February 22, 2021

More Wobbles, but Nothing Abnormal Yet

Current Market Outlook

After a very strong rally from the late-January lows, the major indexes are again in the midst of a pullback—during the past week and a half we’ve seen a few days of churning and distribution as worries over inflation (and a less-loose Federal Reserve) cause some profit taking, and today saw a big rotation out of growth stocks. Could this be the start of a “real” correction? It could be, as the intermediate-term advance is long in the tooth and sentiment remains giddy. That said, we never anticipate, and so far, we really haven’t seen much abnormal action yet—while a few stocks have fallen apart after earnings, most leaders are intact and even the weakest major index (Nasdaq) is near its 25-day line, which is acceptable. Given some of the yellow flags out there, our antennae are up, but with most of the evidence still positive, we’re keeping our Market Monitor at a level 7.

This week’s list has many recent earnings winners, including a few that are busting loose from good-sized bases (regular or post-IPO). Our Top Pick is Wix.com (WIX), which has a great story, accelerating growth and just staged a very powerful breakout.

The AZEK Company (AZEK)

azekco.com

Why the Strength

The pandemic and resulting lockdowns have had a big impact on American society and business—some negative, but some very positive. One of the biggest winners is the home improvement area, which has received a major boost as home-bound Americans tackle remodeling projects. Azek is a big beneficiary of this trend: It’s a leading manufacturer of composite and PVC decking, railing, trim, pavers and other related building products. The vast majority (72%) of the company’s sales comes via the residential repair and remodeling (R&R) market, with another 11% accounted for by new construction and 17% from commercial markets. And Azek’s recent results, out just two weeks ago, underscore how strong the U.S. remodeling market is right now. For its fiscal first quarter, the company reported earnings of $0.15 a share, up 650% from a year ago and three cents ahead of expectations. Sales were also hot and heavy, surging a whopping 28% in the quarter (also topping estimates) as strength was seen across its business lines. And Azek management projected sales growth of 16% this fiscal year (ending in September), nicely above its previous guidance for top line growth of 12%. Analysts are bullish (earnings up 31% this year, 19% next), too, with the only wild card being interest rates—a backup in borrowing costs could take a bite out of the remodeling market, but right now, there’s no question Azek is firing on all cylinders.

Technical Analysis

AZEK came public last June and enjoyed a good first couple of months before falling into a typical post-IPO droop. However, like many IPOs from last year, it steadied itself and built a nice-looking launching pad for a few months. It began to show life in December and has picked up steam since, with shares reacting well to earnings two weeks ago before chopping sideways in recent days. We’d prefer to aim for dips of a couple of points, but if you wanted to nibble here we wouldn’t argue with it.

AZEK Weekly Chart

AZEK Daily Chart

Deere & Company (DE)

deere.com

Why the Strength

Strong crop prices have been an underrated trend over the past year, and they’ve given farmers the flexibility to upgrade old farm equipment, including tractors. And now the not-so-stealth bull market in commodities has pushed John Deere’s agricultural equipment sales significantly higher, while the red-hot housing market has resulted in higher revenue for construction and lawn equipment—a perfect storm of demand that’s driving sales and earnings through the roof. The maker of the iconic green and yellow mowing, harvesting and construction machinery reported a top line increase of 19% to $9.1 billion in its latest quarter (ending January), while its bottom line of $3.87 per share was up 137% (!) and more than twice analyst estimates. Growth was seen across all its segments in the latest quarter: The company’s production and precision ag business reported a 22% sales hike over last year thanks to increased sales of equipment and technology solutions for production-scale growers of grains, cotton and sugarcane. Net sales for Deere’s small ag and turf business, which includes hay and forage equipment, lawn and golf course equipment and utility vehicles, was up 27%. And in the construction and forestry category, revenue rose 21% due to higher shipment volumes and favorable currency factors. Deere doesn’t expect such rapid growth to continue, guiding for 2021 revenues (except in Asia) to be up in the low-single-digits in most categories, with industry sales of heavy equipment to be up between 15% and 20% for the year. (North American agriculture is expected to show particular strength due to the resurgent farm economy). Looking ahead, management touted the technological improvements in its earthmoving and roadbuilding products as being future growth drivers, especially if infrastructure work picks up. Analysts see earnings soaring 68% this year and another 17% in 2022, and even those will likely prove conservative.

Technical Analysis

DE is a big company, but the stock has shown the ability to trend nicely when conditions are favorable, and that’s what’s going on now. The stock broke out of a multi-year consolidation in August and has been kiting higher since, finding repeated support at its 10-week line during the market’s periodic selloffs. Last Friday’s big-volume pop after earnings was encouraging, though like most names, we prefer targeting dips for entries.

DE Weekly Chart

DE Daily Chart

DraftKings Inc. (DKNG)

draftkings.com

Why the Strength

You won’t find many stories bigger than DraftKing’s, as the firm is positioned to be one of (if not the) leading players in the iGaming (online casino-like gambling), daily fantasy sports and online sports betting industries. Obviously, there are other players (Penn National most notably, and some smaller fries like Fubo are making inroads), but DraftKings’s advantage was that it was built from the ground up for the new industry reality. Indeed, the company has a first-mover advantage in terms of scale and partnerships: It has the industry’s leading online sports betting footprint, launching in two new states in Q3 (Illinois and Tennessee), and it’s gone live in both Michigan and Virginia since. The firm also is ready to hit the ground running in Connecticut via a partnership with Foxwoods casino if/when that state approves online gambling, has a ton of deals with key franchises and media outlets (Chicago Cubs, ESPN, NFL, New York Giants, etc.) to be the exclusive gambling provider, and for iGaming, it’s a top player in a few different states. Even with that, DraftKings is live in just a dozen or so states, leaving a ton of room for expansion as local governments look for ways to attract more revenue (especially in the wake of Covid-related shortfalls). Impressively, despite the relatively small area of operation, business is big and getting bigger in a hurry—on a pro-forma basis, revenues were up 42% in Q3 and totaled $133 million, with one million active players in Q3 (up 64% from the year before). The company is on record saying it believes the top line can expand to $800 million or so this year (up 45%), which most analysts see as conservative. All in all, there’s little doubt that DraftKings is going to get much, much bigger in the years ahead. The next update comes Friday morning (February 26), when the firm will report Q4 results.

Technical Analysis

DKNG went bananas last spring, zooming all the way to 45 in June. But after that, the stock went down (to 28 in July), up (to 64 in October) and down again (44 just after the New Year), representing seven months of no net progress. Since then, though, shares have begun to act more constructively—DKNG moved above resistance near 56 earlier this month, tested its prior all-time high two weeks ago and has had an orderly pullback since (even closing up today). Earnings are a roll of the dice, but we’re OK starting small here and seeing how the quarterly report is received.

DKNG Weekly Chart

DKNG Daily Chart

Magna International Inc. (MGA)

magna.com

Why the Strength

Electric vehicle companies are likely in the early stages of a great growth wave, with a growing number of automakers announcing new models in the white-hot EV market. At the heart of the mix is Magna International, which supplies auto components and systems to nearly 60 equipment manufacturers globally and has partnerships with some major industry players. A big part of the excitement surrounding this Canadian auto parts supplier is that it recently entered a billion-dollar joint venture with South Korea-based LG Electronics to make key components for electric cars; the plan is to gain market share in e-axle systems, which combine electric motors, power controls and gears into a single unit. The company is also working closely with luxury EV maker Fisker by helping to manufacture that firm’s highly touted electric SUV, the Ocean, which is supposed to hit the U.S. market later next year. In the meantime, the rapid economic recovery has Magna turning heads on the earnings front as well, delivering a fantastic fourth quarter performance: Q4 sales of $10.6 billion (up 12%) and earnings of $2.83 per share both easily topped estimates, with the earnings figure doubling from a year ago. Magna also raised its quarterly dividend by 7.5%, to 43 cents per share (2.1% annual yield). Perhaps even more impressive is the outlook, as analysts see Magna’s top line surging 19% this year while earnings leap 70% (which would mark its highest earnings level in many years), and the company actually has an even stronger outlook than that! Further out, the company anticipates annual light-vehicle production in North America, Europe and China will reach 62 million by 2023, which if realized would represent a 27% increase from 2020 production numbers. It’s a solid turnaround situation with an EV kicker to the story.

Technical Analysis

Covid-related production setbacks pushed MGA shares lower last winter, with shares hitting rock bottom at 25 in March. The bounce-back from there was gradual at first, picking up steam (and hitting multi-year highs) starting in October after the stock catapulted off the 10-week line. Shares moved mostly sideways for the first few weeks of 2021 but have turned strong, with MGA popping to new highs last week on triple its normal volume. We’re OK starting a position on dips.

MGA Weekly Chart

MGA Daily Chart

Mohawk Industries (MHK)

mohawkind.com

Why the Strength

Despite a recent rise in longer-term interest rates, there’s been no sign of a slowdown in real estate. (In fact, housing permits is one of the sector’s best leading indicators, rose 10.4% month-over-month in January and 22.5% from a year ago!) And that’s great news for Mohawk Industries, which might be the most direct play on a strengthening housing market: Mohawk is the world’s largest flooring manufacturer, with the leading market share in ceramics, carpets, laminates, wood, countertops, stone flooring and more, selling to more than 25,000 customers worldwide. (Indeed, this is a global story—58% of sales do come in the U.S. but there’s a lot in Europe and elsewhere, too.) With remodeling (which benefits Azek; see our writeup earlier in this issue) and new building going through the roof, it’s not a surprise to see Mohawk’s numbers follow the same trajectory: The firm had been underperforming for a while and sales took a hit early in the pandemic, but Q3 sales were the highest in five quarters while earnings catapulted higher, and the Q4 report was even better, with sales up 9% (strength was seen across all products) and (thanks to strong demand and cost controls) earnings surging 57% and cruising past official estimates ($3.54 per share, 66 cents higher than expectations). And the best is yet to come, with analysts rushing to hike their outlooks—they now see earnings of nearly $12 per share this year (up 34%), up from an estimate of around $10 before the Q4 report. Clearly, if rates or elevated real estate prices crimp the housing market, all bets are off, but the odds strongly favor the good times continuing for another few quarters, which plays into Mohawk’s hands.

Technical Analysis

MHK topped at 286 in late 2017 and began a long descent as growth flatlined—the low near 56 came last March with everything else, with shares having an uneven, choppy recovery for the next few months. But early November marked a change in MHK’s fortunes, with shares marching higher 12 weeks in a row, and after a one-week shakeout with the market, the stock has rallied the past three weeks and sits at two-plus-year highs. We think modest weakness (possibly filling the post-earnings gap) would be buyable.

MHK Weekly Chart

MHK Daily Chart

MongoDB (MDB)

mongodb.com

Why the Strength

MongoDB’s cloud-based document database program is fast becoming a (the?) gold standard for software developers, billing itself as the most popular database for modern apps. Using a streamlined cross-platform approach, it allows users to bypass cumbersome Excel-based databases and quickly build more scalable and flexible applications. Although the company’s software is offered free of charge to new customers, it monetizes the product by upselling subscription-based management tools to boost the value the user can get from it. Mongo has achieved stellar success on this front, as evidenced by third-quarter revenue growth of 38%; amazingly, same-customer revenue growth (one of the key metrics for subscription-based businesses, similar to same-store sales growth for retailers) has been above 20% for a mind-boggling 23 quarters in a row! Plus, its community server has been downloaded over 130 million times, including over 55 million times as of Q3—more than the total number of downloads in the first 10 years of Mongo’s history. There is some competition, of course, but Mongo looks like the leader and is bolstering that via partnerships, including a recent one with Chinese tech juggernaut Tencent, which allows customers to easily adopt and use MongoDB-as-a-Service across Tencent’s global cloud infrastructure. (That announcement was a big reason for the stock’s latest strength.) The one worry here is that growth, while rapid, has been decelerating for a few quarters, though analysts see that decline stabilizing soon (27% revenue growth in Q4 and Q1 are expected, both of which are likely conservative). Plus, the prize here is huge, as the database market that MongoDB operates in should lift 30% annually and reach $22 billion by 2026. The next quarterly report is out on March 9.

Technical Analysis

MDB hit new highs in May of last year, but it then went dead for a while, making little net progress from June through November of last year. But it’s been a different story since then, with a strong rally to 400 in December, a five-week rest (including a nice shakeout with the market in late January) and a push to new highs this month. Overall, the action is solid, and with the 50-day line catching up, we’re OK starting a position here or on dips.

MDB Weekly Chart

MDB Daily Chart

SelectQuote (SLQT)

Why the Strength

Here’s an easy, powerful story that should go far if management makes the right moves. Though the stock just came public last May, SelectQuote has been around for three decades and is now one of the leading online insurance providers out there; it doesn’t actually insure anyone (no underwriting risk, etc.), but serves as a portal, connecting thousands of insurance-seeking consumers with more than 50 insurance providers. But any firm can build a portal—SelectQuote is the leader thanks to its licensed internal agents (more than 1,500 who are specialists in various insurance fields), technology (real-time quotes and underwriting, advanced lead scoring, financial reporting tools) and data (gathered more than one billion data points over the years), all of which can accurately rank lead candidates and produce better outcomes for both shoppers (easier, convenient) and insurers (lower cost of customer acquisition). Health insurance for seniors is the main draw here, making up 80% or so of total revenue thanks mostly to Medicare Advantage; life insurance is smaller (14% of the tally) but also growing fast (up 50% during the past year), with auto insurance making up the rest. As the recent Q4 report showed, business continues to hum, with sales and earnings more than doubling and easily topping estimates, and analysts see much more of that coming both this fiscal year (ending in June; earnings up 83%) and in fiscal 2022 (earnings up another 48%). Given that the insurance markets SelectQuote plays in are north of $100 billion, there’s no reason growth can’t remain rapid for years to come. We like it.

Technical Analysis

SLQT is one of many relatively recent IPOs (May of last year) that spent a few months correcting and consolidating but is now on the move. The stock fell as much as 46% last summer and fall before steadying itself. Buyers began to show up in November, and after a quick shakeout with the market late last month, the stock now looks like a fresh leader—SLQT soared two straight weeks on big volume before and after earnings, and shares nosed to new price highs last week and again today. We probably wouldn’t chase it here, but a modest dip of a point or two would be very tempting.

SLQT Weekly Chart

SLQT Daily Chart

Sonos (SONO)

sonos.com

Why the Strength

Sonos (originally covered in the November 23 issue), which offers high-fidelity wireless home audio products and is a direct play on the connected home theme, showed tremendous resilience in an obstacle-filled fiscal Q1 that included component and container shortages, port backlogs and Covid-related dock worker illnesses. Despite these setbacks, Sonos managed to beat expectations on every key metric, which has kept the stock’s uptrend in strong shape. Total revenue increased 15%, to $646 million, while system products revenue leapt a sterling 59% thanks to a record addition of new homes and an increase of existing customers making add-on purchases. Earnings per share of $1.01 increased from 60 cents a year ago and beat estimates by 15 cents. While some analysts are skeptical that Sonos can maintain its growth rate once the pandemic subsides, management sees a huge opportunity in audio (including the explosive growth of streaming music, podcasts, audio books and social audio), which it believes will drive long-term growth as the economy reopens. Additionally, the firm sees opportunities in work-from-home audio demand, as well as the recent home theater trend, all of which should keep demand elevated for the firm’s high-end speakers and systems. The company guided for fiscal 2021 (ending in September) revenues to be around $1.55 billion, which would represent 17% growth, in line with analysts’ expectations. Sonos isn’t changing the world, but it’s well managed and the top brass believes it’s playing in a $60 billion (and growing) market—as consumers’ preferences change, Sonos should continue to do well.

Technical Analysis

SONO launched a powerful breakout from a three-month base in late November, blasting ahead on 13 times average volume, which is usually a good clue that a major advance is getting underway. The action for the next few weeks was solid, albeit choppy, but SONO has gone vertical in February, rallying to new highs before and after earnings. Near term, it’s extended, but bigger picture it’s still likely in the early stages of its run. Aim to enter on weakness.

SONO Weekly Chart

SONO Daily Chart

Teck Resources Limited (TECK)

teck.com

Why the Strength

Mining and metals stocks have morphed into leaders of the market advance, as super-loose fiscal and monetary policy along with greater economic expectations have pushed prices for base metals nicely higher. One of the top movers in the sector is Teck Resources, a diversified miner with coal, copper, zinc, and oil sands operations in Canada, the United States, Chile, and Peru. Metallurgical coal (or met coal), used in steelmaking, is Teck’s primary commodity, followed by copper. Met coal has been surging in price thanks in large part to resurgent Chinese demand amid a boom in infrastructure investment; in fact, nearly 20% of the company’s fourth-quarter sales was shipped to China. While China is a key customer for everything Teck digs out of the ground, higher steel demand across emerging markets and a shortage of met coal supplies should keep pricing strong through 2021. And unlike some of its larger peers, Tech has the added advantage of operating in stable countries like the U.S., Canada and Chile, lessening the political risk compared to other mining operators. Looking ahead, Teck also has the potential to boost production without a lot of cost, which should turbocharge the firm’s bottom line as 2021 progresses. As for the here and now, the company is already seeing improvement in margins—Q4 results (reported last week) showed earnings up 15% and miles ahead of estimates (46 cents per share vs. 29 cent forecast) even though revenues were down 4%. Teck is also moving quickly on a new mine in an effort to boost copper output, another commodity that’s been red hot. Analysts see earnings doubling this year.

Technical Analysis

TECK has been advancing since last March’s low, but progress has been much smoother in recent months. After breaking out of a base in November, the stock kited as high as 21, pulled back with the market in late January and has since surged to higher highs, bolstered by last week’s strong Q4 report. Given the chart and the market, we favor getting in on dips toward 22.

TECK Weekly Chart

TECK Daily Chart

Wix.com (WIX)

wix.com

Why the Strength

The demand for e-commerce tools has mushroomed since the start of the pandemic, and Wix has filled those needs by building new products and boosting its customer support. The company’s web design platform allows amateur and professional users to have an online presence for a low cost; many set up websites free of charge (albeit with Wix ads placed on them), but the firm is growing fast by providing value-added services as customers’ businesses grow. The fourth quarter was a persuasive testament to Wix’s growth initiatives, including the launch of Editor X, a suite of collaboration tools that enable concurrent editing (making it the only fully collaborative web creation platform in the world). The firm also introduced several key modifications to the Wix Payments platform, including a new feature designed to improve the user experience and expand its overall product offering. Highlights of the latest report include payments and collections revenue increasing by a whopping 382% in full-year 2020, thanks to an improved take rate (the number of users or site visitors that take action on offers). Revenue in Q4 leapt by 38% to $283 million, helped by an increase of 185,000 premium subscriptions (up 107%), for a total subscriber count of 5.5 million. Also, the total registered user base rose 19% to 197 million, prompting management to predict that in five years, “half of all the new things on the internet will be built on Wix.” Wall Street concurs, as evidenced by recent share price upgrades from two big-name institutions. Going forward, Wix will pursue its goal of democratizing the internet and providing a place where most individuals and small businesses (business solutions revenue nearly doubled in Q4, led by Payments) will build their web presence. Analysts see revenues up 30% this year while free cash flow (which totaled $2.30 per share last year) spikes.

Technical Analysis

WIX shares rallied from its 160 breakout level last May all the way to 300 before effectively topping out in July. Then came an exhausting six months of backing and filling within a sideways range that took shares down to their 40-week line a few weeks ago. But the buyers have since returned, with WIX perking up earlier this month and staging a massive-volume breakout on earnings last week. We’re OK buying some here.

WIX Weekly Chart

WIX 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.

The next Cabot Top Ten Trader issue will be published on March 1, 2021.