December 6, 2021

You can analyze omicron’s spike protein, slice and dice the words of the Fed chairman or do a deep dive into last week’s jobs report all you want. But at the end of the day, all that matters now is that the sellers are in control. To be fair, some short-term measures are stretched, so some type of bounce is possible. Thus, if you’re already defensive, we wouldn’t be in a rush to sell a ton of stuff here, but there’s no question the onus remains on the bulls to begin repairing the damage. We’ll keep our Market Monitor at a level 5.

This week’s list is a hodgepodge of strong names, be it due to company-specific moves, earnings or sector resilience. Our Top Pick is a direct beneficiary of all things construction and infrastructure, and its stock is holding up well.

Market Overview

Current Market Outlook

Sellers Are in Control
You can analyze omicron’s spike protein, slice and dice the words of the Fed chairman or do a deep dive into last week’s jobs report all you want. But at the end of the day, all that matters now is that the sellers are in control—the intermediate-term trend of the major indexes is down, and most individual stocks are in tatters, living below even longer-term moving averages. Now, to be fair, some short-term measures are stretched (Friday saw nearly 950 NYSE and Nasdaq stocks hit new lows!), and there was puke-type action in many growth stocks today that could lead to some bounce action. Thus, if you’re already defensive, we wouldn’t be in a rush to sell a ton of stuff here, but while we’re open to anything, there’s no question the onus remains on the bulls to begin repairing the damage. We’ll keep our Market Monitor at a level 5: It’s fine to hold your strong, resilient names, but it’s also best to hold plenty of cash and wait for the correction to play out.

This week’s list is a hodgepodge of strong names, be it due to company-specific moves, earnings or sector resilience. Our Top Pick is Martin Marietta Materials (MLM), which certainly won’t be your fastest horse, but has a clean outlook and a resilient chart.

Stock Picks & Previously Recommended Stocks

Stock 1

ArcBest Corporation (ARCB)

Why the Strength

The trucking industry is mostly made up of smaller companies, but large-scale truck shippers are rapidly expanding their footprint. ArcBest is a high-profile example; it offers truckload and less-than-truckload (LTL) freight shipping, home moving and transportation management services. The company has some 240 centers across North America providing service to all 50 states, Canada and Puerto Rico. Most of ArcBest’s revenue (around 70%) comes from its Asset-Based segment, which includes LTL services, with the firm’s ground expedite service segment the next largest, followed by the FleetNet business, which offers roadside assistance and vehicle repair and maintenance solutions for commercial and private fleets. The company’s Q3 report was the reason for the latest strength, featuring strong cash flow, record revenue of $1 billion (up 28% from a year ago) and per-share earnings of $2.59 that beat estimates by 13 cents. The quarter also saw a per-day revenue jump of 21%, a total tonnage per day increase of over 2% and a 3% hike in LTL-rated weight per shipment. On the acquisitions front, ArcBest closed on its purchase of MoLo Solutions, one of the fastest-growing truckload brokerages in the U.S., as part of the firm’s strategy to expand its shipping and logistics portfolio. ArcBest’s strong quarter didn’t go unnoticed on Wall Street, with a major institution rating the company its top LTL pick in the sector. Additionally, management just announced a $100 million accelerated share buyback program as part of a shareholder return plan. While growth will slow after a huge surge this year, analysts still see the bottom line rising 16% in 2022, which should prove conservative. A modest valuation (16 times earnings) doesn’t hurt, either.

Technical Analysis

ARCB more than doubled in the first few months of 2021 before hitting a wall in May and giving back 70% of its gains by June. But shares bottomed out at 53 over the next few weeks and launched a bowl-shaped recovery in August, with ARCB accelerating to new highs and reaching 115 last month. Better yet, the pullback of the past three weeks has been orderly despite the market’s weakness, with support showing up north of the 50-day line. If you’re game, a small position around here with a stop under the 50-day line could work.

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Stock 2

Arista Networks (ANET)

Why the Strength

Enterprise cloud systems are booming, with Arista sales seen coming in 25% higher this year at $2.9 billion and EPS around $2.78. Arista focuses on large corporate campus communications and worldwide networks. Cloud “Titans” — huge service providers like Microsoft — are leading the demand for Arista’s equipment, like 10 Gigabit Ethernet or faster switches that direct massive amounts of data around the globe and its Extensible Operating System which allows clients to program, monitor and automate networks. Management said in early November cloud strength will contribute to compound annual growth of 15% through 2025 and keep operating margins in the high 30% range. Investors were wowed by the guidance and bought up shares to an all-time high near 133. Business has already rebounded at a better-than-expected clip this year after 2020 brought the first sales decline in recent memory as supply chain and pandemic shutdowns crimped results 3%. Arista beat expectations again in its recent Q3 report thanks to prescient stockpiling of critical components to fulfill orders. Lead times for some parts remain long, in some cases triple the wait for a higher price, but Arista says it has planned well enough to avoid disruption and has been able to pass along price hikes to customers, too. Moreover, whereas most times you can only look ahead a quarter or two in the industry, Arista is ordering parts for a year or more out given the big orders it’s getting from the aforementioned Titans; this is a rare technology story that (a) is just beginning to re-accelerate and (b) has a lot of reliability looking ahead.

Technical Analysis

ANET had a huge, 20% gap up on Q3 earnings in early November, riding momentum from the highest volume in a year to push to an all-time peak of 133, after adjusting for a mid-month 4-for-1 split. Shares have pulled back since then, but ANET has only given ground grudgingly as the 50-day line (nearing 111) catches up. Given that it’s one of the most resilient growth stocks out there, we’re OK starting a position here with a stop under 110 if you don’t own any.

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Stock 3

Dollar Tree (DLTR)

Why the Strength

Dollar Tree is one of the largest discount retailers in the U.S., operating a namesake chain of stores as well as Family Dollar, which it acquired in 2015. At both locations the business has been selling everything for a single greenback for more than 50 years. The magical price point has long drawn budget-conscious shoppers and others who enjoy the thrill of the discount hunt. But the buck is breaking, so to speak, with the squeeze from higher prices from manufacturers and increased cost of shipping goods. Investor worry over margins started to ease in September as management announced that tests of higher prices received positive customer feedback, so it will convert thousands of stores over the next few years to Dollar Tree Plus locations, which will have goods at $1, $1.25, $1.50, $3 and $5. Offering more products at the $1.25 to $1.50 price may be modest in real-life terms, but could dramatically improve margins, which trail the larger discounter Dollar General (which doesn’t have price ceilings). The belief is that value-focused customers will still flock to stores even at somewhat higher prices, generating income for the current Q4 of fiscal 2022 of $7.1 billion and EPS of $5.51, with EPS estimated to surge next year to a consensus $7.41 on management’s renewed focused on margins. The disclosure of activist shareholder Paul Hilal as a beneficial owner (5.7%) of shares in Dollar Tree mid-November further fanned investor hopes. The expectation is that Hilal, owner of hedge fund Mantle Ridge and a one-time manager for Bill Ackman, will agitate for further, shareholder-friendly changes to the 15,500-store business. It’s an intriguing special situation.

Technical Analysis

DLTR had been in a broad range since acquiring Family Dollar in 2015, unable to break a ceiling at 115. In fact, shares had slumped to 85, the middle of the long-term range, in September when management announced plans to add higher price points at up to half its stores in the next three years. DLTR gapped 17% higher on that news, then added a breakaway gap, up another 20%, with the emergence of Mantle Ridge to the ownership roster. DLTR has pulled back and might need to rest a bit here, but is in good shape overall—further weakness would be tempting.

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Stock 4

Ferrari (RACE)

Why the Strength

As the maker of some of the world’s most highly prized luxury sports autos, Ferrari needs no introduction. The Italian supercar company has largely sidestepped the semiconductor shortage and Covid-related problems that have plagued other auto producers this year, and Ferrari’s well-heeled clientele have been on a buying spree of late. Vehicle deliveries in the third quarter totaled 2,750, a 19% improvement from a year ago and up 11% compared to pre-pandemic 2019. Moreover, the average price of a Ferrari in Q3 was around $363,000 (up 2%), as customers weren’t averse to spending more money per car. Revenue of $1.2 billion missed the consensus but increased 17%, continuing a trend of double-digit sales growth that the firm attributes to a stronger product mix and pricing, as well as higher sponsorship money from its partnership with the Formula One racing series. Among shipments, sales of eight-cylinder cars jumped 39% and engine revenues rose 25%, while per-share earnings of $1.29 beat the consensus by 13 cents. Looking ahead and also contributing to the strength was the unveiling (to rave reviews) of Ferrari’s latest Icona V12 limited-run model. Moreover, management is pursuing an electrification strategy with plans to launch its first full electric car in 2025, the prospects of which has Wall Street salivating. One big institution upped its price target for Ferrari based in part on the potential for the firm to offer “a range of EV products at potentially higher prices than the average selling price of today’s Ferrari,” while increasing volumes. Looking ahead, analysts see 16% sales and 39% earnings growth for 2021, with growth continuing into the next couple of years.

Technical Analysis

RACE rallied for most of last year before losing momentum at the start of 2021, peaking around 230 in January and falling to 185 by March. The stock spent the next seven months chopping out a lateral, tightening basing pattern, but like so many names it got going in early October—both before and (especially) after the Q3 report, RACE spiked on two big weeks of volume, and after peaking near 280, its latest pullback to the 25-day line looks normal. If you want in, it looks like a decent risk/reward situation here.

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Stock 5

Martin Marietta Materials (MLM) ★ Top Pick

Why the Strength

If you’re a believer in a sustained upcycle for construction in the U.S., including for infrastructure spending, then it’s hard not to be bullish on Martin Marietta Materials, which is one of the leading providers of aggregates (mix of crushed stone, gravel and sand) as well as ready-mix concrete, types of cement, asphalt and more—basically, the nuts and bolts of building anything. It’s #1 or #2 in 90% of the markets it serves, has 90 years of reserves and has placed operations where demand is highest (Texas, parts of Colorado, etc.). Aggregates and cement make up around 80% of EBITDA, and what’s so attractive about this from a long-term point of view is that demand (both in terms of volumes and prices, which usually advance 3% to 5% a year; mid-year price hike in 2021 was well received by customers) tends to glide higher in all but the worst economic circumstances. Indeed, Martin’s earnings have lifted every year since at least 2014, and the stock is strong today as most expect business to accelerate as Federal and state infrastructure spending lifts and other big projects (like huge distribution centers and data centers by big players Amazon, Walmart, Facebook, etc.) break ground. The company expects EBITDA to lift 15% this year, while Wall Street sees earnings up 23% next year with double-digit growth likely for many years after that.

Technical Analysis

MLM has always been a bit of a two-steps-forward, one-step-back kind of performer, and that hasn’t changed in 2021—the stock ground higher (with plenty of pullbacks and shakeouts) into early May before taking a breather, and that breather ended up lasting about 24 weeks, though impressively, could only take the stock down a maximum of 14% from its highs. The action since early October has been better, with eight weeks up in a row bringing MLM to new highs, and the market-induced dip of the past three weeks looks normal. We’re OK starting small here or on dips.

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Stock 6

Marvell Technology Group (MRVL)

Why the Strength

Marvell just reaffirmed its leadership role in the fabless chip design space with yet another blowout quarter. In Q3, the semiconductor firm posted earnings of 43 cents a share, which were an eye-opening 72% above the year-ago level and beat estimates by four cents (the reason for the strength). Revenue of $1.2 billion was 61% higher and surprised by 5%, driven by record growth across all five of its major segments. Enterprise networking sales rose 56%, along with 28% and 20% growth, respectively, for the carrier infrastructure and consumer segments. Data center revenue grew by over 100%, driven by “robust demand” from cloud customers (this year’s purchase of Inphi was big for this segment). The cloud area is Marvell’s most diverse end market with multiple product lines contributing to the growth, including SSD and HDD controllers and ethernet switches, and management emphasized the products are benefiting from new product ramps, which Marvell expects will drive sustained growth. In the auto/industrial segment, Q3 revenue also more than doubled and exceeded the company’s own guidance as the company said it’s benefiting from quick adoption of its ethernet solutions by auto OEMs and which have higher chip content. Marvell sees a multi-hundred-million-dollar revenue stream from its auto ethernet business in the next few years and also believes its next multibillion-dollar opportunity is in automotive computing for autonomous and semi-autonomous vehicles, as well as auto electrification. Bottom line, Marvell is playing in a bunch of fast-growing areas, and Wall Street thinks the good times will continue—after a 68% bump this year, analysts see the firm’s bottom line leaping another 43% in 2022.

Technical Analysis

After correcting earlier this year, MRVL got going again in May and reached new highs by the summer. The action after that was OK, but there wasn’t a lot of progress, and shares looked iffy during a shakeout in late September. But since then MRVL has been a star—marching higher all but one week and, after a market-related dip, soaring on earnings last Friday. Given the market environment, we’ll set our buy range down a bit if you want in.

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Stock 7

Pure Storage (PSTG)

Why the Strength

Pure Storage provides flash-based data storage hardware and software products for data centers, as well as offering storage-as-a-service solutions that combine on-premise data storage with public cloud services. The company is in the midst of transitioning from selling only hardware to also offering software and storage services using a subscription model, the success of which was highlighted in its third-quarter results. Pure Storage saw its Q3 revenue rise 37% from a year ago to $563 million, beating estimates by 6%, while per-share earnings came in 10 cents above estimates at 22 cents. The company, which saw strong customer demand and execution from both the public and private sectors, added 345 new customers for a total count of around 9,500 in the quarter, including more than half of Fortune 500. Other metrics were equally impressive, with subscription service revenue growing 38% and remaining performance obligations (which includes committed and non-cancelable future revenue) rising 27%. Also in the quarter, Pure acquired Portworx, a cloud-native data storage and management platform that has since been integrated into its growing portfolio of subscription services. Additionally, the company repurchased over 2.3 million shares in Q3 (nearly 1% of the total) and has more buyback power left. Pure’s sterling Q3 performance inspired a bevy of upgrades from Wall Street, with several big names raising price targets. It’s not changing the world, but Pure Storage’s business looks like a good bet to pick up steam from here.

Technical Analysis

PSTG hit a record high of 29 in February, then turned sharply lower, finally hitting a low at 17 in May. A 14-week base followed with shares tightening between 18 and 21, and PSTG completed the bottoming period in late August with a high-volume breakout on earnings. Eleven more weeks of relatively tight trading followed, with shares taking off yet again after the latest report. More recently, PSTG has been hacking around, but its refusal to give ground in the tech selloff bodes well. You could nibble here or keep it high on your watch list.

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Teradyne (TER)

Why the Strength

Testing is essential for the semiconductor industry, and Teradyne designs and manufactures automated chip test equipment for some of the world’s biggest electronics firms, including Samsung, Qualcomm, Intel and IBM. The stock’s latest strength is courtesy of a strong Q3—its eighth consecutive quarter of double-digit revenue and profit growth. Teradyne’s sales were up 16% from a year ago as test revenue rose 14% (and 67% above the comparable pre-pandemic 2019 quarter), driven by semiconductor test and wireless test strength. Industrial automation segment revenue increased 32% from both a year ago and from Q3 2019 on global demand growth at the firm’s subsidiary, collaborative robot arm maker Universal Robots. Per-share earnings of $1.59, meanwhile, rose 35% and beat the consensus by 15 cents. Teradyne emphasized that sales continue to be dominated by its semiconductor test business sales, thanks in part to its UltraFLEX product line, which management said was aligned to the performance requirements of its fast-growing compute and mobility markets. Teradyne also said its industrial test and automotive end markets have “rapidly expanded” with sales of its Eagle Test equipment for both markets more than doubling in the first nine months of 2021. Going forward, the company sees mobility remaining its largest submarket over the midterm and expects computing to grow at a faster rate, while automotive should remain at “current elevated levels.” Also helping is a modest share buyback program (share count down 2.5% over the past year). Analysts see earnings up just 8% in 2022, but given how fast estimates have been rising ($6.37 per share today, up from $6.05 two months ago), that’s probably too low.

Technical Analysis

Following last year’s pandemic crash, TER ran up over 200% before running out of steam in February. Shares then drooped into what became a grueling eight-month trading range between 105 and 140, which included a long, tedious decline to its lows during the summer and early fall. The lethargy was broken by the Q3 report in late October as shares exploded on volume that was more than twice above normal. TER is gyrating with the market here and does have some old overhead, so if you want in we suggest starting small and aiming for weakness.

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Stock 8

Toll Brothers Inc. (TOL)

Why the Strength

Testing is essential for the semiconductor industry, and Teradyne designs and manufactures automated chip test equipment for some of the world’s biggest electronics firms, including Samsung, Qualcomm, Intel and IBM. The stock’s latest strength is courtesy of a strong Q3—its eighth consecutive quarter of double-digit revenue and profit growth. Teradyne’s sales were up 16% from a year ago as test revenue rose 14% (and 67% above the comparable pre-pandemic 2019 quarter), driven by semiconductor test and wireless test strength. Industrial automation segment revenue increased 32% from both a year ago and from Q3 2019 on global demand growth at the firm’s subsidiary, collaborative robot arm maker Universal Robots. Per-share earnings of $1.59, meanwhile, rose 35% and beat the consensus by 15 cents. Teradyne emphasized that sales continue to be dominated by its semiconductor test business sales, thanks in part to its UltraFLEX product line, which management said was aligned to the performance requirements of its fast-growing compute and mobility markets. Teradyne also said its industrial test and automotive end markets have “rapidly expanded” with sales of its Eagle Test equipment for both markets more than doubling in the first nine months of 2021. Going forward, the company sees mobility remaining its largest submarket over the midterm and expects computing to grow at a faster rate, while automotive should remain at “current elevated levels.” Also helping is a modest share buyback program (share count down 2.5% over the past year). Analysts see earnings up just 8% in 2022, but given how fast estimates have been rising ($6.37 per share today, up from $6.05 two months ago), that’s probably too low.

Technical Analysis

Following last year’s pandemic crash, TER ran up over 200% before running out of steam in February. Shares then drooped into what became a grueling eight-month trading range between 105 and 140, which included a long, tedious decline to its lows during the summer and early fall. The lethargy was broken by the Q3 report in late October as shares exploded on volume that was more than twice above normal. TER is gyrating with the market here and does have some old overhead, so if you want in we suggest starting small and aiming for weakness.

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Stock 9

Toll Brothers Inc. (TOL)

Why the Strength

Anyone who keeps tabs on their neighborhood knows the housing market remains hot, with sellers setting deadlines for bids and things flying off the market. And yet homebuilding stocks have been mostly rangebound for a few months, supposedly due to cost inflation and labor shortage issues—although the top dogs of the sector, like Toll Brothers, which is the leading high-end nationwide homebuilder, haven’t been fazed too badly. Indeed, in the quarter ending in July, not only did sales (up 37%) and earnings (up 108%) excel, but forward-looking measures like contracts signed (up 35% in dollar terms) and backlog (up 47% in units and 55% in dollars!) have impressed as underlying factors (under-building for so many years, more work from home, etc.) have remained strong. And now investor perception may be improving again with the new virus variant, which only reinforces those trends and is likely to keep mortgage rates under pressure, while Toll’s client base (average FICO score of 764; average 69% loan-to-value; 18% did cash purchases) should be relatively unaffected by any economic hiccups that arise. Wall Street is certainly bullish, seeing the bottom line and cash flow surging nearly 50% this fiscal year (which just began in November) to record levels as Toll delivers on its growing backlog. The big key will come this week with the company’s next quarterly report due (numbers released Tuesday evening; conference call Wednesday morning). If the numbers are pleasing, we think Toll can do well.

Technical Analysis

TOL broke out to new all-time highs in January and ran to 68 in May before topping out. As mentioned above, the numbers have been great since then, but the stock has been stuck in a 24% deep, 29-week-long range. But it seems that the sellers have moved on—TOL is actually up seven of the past nine weeks, and two weeks ago, shares traded next to no volume, a clue that no more supply is coming to market. If you’re aggressive, you can nibble here, or just wait to see if you can enter on a minor wiggle after earnings.

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Stock 10

TopBuild (BLD)

Why the Strength

If there’s an industry that may benefit from the recent market and economic turbulence, it’s construction and housing, as interest rates have faded and housing was one of the big beneficiaries of the pandemic—and anything that benefits the housing sector is going to help TopBuild. The company operates via two complementary divisions: Its TruTeam segment is the leading installer of insulation for residential homes via 235 branches, doing everything from procurement to logistics to installation; while its Service Partners segment is the leading distributor of insulation and related accessories, serving both residential and commercial customers. Plus, in addition to its leverage to the strong housing market, TopBuild is something of a roll-up play—it’s acquired eight firms so far this year, normally smaller ($4 to $8 million of annual revenue), but also including a couple of good-sized ones this year ($144 million and $747 million in revenue). TopBuild is being affected by supply chain issues and labor shortages like everyone else, but business is good, margins are improving and Wall Street sees even better times ahead—in Q3, sales rose 21% and earnings were up 40%, and while earnings have steadily advanced the past few years, they’re taking some step functions higher, with a 46% leap this year and another 28% gain anticipated in 2022. Of course, with the macro picture uncertain, there’s always the chance that the company’s fortunes could change, but there’s no question that the wind is at TopBuild’s back today.

Technical Analysis

BLD rallied nicely last year but slowed down once the calendar flipped, topping at 235 in mid-April and going on to build what ended up being a reasonable (24% deep) six-month base. And since mid-October, the buyers have returned, with a pre- and post-earnings rally that took the stock to 280 or so, and the recent weakness has been very reasonable given the market’s selloff. We’re not opposed to nibbling on further dips.

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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 December 13, 2021.