February 14, 2022

After a three-week rally, stocks hit resistance at logical levels, with the indexes backing off … though they still remain nicely above their January lows. It’s possible we’re starting a re-test phase, with the major indexes and many stocks set to attack their January lows. But, really, we’re less concerned with gaming out the daily action than with sticking to the overall evidence—until proven otherwise, the trends of the major indexes, of growth-oriented funds and of most stocks is pointed down, so we advise remaining generally defensive and patient as we allow more stocks to build bottoms and form legitimate setups.

That doesn’t mean, however, that the wheat isn’t starting to separate from the chaff among individual stocks. This week’s list has a bunch of stocks that have shown some great-volume accumulation during the past two or three weeks, though our Top Pick is a solid long-term setup ahead of earnings.

Market Overview

Still Not Much to Do
The prospects of a Russian invasion of Ukraine has caused the market to hit another pothole, but we’re more focused on the what than the why—after a three-week rally, stocks hit resistance at logical levels, with the indexes backing off … though they still remain nicely above their January lows. It’s possible we’re starting a re-test phase, with the major indexes and many stocks set to probe their January lows; if so, it will be important to see how the broad market holds up (number of new lows, percent of stocks north of their 200-day lines, etc.). But, really, we’re less concerned with gaming out the market’s daily action and sticking with the overall evidence—until proven otherwise, the trends of the major indexes, of growth-oriented funds and of most stocks is pointed down, so we advise remaining generally defensive and patient as we allow more stocks to build bottoms and form legitimate setups. Our Market Monitor will remain at a level 4 as we keep most of our portfolio on the sideline.

That doesn’t mean, however, that the wheat isn’t starting to separate from the chaff. This week’s list has a bunch of stocks that have shown some great-volume accumulation during the past two or three weeks, as well as others with excellent big-picture launching pads. For our Top Pick, we’ll go with Planet Fitness (PLNT), which has a great setup ahead of earnings—you could nibble here, or just wait to see if the quarterly report kicks the stock out of its range.

Stock Picks & Previously Recommended Stocks

Stock 1

Atkore Inc. (ATKR)

Why the Strength

Atkore supplies metal framing and electrical conduits, known as raceways, to the North American market. It’s a niche business that Atkore management is focused on dominating, seeking to spend $1 billion in the next two to three years on acquisitions, stock repurchases and increased capital expenditures on things like beefing up its digital ordering systems. The company’s aggressive M&A effort means the addition of tuck-in business lines that provide huge year-over-year advances in an industry that is growing low to mid-single digits annually. In its recently announced fiscal Q1 results, sales jumped 65%, EBITDA more than doubled and earnings hit $4.58 per share, up from $1.88 a year ago, mostly thanks to 2021 acquisitions. There are many forms of raceways, with various construction sub-sectors having different preferences – telecoms prefer HDPE plastic pipes to run their wires, homebuilders use PVC, transit systems want fiberglass. Atkore sells more than 30 plastic and metal conduit and framing products to meet those niches, and continues to buy competitors to broaden its offerings and reach. Recently, it acquired a deeper foothold into Canada with the purchase of Sasco, while adding fiber-optics conduit specialist Four Star, out of South Carolina. Management has spent about $300 million of its $1 billion already, mostly on stock buybacks, but their preference is to keep buying up competitors, with more than 100 deals being evaluated right now. As business stands today, the company sees EBITDA coming in at $900 million for fiscal 2022, up $250 million from prior guidance. It’s not revolutionary, but Atkore has a good-looking roll-up story.

Technical Analysis

ATKR has been stair-stepping higher for many months, with plenty of corrections and shakeout along the way. The latest dip with the market started near Thanksgiving and lasted a couple of months, but only took the stock down 22% before shares catapulted higher during the past two weeks—ATKR gapped up on earnings and then raced back to its highs near 120 in the middle of last week before the market pulled it lower. If you’re game, we think the stock is a decent risk-reward around here.

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Stock 2

BioCryst Pharmaceuticals (BCRX)

Why the Strength

BioCryst focuses on rare disease therapeutics and has two drugs on the market right now, one of which is a niche intravenous treatment for influenza called Rapivab. But what moves the needle for investors is a potential blockbuster called Orladeyo, a once-daily pill to treat hereditary angioedema (HAE) in people 12 years and older. HAE typically causes swelling in the stomach, extremities and throat, which can be fatal. One in every 50,000 to as many as one in 10,000 people suffer from HAE. It’s usually treated by injection from one of eight drugs offered by competitors, including a generic, but Orladeyo is the only pill approved for prevention. The drug has only been approved and sold in the U.S. for a year, but it’s off to a great start, generating $122 million revenue in 2021. In the middle of last year, the drug received approval in the E.U., and launched in Germany as well as in Japan. That should help Orladeyo sales more than double to at least $250 million this year, with management projecting peak sales to hit $1 billion down the line. BioCryst develops drugs on a structure-based approach, meaning they build off of the structure of the molecule they want to address. This should allow the company to develop other oral drugs for difficult to treat afflictions. A new inhibitor from this approach, BCX 9930, appears promising for a rare form of anemia, paroxysmal nocturnal hemoglobinuria (PNH). About 500 cases of this blood disease are diagnosed annually in the U.S. BCX 9930 has orphan drug and fast track status from the FDA and the company has just started trials for the drug; there are other potential applications for this drug, too, making it a potential blockbuster down the road. BioCryst also recently received some non-dilutive funding from some big backers in January, which was a cause of the recent strength. Q4 results are due February 23; the consensus is for a loss of 30 cents per share on sales of $51 million.

Technical Analysis

BCRX ran as high as 18.5 in August before starting what ended up being a deep correction; shares fell as much as 42% and lived below their 40-week line for a couple of months late last year. The funding news in January ended the downturn, with BCRX rallying north of 17, and after a shakeout with the market, it’s powered back to its old highs. If you want in, aim for dips.

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Stock 3

Boyd Gaming (BYD)

Why the Strength

As the pandemic winds down in the U.S., casino gambling is back with a vengeance. Boyd is a Nevada-based gaming and hospitality provider and one of the nation’s largest casino entertainment companies, operating 28 gaming properties in 10 states. But the Boyd story is more than just the return of casino demand; it’s also about the online sports-gambling boom the firm is positioned to benefit from (indeed, sports gambling has increased more than 20-fold in the last three years!). Boyd has a 5% stake in online sportsbook FanDuel and offers FanDuel sports betting in six states, recently opening FanDuel Sportsbooks in each of its five Louisiana properties while launching mobile sports betting in that state, too. Management views online sports betting as an increasingly important part of Boyd’s business, but sees an even more compelling opportunity in online casino gaming (so-called iGaming); while iGaming is still in its infancy (only six states have legalized it), Boyd’s digital operations generated nearly $24 million in EBITDAR last year, a metric expected to exceed $30 million in 2022. The Q4 report, meanwhile, featured record performances across every segment of Boyd’s operations (the main reason for the strength). Revenue of $880 million was 38% higher from a year ago and 5% above estimates, while per-share earnings of $1.35 beat the consensus by 10 cents. Partly as a result of record free cash flow, the company also resumed regular share repurchases under a $300 million buyback authorization in Q4 and reinstated a 15-cent quarterly dividend (more than double its previous one), resulting in a 1%-ish yield. For Q1, analysts expect sales and EPS growth of 12% and 31%, respectively.

Technical Analysis

BYD had a picture-perfect post-pandemic run, with a very persistent and smooth advance through April of last year. The stock has had some periodic issues since, but really, the two corrections that followed (29% and 21%) were very reasonable given the prior move, and now the bulls are back, with three straight weeks of accelerating buying volume. We wouldn’t argue with a nibble here, but officially we’ll set our buy range down a bit after the recent move.

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Stock 4

Capri Holdings (CPRI)

Why the Strength

As consumers look past the pandemic, luxury sales are beginning to boom—particularly in the U.S. and China—led by demand for high-end shoes, clothing and jewelry. This trend was clear to see in the fiscal third quarter earnings report for Capri, the multinational fashion holding company which owns the well-known luxury brands Jimmy Choo, Michael Kors and Versace. Capri’s Q3 consensus-beating sales of $1.6 billion were 24% higher from a year ago, while per-share earnings of $2.22 beat estimates by a whopping 52 cents. The strong results were driven by strong momentum across all three of Capri’s luxury houses and in spite of ongoing supply chain challenges. By segment, Versace reported Q3 revenue of $251 million, while Jimmy Choo’s sales were $178 million and Michael Kors’s sales were $1.2 billion. Management noted that business in the U.S. (which overtook Europe as its largest luxury market this year) was boosted by a “quick rebound” in local consumption based on higher vaccinations. Meanwhile in China, demand remained strong into late 2021 despite lockdowns in some areas. Capri also increased full-year fiscal 2022 guidance (ending in March), targeting per-share earnings of $6 (up 13% from prior guidance). Looking ahead, the firm acknowledged supply constraints remain a challenge, but predicted double-digit earnings and revenue growth in fiscal 2023, as well as “multiple years” of growth from its three main segments based on the continued recovery from the global pandemic. Buybacks are also expected; the company bought around $200 million of its shares in Q3 with $800 million remaining in its repurchase authorization. A tame valuation (just 11 times expected earnings) helps the cause.

Technical Analysis

CPRI has a nice, coiled, multi-month pattern that should produce good things if the market can hang in there. Shares effectively peaked last March and stayed capped at 60 through October before breaking out—but the market then ran into issues, which created another consolidation (between 50 and 70, round numbers). But now the buyers are showing their hand, with three straight weeks of big-volume buying. There will be wiggles, but we’re OK starting small here or (preferably) on weakness.

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Stock 5

Datadog (DDOG)

Why the Strength

Growth stocks remain mostly in the outhouse, but we’re starting to see some flex their muscles, and at this stage Datadog is one of the most impressive. And that’s not a surprise, as the company plays in one of our favorite long-term growth areas: Broadly called Observability, the firm’s offerings are mission critical for the app and cloud era that thousands of companies are moving to, with solutions like infrastructure monitoring and application performance and logo management (extremely important given how many apps and systems big firms are using these days) being gobbled up by customers, as well as newer products like one that allows clients to protect sensitive information even as it passes through teams and departments (especially vital for regulated industries), one that constantly analyzes and find the most resource-consuming parts of your programming code and some newer security products, too. All in all, Datadog now has 13 offerings, up from nine a year ago, and customers are gobbling them up—indeed, the company’s metrics are impressive across the board. In Q4, sales growth accelerated again to 84%, while earnings more than tripled and crushed expectations, but even more enticing were sub-metrics like a 32% jump in total customers, a 114% jump in customers that pay Datadog at least $1 million annually, and the fact that this was the 18^th straight quarter of same-customer revenue growth north of 30%! (A partnership with Amazon Web Services, and the signing of the firm’s largest-ever deal with a major media company also helped perception.) Going ahead, management sees the top line up nearly 50% this year, though earnings could be held back by investments. Even so, the idea here is plain to see: Datadog is going to get much, much bigger in the years ahead.

Technical Analysis

DDOG got hit during the vicious January downturn, falling around 40% from high to low. That said, there was some relative strength shown, as shares hung around their 200-day line while most other former leaders didn’t. And now the stock has shown tennis ball-like action, rallying quickly back to its 50-day line and then, on Thursday, popping above 180 on earnings. DDOG has fallen off since, which isn’t surprising given the environment, but it looks like it wants to get going if/when the market ever does. If you want in, we’re OK nibbling here with a loose stop, or just keep it on your watch list.

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Stock 6

Hyatt Hotels (H)

Why the Strength

Leisure travel was dented by a surge in omicron in late 2021, but hotel operators are preparing for a demand surge in the coming months. Already, travel bookings have picked up since the start of this year and are on a pace to exceed pre-pandemic levels for the first quarter. Hyatt manages and franchises luxury and business hotels, resorts and vacation properties and is benefiting from increased traveling as the pandemic winds down. The company reported a gradual strengthening of demand in the third quarter and heading into Q4, with group bookings for 2022 showing “significant improvement” and bookings momentum in Europe trending at roughly the same pace as the U.S. Total management and franchise fee revenues were $96 million in Q3, up 140% from a year ago, while net rooms growth was an industry-leading 7%; per-share earnings of $2.31, meanwhile, obliterated the consensus by $2.66. In an effort to double its global resorts footprint, Hyatt recently completed an acquisition of Apple Leisure Group, a leading luxury resort-management services, travel and hospitality group, which gives Hyatt nearly 100 hotels and resorts in 10 countries, as well as a pipeline of 24 potential newbuilds in the Americas and Europe. As a result, Hyatt now offers one of the world’s largest collections of luxury all-inclusive resorts. Also accounting for the strength are a couple of recent analyst upgrades as the travel sector comes back into favor while omicron’s impact wanes. When Hyatt reports its Q4 report on Wednesday (February 17), Wall Street expects a 155% revenue increase and a loss of 23 cents per share, though (a) that’s likely too conservative, and (b) the focus is on the future, with analysts seeing a 66% revenue jump this year as earnings leap into the black.

Technical Analysis

H rebounded strongly from its March 2020 pandemic crash low, reaching 92 last February, which was just a few points shy of all-time highs. The stock trended lower between March and August, hitting bottom at 68 before roaring back to life in September. From there, H has been choppy, but every time the pressure came off the market, the stock has popped to higher highs. If you’re aggressive, you could buy a small stake on dips, or just see what earnings brings on Wednesday.

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Stock 7

Nucor (NUE)

Why the Strength

Nucor is a leading steel company with a massive market share in North American structural, cold finish and bar steels. The industry is decidedly cyclical, yet Nucor has managed to maintain consistent profitability for many years, even in periods when other steelmakers have bled red ink. A key to Nucor’s success has been in its margin-boosting capital investments, allowing it to achieve increasing efficiencies (the latest being a $290 million modernization of its Indiana sheet mill). Last year was a record-setting one for the firm: Nucor posted full-year sales of $36 billion, up 81% from the prior year, based on higher tons sold and higher selling prices (up 64% from 2020). Fourth-quarter revenue was $10.3 billion (its fourth consecutive quarterly record), up a mouth-watering 97%, while per-share earnings of $7.97 beat estimates 12 cents. Nucor also operated its mills at 94% of capacity for the year, versus 82% in 2020, a testament to the strong demand for its output. Management said it’s view was “overwhelmingly positive” for 2022 based on pent-up demand, predicting the end use market would remain strong for steel and steel products and expecting another year of “strong profitability.” Helping the cause are some steel plant shutdowns in China for various reasons, which is keeping prices elevated. Even so, Nucor expects supply chain issues will ease, while inflationary pressures will abate as the year progresses—though analysts see the bottom line still coming in north of $18 per share this year! Shareholder returns remain a focus going forward—Nucor just hiked its quarterly dividend by a healthy 24% (1.7% yield) with plans to repurchase a bunch more shares in 2022. (The share count is already down 7.5% from a year ago.) The good times won’t last forever, but it looks like they’ll last a lot longer than most expect.

Technical Analysis

After a huge rally in the first five months of last year, NUE topped at 110 in early June and entered a lengthy consolidation. Aside from a rally to 128 in August, shares didn’t make much progress for eight months even as earnings went through the roof. But after sharp drop to 90 in late January, earnings helped the stock turn over a new leaf with shares rising for the last three consecutive weeks toward their highs—making the January dip look like a shakeout. If you want in, a small position around here is OK.

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Stock 8

Occidental Petroleum (OXY)

Why the Strength

The oil story is fairly well known at this point, so some sort of shakeout is always possible, but the evidence still suggests that the cash flow stories in the sector are far from fully appreciated. One newer name (for Top Ten anyway) is Occidental Petroleum, which has had a so-so history as it got too diversified for its britches and took on way too much debt in years past; the company has only recently completed a whopping $10 billion divestiture program, leaving it with core operations in the Permian, the Rockies and a little in the Gulf of Mexico and overseas, along with a profitable chemical operation that’s a global leader in caustic soda (helps make soaps, paper and petroleum products) and is the third largest U.S. maker of PVC. The acreage is great (Occidental has by far the largest number of top-producing wells in the Delaware basin), which along with the chemical business has led to a torrent of free cash flow of late (nearly $2.50 per share in Q3 alone!), though most of that has gone to debt reduction—Occidental paid back $4.3 billion in Q3 alone and tendered another $1.5 billion or so in December, getting the total figure down to $29 billion-ish. Here’s why that’s key: Management has said it wants debt to decrease to the “mid-$20 billion range” before it starts boosting returns to shareholders, so it’s possible the firm could hit its target pretty soon—which in turn means it could start paying out huge dividends and/or buying back shares within a quarter or two. And that’s assuming energy prices ease back 10% or 20%--if they stay up here who knows how big free cash flow could be, even if the firm does expand output some. All in all, Occidental looks like it’s just turning the corner in terms of shareholder returns, and Wall Street is rewarding them for it.

Technical Analysis

OXY hasn’t really been a leader in the oil group—after topping just below 33 last March, the stock suffered through three sharp corrections (31%, 35% and 27%), with no net progress through January. But now we’re seeing a change in character, not just because the stock has moved to new highs but because of the volume (three straight weeks of above-average buying) and persistency, too. We’ll set our buy range down a bit, aiming to grab shares on a shakeout.

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Stock 9

Planet Fitness (PLNT) ★ Top Pick

Why the Strength

We’ve always loved Planet Fitness’ overall growth story, and after two years fighting virus-related headwinds, shares seem to be anticipating a return to the prior good times. The firm is one of the only nationwide fitness center chains, known for its reasonable pricing (starting at $10 per month, though most pay $23 per month, allowing you to use any location and bring a friend, too), its non-musclehead clientele (take your grunting elsewhere!) and its top-notch equipment—all in all, the chain appeals to the masses that want to work out but aren’t obsessed with it … a group that’s likely to grow in the wake of the pandemic. At year-end, Planet had 2,254 stores (90% or so are franchised, though it has brought some back under the company-owned umbrella of late; 98% of locations are open) that have solid economics (payback of the initial investment in three to four years); the top brass sees the potential for more than 4,000 in the U.S. alone and has been expanding steadily. Indeed, despite the pandemic and on-again, off-again mask mandates, the company opened 132 new locations last year (6.2% store growth) and actually saw total membership finish the year at 15.2 million, up 12.5%, which, along with equipment sales to franchisees, has prompted a big turnaround in the financials during the past couple of quarters. But that should be just the tip of the iceberg: In Q3 2019 (pre-pandemic), revenue per store came in at nearly $88,000, compared to just $68,500 in Q3 of last year—while quarterly revenue figures can be affected by periodic equipment sales to franchisees, there’s no question that even the existing store base has plenty of “catch up” potential as virus restrictions ease, and that says nothing about new store openings. The next big update will be the Q4 report, which will be released February 24.

Technical Analysis

PLNT reached 82 in May 2019; as of a few weeks ago, it was still hanging around the same level, representing a massive base-building effort for nearly three years. And, to us, it seems like the stock wants to breakout—in fact, PLNT did break out in October, but the market’s decline yanked it lower, leading to a fresh, well-controlled three-month launching pad since then. The stock has perked up near its highs of late, and a decisive push above 100 or so would be bullish. You could just wait for earnings on February 24, but if you’re more aggressive, we’re OK starting a small position here or on dips.

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Stock 10

Spirit AeroSystems (SPR)

Why the Strength

Spirit is one of the world’s largest designers and manufacturers of aerostructures for commercial and defense aircraft. The company’s core products include fuselages—most notably for the 737 MAX, which it sells to its former parent Boeing—as well as pylons and wing components. After being grounded for several months after two fatal crashes, the 737 was cleared to fly again in the U.S. in late 2020, and has recently been cleared for commercial flights by China. The 737’s comeback is expected to be big business for Boeing (which sold a quarter of its planes to China prior to the grounding), and in turn, for Spirit, as the 737 has accounted for a large part of its sales in recent years. With the 737 back in production (Boeing estimates a 43% increase in the build rate for 2022), and with global air travel expected to make a big comeback this year, Spirit is on a glide path for continued revenue growth. In Q4, Spirit grew sales 22% from a year ago, to just over $1 billion, mainly due to higher production deliveries on the 737 and increased revenue from its recently acquired Airbus A220 and Bombardier programs. Spirit’s backlog at the end of Q4 was around $35 billion, with work packages on all commercial platforms in the Airbus and Boeing backlog. And while earnings remain in the red, the bottom line is expected to steadily improve in the next few quarters and return to the black by the fourth quarter, helped in part by a recent restructuring. As a result, two major Wall Street banks have just raised their price targets for Spirit (a reason for the strength). Looking ahead, analysts see revenue growth of around 20% in Q1 and Q2, followed by several more quarters of mid-30% growth as business recovers.

Technical Analysis

After a strong start to 2021, with shares soaring from a late January low at 33 to 54 in March, SPR encountered some serious turbulence. Since that point, the stock has dropped to the 35 to 40 area a handful of times, with the nadir in December (34% off its high) and another shakeout in January to 40. But SPR has acted well since then, running back to its old highs before some sellers showed up with the market. Expect volatility, but if you want to nibble on dips, we’re fine with it.

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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 February 22, 2022.