting a position here or (preferably) on dips.

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Stock 3

Blackstone (BX)

Why the Strength

With both stocks and bonds getting hit this year, and with tight money threatening real estate, you’d expect a giant asset manager like Blackstone to be suffering—and for the stock to have gone over the falls. Instead, shares are holding up well, thanks in large part to a change in emphasis that started a few years back: Whereas the firm used to be heavily reliant on one-time realizations for income (say, when a firm it owned a stake in went public or was bought out), it’s shifted to fee-related earnings (which now makes up nearly three-quarters of all assets) and so-called perpetual capital (the money can’t be withdrawn easily; makes up more than one-third of assets) to produce more consistent, reliable results. (A shift to C-Corp status a few years ago, with qualified dividends, also broadened the investor base.) Today, about half of distributable earnings are from real estate holdings, with private equity making up a third and credit, insurance and hedge fund solutions making up the rest. And results have been excellent: In Q1, fee-related earnings rose 55%, assets under management rose 41% (including a 41% jump in fee-related assets and a 127% leap in perpetual assets), while distributable earnings leapt 69%, leading to a solid ($1.32 per share) quarterly dividend. Of course, with the Fed on the rampage, the investing environment soft and recession fears rising, it should be harder to raise new money in the months ahead (i.e., growth will surely slow), but it’s less likely Blackstone will see its earnings really keel over given the asset mix these days. And, of course, when the bull market returns in stocks and other assets, it’s nearly a sure bet Blackstone will thrive.

Technical Analysis

BX had a beautiful, smooth advance from the vaccine blastoff in November 2020 to its peak a year later near 150. The initial selloff was sharp (down to 100 by January), but the stock found big-volume support after Q4 results and was resilient for a few months after, too. BX did briefly dip to a new low at 94 last month, but as the pressure has come off the market somewhat, the stock has perked up. There’s some resistance in the mid 120s, but we’re OK with a small position here or on dips with a stop near the century mark.

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Stock 4

Enphase Energy (ENPH)

Why the Strength

Enphase’s business centers around microinverters, devices that take the raw DC power from solar panels and converts it into AC powr for home and business use. Microinverters are a growth business since U.S. residential solar installation rose 30% in 2021 and solar installations in general are surging. That’s good for Enphase, since it’s the largest provider of microinverters in the country. A key edge: Its products keep collecting electricity even if one solar panel fails, a bugaboo of “regular” inverters. An expanding product line plus expansion into new markets has investors thinking it can push revenue to more than $2 billion this year, from $1.3 billion in 2021. The firm’s new flavor of microinverter, the IQ8, has been on the market about eight months and is rolling out rapidly, seeing excellent traction because it provides the ability to have a photovoltaic array set-up act as a microgrid when the larger power grid fails, so it can provide electricity to the household, something solar panels couldn’t do before. Enphase is also tripling its addressable market to existing customers, now offering onsite battery storage, whole house energy management, data and analytics and even advanced EV chargers. A typical Enphase customer probably spends $2,000 on their microinverters, about 15% the cost of a rooftop solar set-up. Management thinks new offerings can get a lot of past and future customers to spend another $6,000. International markets are starting to open up for Enphase, too; the company says the Ukraine crisis has sparked a lot of interest from German homeowners, a big solar market where 80% of people adding solar go all-in and buy EV chargers, battery storage and energy management systems at the same time. Plus, today’s news that solar import tariffs are being eliminated for a couple of years should keep costs in check. Growth has been rapid and reliable for years, and there’s no sign of slowing down, with Wall Street seeing sales and earnings up 50% and 45% (respectively) this year, with more solid growth in 2023.

Technical Analysis

ENPH has a volatile chart over the past 17 months, but it’s actually been outperforming the renewable energy sector and most growth stocks. Shares sold off sharply after peaking at an all-time high of 268 in November, but it’s etched higher lows since January, and as the pressure has come off the overall market, ENPH has perked up nicely, with today’s news on tariffs helping the stock to rally on big volume. We like the action but think aiming for weakness makes sense after the recent move.

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Stock 5

Laredo Petroleum (LPI)

Why the Strength

As the oil rally matures, we’re likely to see more secondary-type names kick into gear—not real leaders, but firms that are thriving in today’s high-price environment. Laredo is the poster child for that, a small (market cap less than $2 billion) operator in the Permian Basin that, like many in the group, took on a lot of debt as it expanded production rapidly in years past. But it’s tightened its belt during the past three years, added some high-return acreage (it bought 57,000 oily acres in the Midland Basin last year), has been chipping away at its liabilities (no debt maturities until 2025) and cash flow is set to go through the roof as CapEx declines (like most producers, it’s targeting flat-ish output) and hedging losses vanish. At $80 oil and current natural gas prices, the firm sees free cash flow of around $16 per share this year, and that figure should rise to $22.50 or so in 2023, and of course the figures could be much bigger if oil stays in the triple digits. To be fair, most of that is still likely to be dedicated to debt reduction; Laredo is hoping to pay off another $700 million of debt by year-end 2023 and have debt total less than one times cash flow a year from now. But what kicked the stock into gear (besides the recent free cash flow estimates) was a whopping $200 million share buyback program, which is around 11% of the market cap; there’s no time table on the authorization, but management seems eager to get involved right away. And the cherry on top of the story is Laredo’s acreage, which likely has eight years of drilling inventory even at $55 oil, with plenty of upside to the number of potential wells if oil stays up here. Who knows how the company will do during the sector’s next dry spell, but it’s cash flow story looks promising now that the sun is shining on the group.

Technical Analysis

LPI’s post-crash run halted around 100 last July, and it thrashed around wildly for a few months, with an initial plunge below 40, a rally back toward 100, and a couple more 30% to 40% dips after that—including a plunge back to 54 in early May. But the cash flow/buyback news has caused another rush higher, with LPI breaking out on huge volume last week. We think it wants to go higher, but given the stock’s history and the big recent move, you should aim to enter on dips.

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Stock 6

Oasis Petroleum (OAS)

Why the Strength

Oasis Petroleum is a small player in the energy patch, with a market cap of $3.2 billion and a checkered history, falling into Chapter 11 during the industry’s dry years and coming out of it at the perfect time, in November 2020, just as everything began reflating. As for the here and now, the stock is strong not just because of stubbornly elevated oil prices, but because of a bullish combination that should go through in Q3—the company is embarking on a merger of equals with Whiting Petroleum, which will result in the premier firm in the Williston Basin, including the largest acreage position (with a 10-year inventory of decent-return wells) and the second highest output level (Continental Resources is first). The combined firm will have next to no net debt, and similar to PDC Energy (another small-ish name making a game-changing acquisition), the free cash flow and cash return story is hard to beat: First, Oasis shareholders will get a one-time $15 per share special dividend when the deal is consummated; second, at $85 oil and $5 gas, the combined firm should produce about $8 in free cash flow per share, per quarter, and around 60% of that will be returned to shareholders through a solid base dividend, buoyant variable payouts and possibly share buybacks. (Net debt is going to be 0.2x cash flow after the deal is done.) And let’s not forget that Oasis also owns 21 million shares of Crestwood Equity Partners (symbol CEQP) thanks to a recent sale of its midstream operation, a stake that’s worth more than $600 million and pays cash dividends totaling $1.25 per Oasis share per year. Even if oil skids 20% from here, Oasis is going to be a cash cow for a long time to come.

Technical Analysis

OAS has been stair-stepping its way higher for months, but it hasn’t really been a big leader in the group—in fact, after shares dipped in April (knocking us out of a recent position), the stock had basically made no progress for six months. But with the Q1 update on the merger and oil prices remaining resilient, OAS started coming back in late May, surging right through seeming tough resistance in the 150-157 range and into new high ground. We’re fine taking a swing at it around here.

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Stock 7

Synopsis (SNPS)

Why the Strength

Before semiconductors are commercialized, it’s essential for chip makers to design, simulate and test them. That’s where Synopsis, a leading provider of chip engineering design automation software and simulation tools, enters the picture. Synopsis offers not only the design tools critical for manufacturers of silicon chips, but also provides simulators that assist in the design of the logic for chips and computer systems, as well as the industry’s fastest emulation system, the ZeBu EP1, which accelerates hardware and software verification for system-on-a-chip (SoC) designs. Synopsis’ suite of products serves more than 10 major industries, but its leading simulation tool, Saber, is a big reason for the strength. Saber is part of a virtual prototyping solution for designers of electric vehicles (EVs), aerospace systems, instrumentation equipment and supercomputers, and it made headlines recently when Synopsis unveiled a collaboration with Analog Devices to provide model libraries for DC-to-DC converter chips as a Saber simulation feature. (The new library is aimed at aerospace and EV powertrain engineers and is expected to accelerate their time-to-market.) Business here has been very consistent, and Synopsis’ fiscal Q2 results fell in line, as the firm exceeded guidance targets across all product categories. Revenue of nearly $1.3 billion jumped 25% from a year ago and beat estimates by 9%, while per-share earnings of $2.50 beat the consensus by 13 cents. For Q3, management expects sales of around $1.23 billion (up 16% if realized) and EPS of $2.04 (up 13%)—both well above Wall Street’s estimates—based on “robust demand and operational execution.” A recent $200 million buyback agreement with a major bank adds to the allure.

Technical Analysis

Like most of its semiconductor peers, SNPS has had a tough go of it for the first four months of the year. After peaking at 375 in late December, the stock has formed a big double bottom structure, with a quick drop to 280 in January (with retests in February and March), and then a lower low in May (255, down 32% from the high) in May. But SNPS may have changed character since then, with the stock moving straight up during the past three weeks, including a nice-volume jump late last month. Minor weakness should be buyable.

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Stock 8

Teck Resources (TECK)

Why the Strength

A major Wall Street bank has predicted that copper prices will soar by as much as 75% in the next three years on the back of alternative energy demand that depends heavily on the metal. That scenario should bode well for Teck, a global leader in copper and zinc production as well as being the world’s second-largest seaborne exporter of metallurgical (or “met”) coal (another hot commodity). The big story here is that Teck’s exposure to these three assets—plus the energy business via an oil sands mine in Canada—has produced as good a demand environment as it’s enjoyed in years. As for near-term catalysts, the recent reopening of China is expected to unleash a tidal wave of demand for copper, as global supplies have been hindered by the Ukraine war and by recent mining setbacks in top producing countries Chile and Peru. Sanctions on Russian coal exports, meanwhile, have resulted in coal prices soaring to record levels this year, and met coal demand should increase as China’s factories restore manufacturing capacity. For Teck’s part, business has been extraordinarily strong in recent quarters, as higher realized copper and met coal prices, plus higher sales volumes, have driven results. Revenue of $5-plus billion was nearly double the year-ago level and per-share earnings of $2.96 nearly quadrupled. The sanguine results prompted Teck to authorize a $500 million share repurchase program (around 2% of market cap), which comes on the back of a hefty $337 million dividend payout in Q1. For the full year, management guided for copper production to remain relatively flat, while zinc production is forecast to jump 28% and met coal output is expected to rise 2%. Analysts see earnings up 50% this year and, while dipping, to remain elevated in 2023.

Technical Analysis

TECK formed a big base-on-base formation during the last seven months of 2021, with the breakout in January leading to a solid (albeit choppy) upmove. That said, progress slowed in March, with the 42 to 45 level providing resistance and leading to a sharp dip to 35 in April. However, TECK has since recovered most of that decline, though volume’s been light--we like the relative strength but think pullbacks make more sense if you want to enter.

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Stock 9

Wesco (WCC)

Why the Strength

Wesco is an established name in the electrical parts space, providing wiring, fuses, tools and testers, as well as logistical expertise and systems capabilities. America’s largest electrical products supplier has further expanded its footprint in the communications sector with its 2020 acquisition of global communication and security products distributor Anixter. As for the here and now, Wesco is pursuing another high-growth opportunity in automation, conference room infrastructure and Internet of Things (IoT). The company recently launched an audio/video conference room service to support the hybrid work trend; the service involves network-enabled touchless capabilities, wireless connections and voice-activated systems for room control (all big selling points in Covid’s wake). The company’s expansion decisions were fully validated in the latest quarter as Wesco enjoyed “accelerating momentum” across its entire business spectrum. Revenue in Q1 increased 22% from a year ago, to a record of nearly $5 billion. Per-share earnings of $3.63 also hit a record and surprised estimates by $1.39. By segment, Electrical & Electronic Solutions (the largest piece of the pie) increased sales by 22%, Communications & Security Solutions sales rose 15% and Utility & Broadband Solutions sales soared 32%. Wesco’s backlog also set a record in Q1 and was up more than 90% (and 25% higher sequentially), which management said will be supported by strategic investments in inventory. All in all, Wesco looks like a rare bird where earnings took off last year, are booming again this year (estimates up 47%) and should continue to push higher from here. The fact the stock is dirt cheap (11 times trailing earnings) is another plus, which is one reason it just authorized a whopping $1 billion share buyback program.

Technical Analysis

WCC enjoyed a strong, steady post-pandemic cash ascent until it finally ran out of gas near 140 last November. The last seven months have been more turbulent by comparison, with shares chopping around in a lateral range between November’s high and 105 (low set in March). However, it steadied itself after that low point, and the quarterly report early last month pushed WCC briefly above 140 before another market-induced retest of the lows. Now, though, shares are pushing higher again—we think the third time could be the charm. You can start small here and add should WCC clear resistance.

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Stock 10

ZIM Shipping (ZIM)

Why the Strength

As China’s main industrial hub reopens following Covid lockdowns, ports around the world are expected to see a shipping traffic surge due to a huge backlog. ZIM Shipping is one of the world’s largest container shipping liners and leases most of its fleet on shorter-term contracts (which lowers costs and increases flexibility, though does open the firm to any dip in charter rates), using “eco-friendly” charter vessels and technology to optimize its cargo mix. That said, the company made notable progress on several initiatives in Q1, including the securing of 17 newbuild “clean tech” ships (to meet new environmental standards due in 2023) with long-term charter agreements, to be delivered in the coming years. These new ships will have a faster propulsion system, allowing them to cut shipping times and should allow ZIM to charge higher premiums; plus, most will be LNG-powered, making them more carbon and cost efficient. ZIM also ended negotiations for one-year contracts on the Asia-to-U.S. shipping lane (45% of its total volume). Despite the China-related shipping backlog, ZIM was still able to grow its carried delivery volumes 5% in Q1 from a year ago at an average freight rate that was 100% higher, while increasing its fleet size by 10%. All of that led to record revenue of $3.7 billion, up 113%, as per-share earnings of $14.19 beat the consensus by $1.38. And because the firm pays out 20% of net income per quarter (and 30% to 50% for the year; there’s no net debt here), the quarterly dividend came in at $2.85 per share. Looking ahead, management expects to generate full-year EBITDA of around $8 billion (up 21% if realized) while continuing to pay out big dividends.

Technical Analysis

ZIM spent the last four months of 2021 bobbing and weaving between the 45 and 60 levels, basically consolidating its prior rally and paving the way for a series of higher highs that kicked off in January and peaked in mid-March at 90. Shares plunged from there before finding a bottom around 50 in late April. The turnaround has been rather choppy, but every dip has found support, and now the stock is in the upper reaches of its range. If you’re game, aim to enter on dips of a couple of points.

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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 13, 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.