February 7, 2022

For many weeks the selling pressure was overwhelming, so the first thing we needed to see was the bulls at least put up a fight—and they did two weeks ago, with lots of hectic action after some oversold extremes. And then we saw some lift for the first time in a while, with many beaten-down names finally getting off their knees and a few stocks pop on earning. All in all, we consider it a good start, with the January 24 likely representing a workable low that the market can build off of.

We’ll take it, but in terms of the overall picture, the bulls still have more work to do: The intermediate-term trend of the major indexes remains down, and most individual stocks are still buried beneath major resistance (just 37% of NYSE and 19% of Nasdaq stocks came into today above their 200-day lines). Near-term, we do think the odds favor some further upside, but the rest test will come as indexes and potential leaders run into resistance; as has been the case, we’re not opposed to starting positions in a potential leader or two, but we continue to think a defensive stance remains mostly appropriate until we see some “real” buying and positive trend changes. Our Market Monitor remains at a level 4.

This week’s list has a variety of recent earnings winners and other setups ahead of their reports. Our Top Pick is Stifel Financial (SF), which (interestingly) is part of a strong Bull Market stock sector and recent surged back to its peaks after a solid Q4 report.

Market Overview

A Good Start—but Much More Needed
For many weeks the selling pressure was overwhelming, so the first thing we needed to see was the bulls at least put up a fight—and they did two weeks ago, with lots of hectic action after some oversold extremes, a sign the buyers and sellers were fighting it out. And then we saw some lift for the first time in a while, with many beaten-down names finally getting off their knees and a few stocks pop on earnings. All in all, we consider it a good start, with January 24 likely representing a workable low that the market can build off of. We’ll take it, but in terms of the overall picture, the bulls still have more work to do: The intermediate-term trend of the major indexes remains down, and most individual stocks are still buried beneath major resistance (just 37% of NYSE and 19% of Nasdaq stocks came into today above their 200-day lines). Near-term, we do think the odds favor some further upside, but the rest test will come if indexes and potential leaders run into resistance; as has been the case, we’re not opposed to starting positions in a potential leader or two, but we continue to think a defensive stance remains mostly appropriate until we see some “real” buying and positive trend changes. Our Market Monitor remains at a level 4.

This week’s list has a variety of recent earnings winners and other setups ahead of their reports. Our Top Pick is Stifel Financial (SF), which (interestingly) is part of a strong Bull Market stock sector and recent surged back to its peaks after a solid Q4 report.

Stock Picks & Previously Recommended Stocks

Stock 1

Allegheny Technologies (ATI)

Why the Strength

A solid rebound in the commercial airline business has breathed new life into Allegheny Technologies, a metals company that produces titanium- and nickel-based alloys, stainless steel and specialty components for several industries—including oil/gas chemicals, but mainly aerospace. Its recent strength is mainly due to the company’s eye-opening Q4 report, as demand for jet engine materials snapped back in the fourth quarter to the highest level in over two years. Sales of $765 million in Q4 rose 16% from a year ago and beat expectations by 6%. Per-share earnings of 25 cents beat estimates by a whopping 15 cents, with operating income of $67 million increasing 125% from the prior quarter and earnings improving massively from the year-ago 33 cent loss. In a further sign that momentum is building, Allegheny eclipsed 2019’s full-year adjusted EBITDA margins for a second straight quarter due to cost controls and improved product mix and pricing. Looking ahead, management guided for per-share earnings between 18 and 26 cents in Q1, which far surpassed consensus estimates, and expects to achieve structural cost savings of $15 to $20 million in 2022 (nearly 14 cents per share) related to its specialty rolled products business transformation. Allegheny also announced a $150 million share repurchase authorization (another reason for the strength), reflecting management’s confidence in the firm’s strong cash and liquidity position. Moreover, the company expects continued forgings and materials demand growth, driven mainly by the ongoing commercial aerospace recovery—indeed, this industry usually has long cycles, and it appears a new upleg is just beginning here. Analysts see sales up 10% and earnings surging this year, with both likely conservative.

Technical Analysis

Like many industrial metal stocks, ATI has been out of favor for years, peaking during the previous commodity inflation period in 2007 at 120 and eventually cratering below 5 in 2020. The rally after that was great, but it gave up a big chunk of that during much of last year, falling 45% from its May peak. But now it looks like the turn has come—ATI rallied six weeks in a row off its low, pulled back sharply with the market but then soared on earnings last week. If you want in, dips would be tempting.

Weekly Chart

Daily Chart

Stock 2

Blackstone (BX)

Why the Strength

With assets under management (AUM) of over $880 billion, Blackstone is one of the largest investment firms out there. Its $261 billion private equity segment is one of the largest investors in leveraged buyouts, and its $279 billion real estate business is a dominant player in commercial real estate acquisition. Credit and insurance ($258 billion) and hedge fund solutions ($81 billion) round out the firm’s profile. While private equity has traditionally been Blackstone’s calling card, the focus these days is on real estate; the company owns over 2,200 properties and it’s on an apartment-buying spree, recently purchasing apartment investor Resource REIT for $3.7 billion, further expanding its realty footprint and bringing it closer to the $1 trillion AUM mark (expected to be hit this year). The company just announced a stellar Q4, achieving record results in almost every metric. Revenue of $5.8 billion rose 59% from a year ago, per-share earnings of $1.92 beat expectations by 52 cents and total AUM grew 42%, thanks in part to a single-year record of inflows that management says has never been achieved by any other alternative investment firm. Just as important is that Blackstone is improving its reliability, too—fee-related earnings (mostly recurring) lifted 144% in Q4 (up 71% for the year) and totaled $1.52 per share, while distributable earnings lifted 55% and came in at $1.71 per share; both underpinned the firm’s quarterly (variable) dividend of $1.45. Looking ahead, Blackstone sees an opportunity to invest $100 billion in energy transition and climate change solutions in the coming decade. Analysts see earnings slipping in 2022, but all signs point to fee-related earnings remaining in good shape.

Technical Analysis

BX had a stellar 2021, rising from 63 to 150 by year’s end (up nearly 140%). Shares tumbled with the rest of the market at the start of 2022, hitting an intraday nadir of 102 in late January. But the rally since then has been tennis ball-like, with two weeks of big-volume buying since earnings. We do think the relatively brief correction after BX’s huge run is less than ideal, but we’re putting more weight in the recent snapback, which is very encouraging. We’ll set our buy range a bit down from here.

Weekly Chart

Daily Chart

Stock 3

Coterra Energy (CTRA)

Why the Strength

Coterra Energy is the name given to the combined operation of Cimarex Energy and Cabot Oil & Gas, which merged last year; that move created some uncertainty, but now the company offers a very well-rounded production profile for investors. Coterra has about 600,000 total net acres split between the Marcellus (173,000), Anadarko (189,000) and Permian (234,000); while gas makes up a bit more of the overall production at this point, that’s set to change, as oil output was up 12% sequentially in Q3 and should be up 30% from the prior year in Q4; it aims to operate four rigs in the Permian and two in the gas-heavy Marcellus. The numbers are still a bit messy given the moving parts related to the merger, but like its peers, there’s no doubt that cash flow is big and getting bigger: Free cash flow came in at around 48 cents per share in Q3 alone (and that actually included a few cents of merger-related expenses), and Coterra is starting pay a lot of that out, with a solid base dividend (2.1% yield) and a variable dividend of at least half the remaining free cash flow—all in, that led to a 30 cent per share dividend for Q3, and that doesn’t even include a special one-time payout of 50 cents a share in October! To be fair, there’s not much straightforward guidance yet for 2022, but the Q3 conference call featured a lot of talk about how little capital would be needed to keep production flat (hinting that big payouts or buybacks could be on the way); indeed, the firm was very lightly hedged back then, so the run-up in oil and natural gas prices should be boosting free cash flow in a big way. It’s a solid story, with the next quarterly report (due February 24) likely to provide a big dividend and some forward guidance, too.

Technical Analysis

CTRA’s chart going back a few months isn’t overly valuable, as the action that counts started after the merger went through in early October. Interestingly, after that time the stock actually ground lower, testing the 19 area four separate times in December and January, including the mid-January shakeout to the 200-day line. But the rally since then has been eye-opening, with a straight-up move toward new highs. A small position on a minor pullback is fine by us.

Weekly Chart

Daily Chart

Stock 4

Dutch Bros. (BROS)

Why the Strength

Dutch Bros. has quickly become one of our favorite cookie-cutter stories in the market; the stock is wild and wooly and probably needs a little more seasoning, but the potential is there. The company operates 538 small-form (new locations are averaging around 900 square feet) beverage locations, with cold drinks the most popular (especially its energy drink offering) but there’s something for everyone. Having started as a family business, the culture and customer service is supposedly top notch; the firm has even leant heavily on opening company-operated stores (instead of franchising) of late, having those that grew up in the corporate environment take over new locations. Whatever it is, Dutch Bros. has been a hit, and the store economics mean the firm is going to get much, much bigger over time—on average, a new location recoups 80% of its opening costs in the first year, and the company is recycling that cash flow into expanding its footprint; all told, the top brass believes it can have up to 4,000 locations in the U.S., and it’s been expanding the store base at a rapid rate (21% last year) to go along with what should be mid-single-digit same-store sales growth. Best of all, business right now is actually outpacing those figures: In early January, Dutch offered a Q4 update, saying that same-store sales rose 10% or so and new openings beat expectations; for 2022, the firm sees 125 new stores opening (up from an estimate of 112), which would represent 23% growth! While we’ve seen such rapid store growth before, it usually pairs with losses, but Dutch’s bottom line is growing nicely and Wall Street expects that to continue. To be fair, the valuation is extreme, but so is the growth potential.

Technical Analysis

BROS came public in September, rallied for a few weeks and then got caught up in the market’s implosion—from top to bottom, shares fell a bit more than 50%, which isn’t good but wasn’t abnormal given the market and the fact this is a new issue. Encouragingly, though, BROS is acting like a tennis ball of late; after a dip below support in the mid 40s, shares have popped higher on excellent volume. As we wrote above, the volatility is extreme (just look at today’s reversal), but if you’re game, you could go after a small position here or on dips, with a loose stop.

Weekly Chart

Daily Chart

Stock 5

Expedia (EXPE)

Why the Strength

A big part of market analysis is spotting abnormal activity—a lot of that is for the downside (big breaks after big advances often mark tops), but also in the bullish direction, too. And so we have Expedia today, which despite a massive wave of omicron, hundreds of flight cancellations and elevated prices for travel, is perched near all-time highs. The company, of course, has become one of the biggest “tells on the overall travel sector—its web of properties includes Hotels.com, VRBO, Travelocity, Orbitz, Hotwire, Trivago, CarRentals.com and more—and business has been steadily recovering from the depths of the pandemic in impressive fashion. In Q3, gross bookings (nearly 80% of which are for lodging) across its platform came in at $18.7 billion, which was still down about 30% from the pre-pandemic Q3 of 2019 (though up huge from the 2020 mess). But other metrics are closer to new highs: Q3’s revenue (down 12% from two years ago) and EBITDA (down just 6%) have rebounded quicker than anticipated, partially thanks to cost controls (costs were 70% of revenue in Q3, down from 73% two years ago) and a big pickup in VRBO (shift toward in-home vacationing vs. hotels). The company is also refocusing somewhat, combining all of its loyalty programs across its brands while selling Egencia (business travel platform) to American Express. But the big idea here is that the choppy travel recovery in 2021 will morph into more of a boom in 2022—analysts see revenue up 35% this year with earnings north of $7 per share, which would be higher than any year since at least 2014. The next big update will come on Thursday evening (February 10), when the Q4 report is due; the headline metrics will be important, but any commentary of increasing trends as omicron fades could be a catalyst.

Technical Analysis

EXPE’s post-crash run took the stock to new all-tine highs, but it finally ran into a wall in March 2021 at 188. What’s followed has been enough dips and shakeouts to get rid of all the weak hands—we see three corrections (27%, 21% and then 16%) since that time, with multiple failures to overcome the 190 area. And that presents an intriguing setup heading into the quarterly report; we’re OK nibbling here, or just seeing if EXPE can decisively get moving after earnings, which should be buyable.

Weekly Chart

Daily Chart

Stock 6

Inspire Medical Systems (INSP)

Why the Strength

About 18 million Americans suffer from obstructive sleep apnea, a condition in which sleep is interrupted multiple times an hour because the airway gets blocked. Usually the solution is a clunky and large CPAP machine, which includes a mask worn during sleep which is connected by a hose to a pump. The problem is some patients can’t tolerate the CPAP – it’s noisy and bulky – so about half end up not using it. Inspire Medical has a better mousetrap: The firm makes a small device that’s implanted into patients, stimulating muscles in the throat to open in coordination with breathing. The device, marketed as Inspire Therapy, is the only FDA approved internal device for addressing obstructive sleep apnea. The outpatient procedure was first approved in 2014 and has been a quick-grower for Inspire, with revenues expanding 80% plus annually since, hitting $230 million last year. As the device has proven itself in patients – the 20,000^th person received one last year – insurance companies including Aetna and Anthem have started reimbursing for it, as does Medicare since 2020. Management believes up to 65% of the non-compliant CPAP patients can benefit from Inspire Therapy, making it a $10 billion market opportunity. (The device is approved in Europe, too, but that area accounts for less than 8% of sales.) To capture that, Inspire needs to convince more doctors to consider it, because CPAP is a 40-year old technology that is viewed as simple to implement, while Inspire seems much more complex. Much of the marketing efforts are focused on addressing consumers directly through ads and extensive PR efforts, thinking patients will prod doctors along. The next big event comes tomorrow evening (February 8), when Q4 results will be released.

Technical Analysis

INSP peaked in March of last year and went on to build a big, deep (37% from high to low) consolidation for the next few months. The breakout attempt wasn’t powerful, and the market had no trouble dragging the stock back down—even to a lower low two weeks ago. But a couple of weeks of good-volume buying have come since then, with shares “only” 21% off their peak. We’re going to set our buy range up from here, thinking a positive earnings reaction could be a chance to nibble.

Weekly Chart

Daily Chart

Stock 7

Mastercard (MA)

Why the Strength

With 2.5 billion cards in circulation, Mastercard is the world’s second-largest credit card network. Its fortunes have drastically improved amid higher spending levels as the global economy recovers, and Mastercard thinks the savings that consumers built up during the pandemic will help fuel elevated spending well into 2022. Indeed, the company recently expressed optimism for the year ahead (a reason for the strength), with management stating consumers will continue spending even if they’re not comfortable going back to retail storefronts. Mastercard reported revenue of $5.2 billion that was up 27% from a year ago, while gross dollar transaction volume of $2.1 trillion grew 23%. Per-share earnings of $2.35 handily beat estimates by 13 cents. But what really caught Wall Street’s attention was the company’s assertion that cross-border spending (up 53%) recovered above pre-pandemic levels, as several borders opened up during the fourth quarter. Mastercard believes that consumers, businesses and government have become “more adaptable to the changing environment” and was confident that its new products and deals, along with stronger partner relationships, will boost growth in the coming year. In the wake of Mastercard’s eye-opening earnings, at least two big Wall Street institutions raised price targets for the company (another reason for the strength), with one analyst emphasizing the resurgence in travel-related spending—an important component of Mastercard’s business. The firm also announced the purchase of Dynamic Yield, McDonald’s AI-enabled personalization platform, to enhance its digital strategy. Impressively, Wall Street sees mid-20% earnings growth both this year and next, so this is far from just a defensive, mega-cap play.

Technical Analysis

After a post-pandemic surge, MA hit a record high of around 400 last April. Shares pulled back to 360 in May and tried to restart the rally but ended up stopping just a few points short of the old high in July. A 24% correction followed, with MA hitting rock bottom at 306 in December, but that’s where the stock’s character changed—since then, shares hit a higher high in January and then zoomed nicely after earnings, with six straight big-volume buying days. The 400 level could be tough to crack, but we’re not opposed to a small buy here or on dips.

Weekly Chart

Daily Chart

Stock 8

Juniper Networks (JNPR)

Why the Strength

Streaming entertainment is booming, with nearly 80% of Americans now subscribed to at least one service, be it Netflix, Peacock or any one of some 50 others available right now. The thirst for more data also means corporations, employees and cloud services providers need to upgrade or risk speeds that will seem like dial-up Internet to employees and customers. That’s driving a push to upgrade data networks from 100 gigabit ethernet capacity to 400 gigabits—which is where Juniper comes in. The company makes 400G networking equipment that Internet providers and mobile phone providers upgrading to 5G systems use to enable their networks to push more data to customers. Juniper says 400G needs more than just hardware, it requires AI-driven networking software to manage massive user demand, security systems to protect data and various offerings to help manage cloud and wide-area networks. Competition among networking companies is intense, with at least a dozen companies significant in some or all of Juniper’s target markets. But the company does a good job of keeping business diversified, with about 40% of this year’s expected $5.1 billion in revenue coming from Internet service providers, with faster-growing enterprise and cloud comprising the rest. The business is roughly similarly split among geographies, and no customer accounts for more than 10% of sales. Growth here isn’t lightning fast, but the attraction is that it should be pretty reliable—expectations on Wall Street is that Juniper will grow earnings per share 14%, to $1.98 this year (with another double-digit gain in 2023), and that assumes supply chain hiccups continue, so if supplies start flowing better, earnings should top that estimate. Shares also pay a healthy dividend, with the next quarterly payout of 21 cents going ex-dividend on February 28 (2.4% annual yield).

Technical Analysis

JNPR broke out of a seven-year range between 20 and 30 starting in November, quickly advancing to near 36, their highest level since June 2011. Inflation fears that have crimped most tech stocks caused the breakout gains to be given back in a couple of weeks last month, but that now looks like a shakeout—JNPR has surged back since earnings and is just a stone’s throw from new high ground. Modest pullbacks would be tempting.

Weekly Chart

Daily Chart

Stock 9

Mosaic Co. (MOS)

Why the Strength

Fertilizer prices are skyrocketing and analysts are predicting global demand for crop nutrients will remain high well into the 2022 growing season. This positions Mosaic (covered in the October 11 report), the nation’s largest phosphate and potash fertilizer producer, for continued growth. Mosaic’s recent strength is about more than just crop demand; last week the Lithuanian government halted the use of its railway for Belarus to export potash to Europe and elsewhere, forcing Belarus to divert its potash shipments to Russia. Analysts also believe Mosaic will benefit from recent U.S. sanctions against world’s third-largest potash producer Belarus (a reason for the strength). The looming supply crunch prompted a major Wall Street bank to upgrade Mosaic on the assumption that Belarus’s potash export capabilities are becoming “painted into a corner.” Another big institution, meanwhile, upped its EPS outlook for Mosaic based on the belief that fertilizer prices and margins have room to increase in 2022. This bullishness is supported by Mosaic’s financial results, including Q3 revenue that rose 44% as stronger pricing offset lower volumes (due partly to Hurricane Ida). In November (the latest month for which data is available), Mosaic said total revenue for the month rose 71% from a year ago, driven by potash and phosphate demand increases of 67% and 49%, respectively. Management also guided for “upward pricing momentum” to continue and expects phosphate segment sales in Q4 to rise around $60 per ton over Q3’s prices, with potash prices rising around $120 per ton sequentially. When Q4 is reported February 22, analysts see sales growing 58% in Q4 with per-share earnings growth exploding 244%--and 2022 as a whole should see earnings near $8 per share.

Technical Analysis

After spending most of last summer establishing a base just above 29, MOS broke out of the cup-shaped pattern in September on above-average volume ... but with the market getting antsy, shares quickly hit a wall in October. The subsequent decline was halted at the 40-week line in December, and while volatility has been elevated, MOS has been resilient, surging back to its peak on big volume last week. We suggest aiming for minor dips if you want to nab a few shares.

Weekly Chart

Daily Chart

Stock 10

Stifel Financial (SF) ★ Top Pick

Why the Strength

Elevated asset prices have been a boon for asset managers, especially for firms with broad digital exposure and online wealth management platforms. Stifel provides full-service securities brokerage, investment banking, trading, investment advisory and related services to individual and institutional clients, and the company partly attributes a sterling 2021 performance (its fifth consecutive year of record earnings per share) to what it calls a “super-charged” digital transformation. Stifel’s Q4 report featured consensus-beating revenue of $1.3 billion that increased 22% from the year-ago quarter, while full-year sales of $4.7% rose 26%. By segment, global wealth management net revenue increased by 17%, institutional group revenue rose 29% and investment banking revenue jumped 41%. Per-share earnings of $2.23, meanwhile, beat estimates by 34 cents. Other highlights include bank loans that improved 46% in Q4 from the prior year, plus the recruitment of 121 financial advisors during 2021 (and 34 in Q4 alone) based on “robust” pipelines as private client revenue shifts to a more fee-based model. In addition, Stifel approved a 100% increase in the quarterly dividend starting in the first quarter (1.5% yield) with plans to push shareholder returns via both dividends and buybacks. Going forward, management sees its net interest income increasing by at least $150 million in 2022, and possibly as much as $250 million (assuming the Fed hikes rates three times this year), which management said would be a “significant driver” of the bottom line in 2022. The company also forecasts net revenue for this year between $4.9 and $5.2 billion, up 10% at the midpoint, which would be the 27^th straight year of a rising top line. It’s a solid financial and Bull Market stock story.

Technical Analysis

Like many financial stocks, SF’s post-crash run topped out in the middle of last year (early May in this case), leading to what became a wear-you-out consolidation: The declines weren’t enormous (one dip was 16%, the other 18%), but net-net, SF basically bobbed and weaved for eight months, including a couple dips below the 200-day line in December and January. But the post-earnings action has been excellent, with a big-volume buying cluster pushing shares back toward their highs. We’re OK starting small here with a stop near 70.

Weekly Chart

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 bold.

The next Cabot Top Ten Trader issue will be published on February 14, 2022.