If you dug into any financial news this weekend, you were likely inundated by tons of bearishness that have arisen due to so many uncertainties, but when it comes to the market, it’s best to just keep it simple and focus on the action itself: The intermediate-term trend of the indexes and vast majority of stocks remains down, with only a few special situation names and some commodity-related titles able to buck the trend. We would say that, just in the past week, far fewer stocks joined the indexes at new correction lows, but we need to see such rays of light lead to real, sustained buying pressures to take action on them. We advise remaining defensive.

Not surprisingly, this week’s list doesn’t have many stocks near new high ground, but we are seeing many that reacted well to earnings and have shown some positive volume clues. Our Top Pick is one of them, a new name in the resilient shipping group.

Cabot Top Ten Trader Issue: May 23, 2022

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Keep it Simple

If you dug into any financial news this weekend, you were likely inundated by tons of bearishness that’s arisen due to so many uncertainties: How aggressive will the Fed be? Will inflation crush the consumer and corporate profits? What will happen to the housing market? And, of course, will we see a recession? All are fine to ponder, but when it comes to the market, it’s best to just keep it simple and focus on the action itself: The intermediate-term trend of the indexes and vast majority of stocks remains down, with only a few special situation names and some commodity-related titles able to buck the trend. On a positive note, would say that, just in the past week, far fewer stocks joined the indexes at new correction lows--but as we’ve been writing endlessly, we need to see such rays of light lead to real, sustained buying pressures to take action on them. We always have our eyes open, but we advise remaining defensive and patient until the tide turns.

Not surprisingly, this week’s list doesn’t have many stocks near new high ground, but we are seeing many that reacted well to earnings and have shown some positive volume clues. Our Top Pick is Golden Ocean (GOGL), a small drybulk shipper that’s producing incredible numbers and should continue to for at least the next few months, if not much longer. Try to buy on dips.

Stock 1

Analog Devices (ADI)

Why the Strength

Market leadership in secular mega-trends such as automation, electric vehicles (EVs) and advanced connectivity helped Analog deliver another record quarter in Q2. The company, which provides high-performance analog, mixed-signal and digital signal processing (DSP) integrated circuits used in virtually all types of electronic equipment, posted its fifth consecutive quarter of record revenue the quarter. Sales of almost $3 billion were 79% higher from a year ago (bolstered by the buyout of Maxim Integrated last summer) and beat estimates by 5%, and the top-line strength enabled a new high in per-share earnings of $2.40, a 29-cent beat. The strength was broad-based with all segments up double digits, led by the industrial segment (its biggest category) which grew more than 20%. Growth within this segment included digital health care (Analog has a number one position in medical imaging), automation, instrumentation and testing. Automotive (21% of revenue), where the firm holds a leadership position in battery management systems, also achieved a sales record, and management expects momentum in the EV market to continue. Communications (16% of sales) and consumer products (12%) also grew, thanks to increasing 5G deployments and expanding bandwidth demand. Going forward, growth rates will slow, but the attraction should be reliability: Analog said it plans to provide more complete solutions and projected 7% to 10% annual revenue growth in the next five years. Analog also sees a path to $15 of adjusted annual EPS (up from an estimated $9.21 this year) and 40% free cash flow margin, enabling it to create “significant value” for shareholders for years to come (it could return all of its free cash flow annually down the road). Analysts see the bottom line surging this year and cranking higher from there.

Technical Analysis

ADI more than doubled between the March 2020 low of 80 and its November 2021 all-time high of 190. But like most of its semiconductor peers, it peaked at that time and fell into slump that dragged it lower with shares falling to 151 in January. However, it’s shown relative strength since then—except for a quick shakeout in March, the stock held that 150 area many times, and ADI has actually perked up in recent days despite the weak environment. There’s still overhead here, so if you want in, keep it small with a stop just under 150.

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Stock 2

Bumble (BMBL)

Why the Strength

One type of theme we like to look for are “follow on” opportunities, which are newer names that pop up in a growth industry with something new and different—and become the new leaders. In that sense, we think Bumble could be “the next” Match.com or Tinder, leading the online dating sector in the years ahead; indeed, the firm was started by the former VP of Marketing for Tinder (and is just 32 years old, by the way). But this isn’t just a Tinder copycat: The big difference with Bumble is that women have to make the first move via initiating a chat, giving them more power to command the conversation, picking and choosing potential matches. (Lots of guys like it, too, taking the pressure off to always go first.) Another difference is Bumble’s policy on “ghosting,” which is when someone abruptly cuts off a conversation (usually in place of actually saying they’re not interested)—basically, a new chat must be responded to within 24 hours or else it disappears. Throw in fewer spam bots than most competitions, and Bumble is carving out a name for itself in the matchmaking industry, leading to consistent growth and now profits, too—in Q1, sales rose 24%, earnings of 13 cents crushed estimates by 17 cents and (most important) user growth on Bumble rose 8% sequentially and 31% from the year before. (Revenue per user was also up 5% from the year before.) The company also operates an older app called Badoo, which is focused overseas, though that’s having a tough time right now (the Ukraine conflict is hurting subscriber totals); its namesake app makes up three quarters of revenue and is the growth engine here. In total, revenues should be up 20%-plus this year, the bottom line should be in the black and most analysts see user growth remaining strong.

Technical Analysis

BMBL came public with a lot of fanfare more than a year ago, and the result was a toboggan slide from the get-go, falling from around 80 to a low of 16 in March. However, while there’s clearly more work to do, the stock now has 11 weeks of positive relative strength and has found big-volume buying on each of the past two quarterly reports (one in early March, the other two weeks ago). It’s not for the faint of heart, but a nibble here or on dips with a loose stop seems like a decent bet.

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Stock 3

Civitas Resources (CIVI)

Why the Strength

Civitas flies under the radar screen of many investors, partially because it didn’t exist in its current form until a few months ago—Bonanza Creek Energy, Crestone Peak, Extraction Oil & Gas and Bison combined in various transactions from early 2021 to the start of 2022 to create Civitas, which is now the go-to producer in Colorado (and the only carbon-neutral one in that state where such things matter); its out put is 43% oil, 31% gas and 26% liquids, and the firm also owns a small midstream operation. Honestly, you can put the firm’s acreage, balance sheet and cost structure up with anyone’s in any state—Civitas believes it has hundreds of potential wells that would return north of 40% even at $55 oil/$2.75 gas; has the lowest operating costs (per barrel or production) of all its peers; and, even after all the mergers, has just $346 million of net debt (0.2x cash flow). Moreover, while big M&A isn’t likely, Civitas isn’t done rolling up some bolt-on acquisitions that will bring with it many locations and permits. While there’s been some hesitation here because of the state it operates in, the fact is the governor is relatively pro-drilling (there are no anti-drilling ballot initiatives this year) and Civitas’ management is confident they’ll have the permits they’ll need, when they need them. In terms of results, they’re fantastic: Over the past four quarters, free cash flow has averaged $2.25 per share, and the firm pays out 46 cents of that as a base dividend (3.0% yield on that alone) and half of what’s left as a variable dividend—all in, the Q1 payout came to $1.36-ish (ex-dividend date June 14). Moreover, this is happening even with huge hedging losses, which should ease in the quarters ahead. Long story short, even if oil eases significantly, the current cash flow numbers could stick for a long time to come.

Technical Analysis

CIVI’s various mergers and combinations likely held the stock back after November of last year—the stock repeatedly tested the 47 level for a few months and then shook out to 45 in February before finally changing character. Though it hasn’t soared, the stock has outperformed the market consistently and it’s even outperformed the oil group as a whole, with pullbacks in recent weeks finding support near the 50-day line, with today’s push bringing near new high ground. We’re OK taking a swing at CIVI here if you don’t own any, with a stop in the upper 50s.

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Stock 4

Darling Ingredients (DAR)

Why the Strength

Darling Ingredients collects used restaurant cooking oil and the waste from animal slaughter and makes high-value animal feed, pet food, nutritional supplements and fuels. The Texas-based business has 135 plants and is adding another 18 with the recently announced purchase of Valley Proteins, which processes beef, pork and chicken primarily in the south and Texas. Producing animal feed from what they collect is Darling’s biggest business right now – accounting for two-thirds of 2021’s $4.74 billion sales. Most of the feed is for livestock, with a big portion made into pet food. Another quarter of Darling’s business is for people, mainly natural sausage casings, cooking lard and collagens – Darling created the now-trendy market for collagen peptide supplements to improve skin and joints. All of that has Darling on track for earnings per share of $5.36 (up 37%) on sales of $5.8 billion (up 22%) this year. Darling also has significant operations in Brazil and China, so it can perform some arbitrage between markets to maximize profits. With high fuel prices and tax incentives for renewable fuels, though, its smallest segment is its biggest growth area. Darling uses what it collects and renders to make green diesel; it generated $430 million last year from a diesel joint-venture it owns with Valero called Diamond Green Diesel. Expansion of the JV’s Louisiana refinery, to be completed in 2023, will contribute $1 billion in additional free cash, allowing management to reduce debt, buy back shares and boost the dividend. Because the fuel’s feedstock isn’t a food crop, like competing green diesel makers use, the JV should avoid a lot of inflationary pressure, too. A reasonable valuation (15 times this year’s earnings) adds to the attraction of this unique story.

Technical Analysis

DAR rallied out of the pandemic on improved outlook for renewable fuels, enjoying an incredibly persistent run into March of last year. But it’s been flats-ville since then, with up-and-down action between 60 and 85 in the 14 months since. Still, lately, it’s putting up a fight—DAR actually tried to break out in April, and while it got yanked down by the market, it quickly bounced back, with its RP line (not shown) testing all-time high ground. If you’re game, you could nibble here or on dips with a stop under the recent low.

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Stock 5

Fluor (FLR)

Why the Strength

Fluor is a leading engineering firm, providing construction, maintenance and project management services for the oil and gas, industrial and infrastructure and power generation (including nuclear) industries. The company is divided into four segments, with energy the firm’s main focus, comprising 41% of revenue (and a reason for the strength). While revenue in Q1 of just over $3 billion was down 7% from a year ago, it beat the consensus by 7%, while per-share earnings of 16 cents missed estimates by 6 cents. Urban, Mission and Other solutions segment sales were down 19%, 21% and 3%, respectively. Consolidated segment profit, however, nearly doubled to $115 million with an ending backlog of $19 billion, led by a strong showing in Energy solutions revenue (up 18%). Indeed, the strength here is really all about what’s likely to come: Fluor said it expects a “substantial” volume of new contract awards from each of its segments going forward; in Q1, awards in its top-performing Energy segment included a construction contract for a chemical facility in the U.S. Gulf coast, as well as a notice to proceed contract for a modular mid-scale liquified natural gas project offshore in the Gulf. The company reaffirmed its 2022 earnings mid-point guidance of $1.28 per share (in-line with the consensus) and said it’s targeting $2.70 per share (a double in two years) for 2024 as the wave of new contracts are executed on. Management also touted the recent completion of NuScale, a 57%-owned power company that markets small modular nuclear reactors for communities across America as it grows its energy footprint. Moreover, the firm said that dividends and share buybacks are possible as it continues to build the backlog and improve cash generation. Analysts see earnings up 25% this year with even faster growth in 2023, while the valuation (26 times trailing earnings) looks reasonable.

Technical Analysis

FLR hit a peak at 25 last May and went on to etch a giant launching pad for the 10 months, from which it broke out beautifully in March. It acted well for a bit, but the market proved too much to overcome; we were actually knocked out of a position as the stock cracked support a few weeks back. But encouragingly, FLR hasn’t gone over the falls—shares have been putting up a fight in the mid 20s, even with a minor hit after Q1 earnings. If you want in here, you could pick up a few shares, or conversely, wait for a push over resistance near 28.

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Stock 6

Golden Ocean (GOGL) ★ Top Pick

Why the Strength

Increased global trade volumes, along with continued port congestion related to China’s latest Covid lockdowns and an overall lack of new ship building in recent quarters have led to boom times for ocean freight shippers. Golden Ocean (based in Bermunda) is a leading international dry bulk shipper handling raw materials like ores, grains, coal and fertilizers. The firm boasts a fleet of 87 vessels, including some ships chartered-in on long-term time contracts, though most are just a few months in length. Golden Ocean sailed past Wall Street’s expectations in Q1 as revenue of $149 million was 68% higher from a year ago, while per-share earnings of 62 cents were 26 cents above the consensus on the back of a strong market for Panamax vessels (the biggest size that can transit the Panama Canal) and excellent contract coverage for its Capesize fleet (the largest dry cargo ships) secured at “attractive levels” last year. Management is even more sanguine about the coming quarters and estimates that Q2 time charter equivalent (TCE) rates will average around $28,000 per day for most of its Capesize and Panamax vessels (up 15% sequentially from Q1). The company anticipates even more freight market strength in the second half of 2022 and has already secured 15% of total Capesize available days for Q3 at an average rate of over $38,000 per day (up 35% from what it sees in Q2!) and 33% of total days for Panamax ships at an average rate of about $35,000 per day. Translation: Golden Ocean is going to be swimming in cash for at least the next few months, and because of that will focus on returning capital to shareholders through dividends; the firm’s Q1 dividend will be 50 cents per share (ex-dividend date May 31). Obviously, the shipping sector is as cyclical as it comes, so the good times won’t last forever, but the next few quarters should be buoyant as the industry’s underpinnings are strong.

Technical Analysis

GOGL’s post-vaccine rally took the stock to 9.3 last June, and that was effectively the top for a while; shares did nose out to 10 later, but net-net, the stock built a launching pad through the January market low point. But since then, GOGL has been a winner, breaking out in February, grinding higher even as the market was sinking and popping last week on earnings. A dip of a few dimes would be tempting.

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Stock 7

NexStar Media (NXST)

Why the Strength

The largest owner of local television stations in the U.S., Nexstar obliterated earnings consensus in its Q1 result, reported two weeks ago. The company posted earnings per share of $5.99, a $1.68 higher than Wall Street consensus, on revenue of $1.21 billion. One catalyst was earlier-than-expected bookings in political advertising, with the upcoming mid-term elections expected to be the second-priciest election campaign in history, which is music to Nexstar’s ears. The company owns 200 stations in 118 markets and, in total, typically takes 12% to 15% of all the broadcast spending in each election. This year, about $3.8 billion is projected to be spent nationally and 80% of what are seen as competitive elections should take place in one of Nexstar’s markets. But it’s not just politics that boosting business. Core advertising – comparable to the prior year – gained modestly on its stations while digital revenue grew double-digits, a sign that cord-cutting may not hurt business too much (although most of its stations can be received with antenna anyway). Digital also includes The Hill, Nextar’s foray into written media. It bought the political news service last fall as an anchor product to build its digital ad inventory around. For the full year, Nexstar should post EPS of nearly $26, more than $8 higher than the previous election year. Next year will see political spending retreat, but Nexstar is renegotiates the majority of retransmission fees it collects from networks this year. Right now, it gets paid well less in fees than it should given its ratings, so a bump is all but guaranteed, helping offset the dip in 2023 ad spending. It’s a solid story, and the 2.0% dividend is a nice bonus.

Technical Analysis

NXST built a long, flat base for much of last year, and it’s tried to get going multiple times starting in November of last year; it finally gained some traction in February and March, but the market’s pull was too much to handle. Still, the sharp dip into early May found big support after earnings, and NXST has pushed higher despite further market weakness since. It’s fine to just watch it, but we’re not opposed to a nibble here with a stop in the 160 area.

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Stock 8

NexTier Oilfield Services (NEX)

Why the Strength

The latest Baker Hughes rig count for U.S. oilfield activity shows an eye-popping 60% increase from a year ago, while domestic oil prices are holding steady near 10-year highs. Both metrics bode well for companies that provide services related to hydraulic fracturing (or fracking), which involves active drilling. NexTier is focused on providing these services mainly to U.S. energy companies (i.e., not much exposure overseas, which can be a blessing given the world environment). Aside from having one of the nation’s largest pressure-pumping fleets, it offers other shale-related services, including optimized trucking, power solutions and equipment monitoring. In the first quarter, NexTier said demand for its solutions was “very strong” with available frac capacity almost fully utilized and which management said would allow the firm to deliver profitable growth, accelerating free cash flow and strong returns. Revenue of $635 million in Q1 mushroomed 178% from a year ago and beat the consensus by 12%. And though per-share earnings of 4 cents missed estimates by a cent, the company noted that the accelerating exit rate late in the quarter suggested “significant upside” for Q2. The company operated an average of 33 deployed fleets in Q1, up from 10% from the prior quarter. Well construction revenue rose 13% sequentially, while completion services sales increased 25%. NexTier further achieved positive free cash flow in Q1 (ahead of schedule), which the firm said will enable it to generate returns above its cost of capital later this year—a critical milestone for the business. For Q2, Wall Street expects 160% revenue growth while NexTier sees momentum building as it heads into its seasonally strong period, with “continued profitability” beyond the quarter. Analysts see earnings of 84 cents per share this year, but that’s up from a guesstimate of just 33 cents three months ago, so it should prove conservative.

Technical Analysis

NEX spent pretty much all of 2021 treading water between 3 and 5.5 and making no net progress. But the stock underwent a dramatic character change in January, starting with a strong breakout on its heaviest weekly volume in 21 months. From there, shares trended beautifully higher until hitting a wall near 12 last month, which has led to a couple of dips to the 50-day line. Sure, maybe NEX cracks, but we think it’s a good risk-reward situation around here.

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Stock 9

Occidental Petroleum (OXY)

Why the Strength

Oil stocks have had big runs and there’s little doubt they’re obvious at this point, but if you’re still looking for a bargain in the group, Occidental Petroleum might be it; after all, Warren Buffett thinks so, with Berkshire Hathaway accumulating a 15% stake in the company, including gobbling up another six million shares in early May. And when you dig into the numbers you can see why even ace value investors would still be interested here: After a bunch of divestitures, Occidental has big positions in the Delaware and Midland basins, Gulf of Mexico and the Rockies, though it also has a solid chemicals operation (north of $2 billion of projected pre-tax profit this uear) that’s a big maker of PVC and caustic soda (for paper and petroleum products). The stock was actually a laggard in the oil sector, partially because of a tattered history and partly because returns to shareholders are still on the back burner—but that could change sooner than most think because the free cash flow profile here is very solid. In Q1, Occidental cranked out a ridiculous $3.3 billion of free cash flow (5.6% of the current market cap!), using it to pay down the same amount of debt (12% of all that was outstanding), getting it closer to its intermediate-term goal of $20 billion in long-term debt. (It’s also in the process of buying back up to another $3 billion-plus, depending on what gets tendered.) Currently the firm pays just a token dividend (0.8% yield), but if energy prices stay elevated, you can bet that figure will go through the roof, along with decent share buybacks, too. Plus, of course, there’s the chance that Berkshire decides to swallow Occidental whole; either way, though, the firm seems undervalued even if energy prices pull in.

Technical Analysis

OXY looked fine early in the year, but it was the Berkshire buying reports in early March that changed the stock’s character. Since that run to the 60 area, shares haven’t made a ton of progress, but it’s also been unable to really pull in much, with one shakeout in April to the 50-day line bringing in the buyers. Last week’s move to new highs did lead to some retrenchment (not a surprise in this environment), and we’re OK taking a swing at OXY here.

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Stock 10

Valero Energy (VLO)

Why the Strength

With gas prices at record highs, and with petroleum supplies under pressure, end users are increasingly turning to renewable fuels to address the problem. Valero (covered in the May 2 issue) is the world’s largest independent oil refiner and the second-largest corn ethanol producer, making it a major player in both the oil/gas and clean energy spaces. Gasoline and diesel margins have just hit all-time highs (price of its output is rising faster than the cost of inputs), which is the main reason for the stock’s strength; that bodes extremely well for Valero’s petroleum refining business (the company makes a 70-cent margin for diesel alone). And with a major Wall Street bank calling for $6.00 a gallon retail gas prices this summer, the company’s elevated refining margins aren’t likely to diminish anytime soon. Indeed, management recently observed that the fundamentals that drove strong results in the first quarter “continue to provide a positive backdrop for refining margins.” On that score, Valero’s refining segment delivered around $1.5 billion in operating income during the quarter (compared to a loss a year ago, and up 15% from Q4). Meanwhile, bio-fuels, ethanol and renewable diesel generated a combined $150 million in operating income in Q1 (up 140% sequentially). And on the diesel front, Valero intends to extend its reach into renewable diesel, made from animal fats and cooking oils, as part of a plan to reduce carbon emissions. The company’s Diamond Green Diesel joint venture with agri-food processor Darling is now set to deliver its Port Arthur project in Q4, ahead of a previously scheduled delivery date in early 2023. All in all, analysts see earnings catapulting to north of $12 per share this year, with a 2023 retrenchment still leaving the bottom line close to $10.

Technical Analysis

We recommended VLO a couple of weeks ago but missed our entry price, as the stock shot straight up after earnings and hasn’t given up any ground since. Given that the stock only really broke out on the upside in March, the odds favor the next pullback being a pause that refreshes, not a major top, and leading refining stocks often trend for longer than expected, too. We’ll set our entry point a bit lower, hoping to grab shares on a shakeout.

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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 May 31, 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.