February 16, 2021

Be Selective, but Stay Bullish

Current Market Outlook

With the major indices in record territory and the leading growth stocks showing strength, it’s hard to be anything less than bullish right now. Even at these elevated levels, the market has provided us with a few attractive entry points recently. But with earnings season well underway and sentiment still elevated, the potential for near-term volatility has increased. Thus, it’s imperative not to throw caution to the wind in this news-sensitive environment. Given the weight of evidence, being selective when buying is the preferred tactic. The dominant intermediate-term trend is clearly up, though, so you don’t want to be too defensive. We’ll keep our Market Monitor at 7 and see how things go from here.

This week’s list has a nice mix of stocks across several industries benefiting from different trends. Our Top Pick this week is CarParts.com (PRTS), which recently had a high-volume breakout from a huge basing pattern.

Agilent Technologies (A)

agilent.com

Why the Strength

Among laboratory support companies, Agilent doesn’t garner as much attention as other big players in the field. But as more academic and research labs reopen around the world, the company is poised to capture more market share. Agilent provides instruments, software and services for research centers globally. The firm is divided into three units: Life Sciences and Applied Markets (45% of revenue), CrossLab (35%) and Diagnostics and Genomics (20%). It closed out a very strong 2020, posting Q4 per-share earnings of 98 cents that were up 10% from a year ago, while operating margin was a healthy 25%. Revenue was 8% higher at $1.48 billion, thanks to recovery in some of its end-markets. Among those top-performing markets were pharmaceuticals, which delivered 12% higher revenue, and food (up 16%), while chemicals and energy grew 3% after posting two quarters of double-digit declines. Among its top foreign markets, China led the way with 13% growth in the quarter and up 7% for the year. (China is expected to be a huge opportunity for Agilent, accounting for around 19% of total sales.) For full-year 2021, the company guided for revenue to range between $5.6 billion and $5.7 billion, up 6% at the midpoint, along with per-share earnings of $3.57 and $3.67, resulting in double-digit growth at the midpoint. Looking ahead, Agilent is focused on a building-and-buying strategy with emphasis on high-growth markets, as well as on increasing its digital capabilities. Management sees its addressable market at about $52 billion, led by pharmaceuticals and diagnostics, providing lots of leeway for the growth initiatives to pay off. Earnings are due out February 16.

Technical Analysis

Shares of A have more than doubled since bottoming around 60 during the March meltdown last year. The stock accelerated its run higher during Q4, twice bouncing off the 50-day line without violating it—most recently in late January. The latest successful trendline test confirmed that the buyers still had control of the intermediate trend, though the upcoming earnings report could create some volatility. Assuming the earnings reaction isn’t conspicuously negative, you could start a position here or (preferably) on dips.

A Weekly Chart

A Daily Chart

Analog Devices (ADI)

analog.com

Why the Strength

The pandemic put a massive strain on the semiconductor industry, as a major surge in the demand for PCs and other electronic devices resulted in a global chip shortage. But as supply is gradually replenished, industry experts estimate global semiconductor sales could jump 12% this year after rising 4% in 2020. Poised to ride this anticipated wave in chip demand is Analog, which specializes in data conversion, signal processing and power management technology. Although it suffered a Covid-related revenue decline in early 2020, its top line staged a meaningful rebound in fiscal Q3 as broad recovery set in, with additional revenue growth in Q4. And when the company reports fiscal Q1 earnings on February 17, Wall Street expects to see a 16% top line increase along with a 28% per share earnings bump. Looking ahead, management sees a big future for its chips in vehicles (auto segment revenue rose by a mouth-watering 40% in Q4). Analog’s new automotive solution reduces a car’s energy requirements by 3% and its weight by nearly 100 pounds. In the white-hot electric vehicle (EV) market, moreover, the firm is well positioned to gain market share; its Battery Management segment boasts a broad portfolio of high-performance devices, including chargers, companion battery charge controllers and battery backup managers. Along these lines, Analog recently announced the industry’s first wireless battery management system for EVs, enabling automakers to scale their EV fleets into volume production across a wide range of vehicle classes. Accordingly, with EV sales expected to increase from 2.5 million units in 2020 to 3.4 million units this year, Analog is well positioned for expansion.

Technical Analysis

After a rough start to 2020, ADI bounced off its March low of 80 and recovered to 125 by June. It lagged its industry peers during most of last summer and fall, forming a launching pad between 110 and 120. Liftoff was in November and the stock has trended higher since then. ADI just posted a record high after a successful test of the intermediate-term trend line earlier this month. You could nibble here or on minor dips.

ADI Weekly Chart

ADI Daily Chart

CarParts.com (PRTS)

carparts.com

Why the Strength

CarParts.com clearly benefited from last year’s stay-at-home restrictions, which forced consumers to change the way they shopped. And while some skeptics fear the online parts seller will see slower growth as the economy reopens, the company’s recent initiatives have been well received by the market, thus higher sales are expected in 2021. In Q3, revenue was up 70% from a year ago as the firm grew 3-to-5 times faster than its closest competitors. The quarter also featured significant improvement in net income, to $1.4 million, or 3 cents per share (compared to a $1.4 million loss a year ago). Gross margin reached record highs, while the company also strengthened its cash and liquidity position, most recently closing an underwritten public equity offering of $60.5 million in net proceeds (which was 3x oversubscribed). CarParts sees its strongest demand from customers ordering parts for vehicles 6-to-12 years old, yet management realizes that as drivers increasingly turn to electric vehicles (EV), the market for EV parts will only expand. To that end, CarParts recently launched an online shopping hub for EV and hybrid vehicle owners—a big reason for the latest strength. Looking ahead, management believes 2021 will see continued strength for the company as consumers continue to avoid mass transit and turn increasingly to the automobile market. The firm plans to offer brakes this year, which analysts believe could result in an estimated $250 million in annual sales. Wall Street estimates call for Q4 revenue to increase 46%, followed by a 29% top line bump in Q1 2021. Earnings are due out March 8.

Technical Analysis

For most of its 10-year existence, PRTS was stuck in neutral and traded under 5. But in the post-pandemic crash recovery last year, the stock exploded from its multi-year base, breaking above 5 in May and hitting 15 by August. Shares then spent six months bouncing between 10 and 15 before taking off again in late January (after the company’s EV parts announcement). PRTS is slightly extended after its latest rally, but we think minor weakness can be used to nibble on the stock.

PRTS Weekly Chart

PRTS Daily Chart

Chegg (CHGG)

chegg.com

Why the Strength

Chegg is doing its part to help keep a lid on the high cost of education. The company is a leading online direct-to-student education business that provides tools that students need to help them study and make better grades—all at an affordable cost. Its main division, Chegg Services, offers learning solutions, including homework help, writing tools, math problem solving and online tutoring to over 3.9 million subscribers, mainly in the U.S. but increasingly overseas. Its Chegg Tutors offering assists students in finding human help for challenging subjects using an online learning platform that connects students to a network of live tutors. Its Required Materials division provides both e-Textbooks and traditional textbook rental services to students to help offset the cost of study materials. And its skills-based learning brand, Thinkful, provides online-only courses to students in the high-demand areas of software engineering, data science and other technology fields. The company has been growing at a rapid clip, with sales more than doubling over the past two years, to $644.3 million in 2020. In the fourth quarter alone, revenues grew 64% to $206 million from a year ago. Per-share earnings, meanwhile, surged to 55 cents from 35 cents in the year-ago quarter (up 57%). For 2021, Wall Street expects more A+ growth from Chegg, with the top line forecast to rise 22% to $788 million. We like the story.

Technical Analysis

Investors have taken note of CHGG’s fast-growing results, bidding the shares up 135% in 2020. However, the stock took a much-needed breather recently, building a four-week tight base before breaking out to 114 last week and notching a new high. You could take a stab here or (preferably) wait for a pullback to enter.

CHGG Weekly Chart

CHGG Daily Chart

eXp World Holdings (EXPI)

expworldholdings.com

Why the Strength

eXp World Holdings is the holding company for eXp Realty, one of the fastest-growing real estate brokers in the world. It was one of the first real estate firms to embrace a virtual business model, eliminating the need for its member agents to use a traditional brick-and-mortar office. eXp offers a full suite of cloud-based brokerage and real estate tech solutions, including residential and commercial brokerage services and an immersive 3D platform that enables agents to be more connected. The company has been called the “Amazon of real estate” due to its dominance of online-based real estate sales (it sold over $23 billion in houses during the latest quarter, far surpassing its nearest competitors). And the firm is attracting lots of agents with its generous compensation plan. (eXp agents start with an 80/20 commission structure, then keep 100% of commissions on all sales in a given year once they pay the firm $16,000.) It has also been expanding lately, with operations in 10 different countries—a big reason for the recent strength. But by far its biggest source of strength is agent count, a key metric and leading indicator for the business. In Q3, eXP reported the highest number of agents showing houses in the company’s history, along with an excellent retention rate. Revenue in the quarter was $564 million, up 100% from a year ago, while agent growth was up 56%. Per-share earnings of 20 cents, meanwhile, blew past the consensus by 12 cents. Analysts expect an equally impressive 91% top line increase in Q4, followed by several more quarters of strong growth. All told, with a nationwide housing boom underway, we like eXp’s prospects.

Technical Analysis

EXPI spent several years bouncing around between 8 and 20. But last year’s post-shutdown real estate boom pushed the stock out of its long-term base. Things got going on the upside for EXPI in August, when it finally broke above 20. By December, shares had reached as high as 80. A 2-for-1 stock split announced last month was the catalyst for another big rally, and by February the stock had doubled. After the latest run-up, we prefer waiting for a pullback to enter.

EXPI Weekly Chart

EXPI Daily Chart

Freeport-McMoRan Inc. (FCX)

fcx.com

Why the Strength

Freeport, which mines copper, gold and other commodities in four continents, is benefiting from some pretty significant tailwinds right now. One of those tailwinds is copper and gold prices, which have risen 90% and 23%, respectively, since last March and given Freeport a higher average realized price for both metals. Average net cash costs for copper production, moreover, fell in late 2020, and management sees costs dropping further this year once the firm’s flagship Grasberg mine in Indonesia (one of the world’s biggest copper-gold mines) returns to full production. Another tailwind is China; as one of the world’s top-four copper producers, Freeport stands to benefit from the rebounding industrial use of the metal in China and other Asian countries. Then there’s the anticipated increase in copper demand for the surging electric vehicle market, as battery-powered vehicles use about four times as much copper as gas-powered vehicles. Highlighting the strength was Freeport’s fourth quarter performance. The top line improved by a very telling 15% from a year ago, helped by higher gold prices. The per-share earnings of 39 cents, meanwhile, was miles above the year-ago 2 cents per share. Sales volumes of copper were 3% above the firm’s October estimate, while gold sales were 9% higher than previous guidance. Analysts predict Q1 and Q2 revenue increases of 65% and 70%, respectively, while the bottom line is expected to increase appreciably. Looking ahead, management projects a copper sales increase of 20% over 2020, with gold volumes expected to rise by more than 50%—even as production costs decline. The company’s quarterly dividend has also just been reinstated, tying a nice bow on an attractive package.

Technical Analysis

FCX spent most of 2018 and 2019 on a sliding board, but there was a dramatic change of character in the stock beginning last spring. The turnaround kicked off in April, and the entire rise since May has been contained by the 50-day line. The latest (successful) trendline test was followed by a move to a new high. We’re OK starting a position here.

FCX Weekly Chart

FCX Daily Chart

Johnson Controls International plc (JCI)

johnsoncontrols.com

Why the Strength

The pandemic put a significant dent in the market for commercial real estate last year, leaving offices vacant as the work-from-home movement became established. Johnson Controls is a major player in commercial and residential building supply, including fire detection, HVAC and refrigeration equipment. While the company experienced a sharp drop in bookings during last year’s Covid-related shutdown, sales have since rebounded thanks to a new artificial intelligence-driven building control system. One indication of the rebound is a reported backlog of $9.5 billion (up 3%), as of Q1 2021. In the latest quarter, Johnson Controls launched seven new offerings, most notably OpenBlue healthy buildings. Touted as the industry’s most comprehensive suite of connected solutions, it features data-driven AI technologies that facilitate enhanced interaction with buildings by creating intelligent, safe and dynamic environments—including a full suite of Covid-19 solutions—and billed as a way to get customers back to work as “safely and efficiently as possible.” Also in fiscal Q1, per-share earnings improved by 8% from a year ago to 43 cents, while free cash flow was up 10% to over $400 million. Although sales declined 4%, the top line improved sequentially compared to last quarter’s 6% decline. The company reported higher demand for residential HVAC equipment in North America, as well as in its Asia Pacific and China markets. (Indeed, HVAC demand is expected to dramatically increase in Covid’s wake in the next 2-3 years.) Looking ahead, management expects Q2 revenue to increase in the low-to-mid single-digit range, then ramp up significantly in the second half of the year (in line with estimates). We like the story.

Technical Analysis

After a waterfall decline from 43 to 23 in last year’s first quarter, JCI commenced a spirited recovery from those lows on the back of improved worldwide HVAC demand. There were a couple of bounces off the 50-day line last fall, followed by a springboard move to new highs in January. You could start small here or on pullbacks of a point or two.

JCI Weekly Chart

JCI Daily Chart

Pinterest (PINS)

pinterest.com

Why the Strength

The stay-at-home trend has caused an explosion of interest in personal projects like recipes, crafting and home décor instructions. One of the biggest go-to sites for collecting these inspirational ideas is Pinterest, a social media platform that features a series of “pins” on virtual “boards” on an unlimited range of topics and often accompanied by web links, pictures, animated gifs and instructional videos. Shares of Pinterest rallied last week when the Financial Times said Microsoft was interested in buying the company (though talks are reportedly “currently not active”). But an even bigger reason for the recent strength was Pinterest’s stellar earnings report. In Q4, the company registered a consensus-beating top line of $705 million (up 76%), driven by strong holiday advertiser demand and positive returns from ad-based products and international expansion. Full year 2020 revenue grew 48% year over year to $1.7 billion. Moreover, the bottom line of $294 million nearly quadrupled, as per-share earnings rose to 43 cents, from 12 cents a year ago. User engagement also improved, with the monthly active user base rising 37% to 459 million, while average revenue per user of $1.57 was up 29%. Management fully expects the positive momentum to continue, guiding for Q1 sales growth in the low 70% range. Analysts agree and expect Q2 revenue to expand by an even more imposing 92%. Further out, the firm plans to deliver more video-based content for users, while enhancing performance metrics for advertisers and increasing its sales umbrella by making the platform more “shoppable.” Given Pinterest’s broadening appeal to creators—and increasing attractiveness to advertisers—the growth runway is huge.

Technical Analysis

PINS spent December and January consolidating in a narrow range, then shook out the weak hands by dropping under the 50-day line. The shakeout was short-lived, though, and PINS quickly recovered to resume its upward trend. The stock then repeated its usual pattern of gapping up on earnings earlier this month (as it has done after the last three earnings reports). The most recent rally caused the stock to become a bit extended from its 50-day line, but we think minor weakness can be used to enter.

PINS Weekly Chart

PINS Daily Chart

Square, Inc. (SQ)

squareup.com

Why the Strength

Digital payment processors are set for another blowout year, as the work-from-home paradigm has made mobile payments more essential than ever. Square is a leader among financial services, merchant services and mobile payment providers, offering a variety of cutting-edge software and hardware payments products aimed primarily at small businesses. Square’s signature card reader attaches to a mobile phone and simplifies the payment process, eliminating the need for expensive equipment. Square Card, its business debit card, allows sellers to immediately access and spend earned funds without setting up a bank account. It also offers online payments, micro terminals and digital systems to facilitate curbside pickups. In Q3, Square’s top line of $3 billion was up 140% from a year ago, while per-share earnings of 34 cents beat expectations by a whopping 112%. By far the biggest contributor to revenue growth has been its Cash App, which contributed $2 billion, or 68% of sales, in the quarter. When the company reports Q4 results on February 23, revenue is predicted to expand by an eye-popping 395%, while earnings are expected to grow 5%. Square has seen consistent growth as its user base has nearly doubled in the last five years, while its gross profit per seller has also doubled. Going forward, management is focused on expanding the lucrative Cash App into new markets, which should pay dividends. Plus, the company should benefit from the fact that 1% of its total assets ($50 million) is invested in bitcoins (deposits of the cryptocurrency are enabled on Cash App). At an estimated total market of $100 billion, Square is serving less than 3% of that, so the upside potential is massive. We like it.

Technical Analysis

The bull market in SQ that began after the stock hit bottom at 32 last March has been fairly steady, with just a couple of pullbacks interrupting an otherwise stellar rise. The most recent dip saw shares temporarily break the 10-week line in late January, which provided SQ with a needed shakeout. Strength was quickly restored, however, and the stock recovered to new-high territory. It’s a bit stretched, so use dips to enter.

SQ Weekly Chart

SQ Daily Chart

Twitter (TWTR)

twitter.com

Why the Strength

Well-known social networking service Twitter found itself at the center of controversy after the January 6 riot at the U.S. Capitol. The company took the contentious step of shutting down President Donald Trump’s personal Twitter account, which he frequently used for messaging while in the White House. Consequently, the company took a hit as a result in terms of its app download rankings. However, Wall Street doesn’t believe this controversy will have a lasting impact on Twitter’s advertising-driven business model. In fact, with more moderate content, brand advertisers may view Twitter as a safer platform for their marketing. And Twitter has captured the attention of more than 320 million monthly active users, including many prominent celebrities and public figures. This potentially creates enormous brand value for Twitter users, as well for advertisers, on its platform. Further, digital advertising has proven to be very resilient to the pandemic-induced economic contraction and has bounced back faster than other forms of advertising. A recent industry survey showed that advertisers are likely to boost their social media spending by at least 25%, with Twitter being a prime beneficiary. The company posted impressive fourth quarter results last week with revenue of $1.3 billion, growing 28% and beating consensus estimates by $102 million. Per-share earnings, meanwhile, came in at 39 cents, up 50% and beating the consensus forecast by 22%. For 2021, analysts expect Twitter’s top line revenue to expand by 31%, along with a full-year earnings per share of $1.27.

Technical Analysis

TWTR took a hit in early January from the fallout after the Capitol riot. But after a brief—and refreshing—pullback, shares bounced back quickly and have since shot up to record territory. Yes, the stock is stretched from its intermediate-term trend line, but pullbacks would be tempting.

TWTR Weekly Chart

TWTR Daily Chart

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 green.

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The next Cabot Top Ten Trader issue will be published on February 22, 2021.