January 24, 2022

When it comes to the market’s action, there’s not much to say—the crash-like action seen in growth stocks since the start of the year has spread out to most every nook and cranny of the market. To be fair, near term, we are starting to see some extremes, plus we’re still seeing a fair number (not a lot) of stocks hanging in there—taking on water for sure, but not definitively cracking. Overall, we continue to advise a cautious/defensive stance; capital preservation is the first goal these days. That said, given how stretched everything is to the downside, we think it’s OK to give things a little more wiggle room on the downside if you already have lots of cash. Our Market Monitor will remain at a level 4.

This week’s list is mostly a mix of energy and defensive-oriented stocks. Our Top Pick is a big energy services outfit that should see growth accelerate going ahead.

Market Overview

Starting to See Some Extremes
When it comes to the market’s action, there’s not much to say—the crash-like action seen in growth stocks since the start of the year has spread out to most every nook and cranny of the market. To be fair, near term, we are starting to see some extremes: The VIX popped to nearly 40 this morning; today saw north of 2,400 stocks on the NYSE and Nasdaq hit new lows; and coming into today, 85% of Nasdaq stocks were below their 200-day lines, which is nearly as bad as prior major lows. Plus, we’re still seeing a fair number (not a lot) of stocks hanging in there—taking on water for sure, but not definitively cracking. Overall, we generally don’t try to catch falling knives, so we continue to advise a cautious/defensive stance; capital preservation is the first goal these days, which means little new buying and lots of cash. That said, given how stretched everything is to the downside, we think it’s OK to give things a little more wiggle room on the downside if you already have lots of cash, and while it hasn’t been fruitful lately, we’re still not opposed to a nibble or two on resilient stocks (assuming you’re already defensive). Our Market Monitor will remain at a level 4.

This week’s list is mostly a mix of energy and defensive-oriented stocks. Our Top Pick is Schlumberger (SLB), which released excellent earnings last week, whose group is strong and has pulled back normally during the recent selling wave.

Stock Picks & Previously Recommended Stocks

Stock 1

AbbVie Inc. (ABBV)

Why the Strength

Many biotechs had a tough 2021 thanks to factors ranging from drug pricing to controversies over the government’s approach to industry mergers. But a few biotechs managed to excel in the weak environment, with drug maker AbbVie being one of the star performers. The company had a stellar 2021 and is in favor despite the fact that its U.S. patent on autoimmune treatment blockbuster Humira (38% of Q3 revenues) is set to expire in 2023. A key reason for the strength is AbbVie’s bulging pipeline, which includes treatments in several stages of testing across five main business segments: Eye care, aesthetics, hematologic oncology, immunology and neuroscience. Three treatments have already been approved for several indications and are expected to be top sellers in the coming years, including Rinvoq (for arthritis and dermatitis), Venclexta (for leukemia) and the just-approved Skyrizi (for psoriatic arthritis). Moreover, sales for AbbVie’s leading aesthetic drug, Botox, were up a solid 23% in Q3 from a year ago and is expected grow further in the years ahead. Additionally, Q3 revealed strength in AbbVie’s portfolio of schizophrenia, bipolar one disorder and bipolar depression drugs. Management also touted its portfolio of migraine therapy treatments, which management said puts the company in a “very strong position” to capture growth in that market. On the financial front, third-quarter revenue of $14.3 billion increased 11% from a year ago, driven by the neuroscience business. Per-share earnings of $3.33 rose by 18%. And when AbbVie reports Q4 results on February 2, the top and bottom lines are expected to jump 8% and 12%, respectively. A cheap valuation (11 times earnings) and a 4.3% dividend adds to the attraction in this environment.

Technical Analysis

ABBV outperformed most of its biotech peers in the first eight months of 2021, rising from 105 last January to 120 by the end of August. But shares dropped sharply in September, hitting bottom at 106 later that month, nearly erasing all its gains from the start of the year. Buyers came to the rescue, though, and the stock etched out a higher low before taking off again in late October, partly as defensive-oriented stocks came into favor. A tightening-up period followed in November before ABBV roared higher in December. The stock has pulled back since the new year, but we’re OK taking a stab on a bit more weakness.

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Stock 2

CH Robinson (CHRW)

Why the Strength

In the face of supply-chain chaos, logistics support providers like C.H. Robinson are in high demand right now. With over 105,000 customers and 73,000 contract carriers, the company offers freight, intermodal and ocean transportation, as well as brokerage, warehousing and transport management services. C.H. Robinson was just upgraded by a major Wall Street bank after the firm posted its first widening of spreads since Q2 2019, calling its global forwarding segment “robust” amid the tight supply environment. (Prior to this, another major bank had upped its outlook for the company based on rising margins and outperformance among its peers.) Another reason for the strength was the Q3 report, which featured strong growth across all business segments and most key metrics. Consensus-beating revenue of $6.3 billion was 48% higher than a year ago, while income from operations leapt 70%. The bottom line of $1.85 per share, meanwhile, breezed past the consensus by 42 cents. Management cited “structural constraints” surrounding the current supply situation, coupled with strong demand and seasonal strength as reasons for expecting capacity to remain tight heading into 2022. In response to supply challenges, C.H. Robinson is continuing its efforts to expand its carrier network and reported a record of 9,500 new carrier sign-ups and increased use of its carrier apps in Q3. Consequently, management raised the dividend last month (to a solid 2.1% annual yield) and increased the company’s share repurchase authorization by an additional 20 million shares (with around two million shares remaining under its earlier authorization; there are 130 million shares outstanding). The Q4 report is due out February 2, with analysts expecting sales and EPS growth of 37% and 71%, respectively.

Technical Analysis

CHRW peaked in October 2020 and had three selling waves during the following few months despite a huge upturn in its numbers; shares didn’t hit their nadir until early October. The action since has been much better, with a stair-step improvement for a few weeks, including a move to new highs around the start of the year. CHRW has pulled back over the past couple of weeks, but it looks normal and resisted the decline today—if you want in, you can nibble here or on dips with a stop under the 50-day line.

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Stock 3

Concentrix (CNXC)

Why the Strength

Concentrix sells ways for businesses to improve their customer experience, including web-based services such as features like chat support. Customer service is obviously important for companies who want to retain customers, but it’s also a big cost center, with the expense of handling a client inquiry going up dramatically as a customer moves from an automated chatbot to a phone call with a human. Ideally, Concentrix works with companies to redesign the customer experience as a digital-first experience, emphasizing under-the-hood type tech fixes that makes interactions more efficient, reducing the need to phone support. For instance, Concentrix helped a telecom firm replace its PC-focused customer chat system with one optimized for Apple’s mobile devices, cutting repeat customer inquiries 25%. More recently, its marketing division has started an electric vehicle specialty, to help automakers convert web visits into customers in what’s expected to be a highly competitive segment. The company has 750 corporate customers, including about a quarter of the Fortune 500. Management took a step to expand its market position recently by paying $1.6 billion in cash to buy competitor PK from that firm’s private equity owners. PK has a specialty in digital IT services, an area where Concentrix was an also-ran. Management says that with PK, first quarter sales will be at least $1.54 billion with operating income of around $200 million. The unexpectedly strong guidance reflects Concentrix’s core business growth at about 8% a year, well ahead of industry expansion of 3%. The combined businesses should pull in sales of $6.5 billion this year, with operating income upwards of $900 million.

Technical Analysis

Concentrix was spun off of IT service outfit Synnex in November 2020 at 80 a share. Spin-offs often drop, but CNXC consolidated an immediate jump at around 100 and pushed to 160 by April and, after a pullback, up to 190 or so in November. Shares have obviously declined since then along with all growth stocks, but CNXC is actually acting pretty calmly, holding support near the 200-day line, which is fairly resilient. It’s not a classic setup, but if you want to nibble here, you can, though waiting for a move back above 176 might be a safer play.

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Stock 4

Diamondback Energy (FANG)

Why the Strength

Diamondback Energy has always been among the best energy explorers out there, with extraordinarily attractive acreage in the heart of the Permian basin (both the Delaware and Midland); it now has 413,000 net acres there with north of 11,000 gross drilling locations waiting to be tapped. And as it’s cut costs, boosted efficiencies and held back expansion efforts in recent years, it’s driven its breakeven oil price to around $32 per barrel, and that in turn has given the company what could be the best free cash flow profile among all the big players out there, especially compared to its current market cap: In Q4, free cash flow came to a whopping $4.06 per share (up from $3.17 per share in Q2 and $1.82 in Q1), which allowed the firm to cut debt by 21% through September and hike its base dividend a couple of times (now yielding 1.8%). And 2022 could be ridiculous in terms of how much money Diamondback will spin off: Even at $70 oil and $3 natural gas (way below current levels), the firm should produce nearly $17 per share in free cash flow this year (!); if current prices stuck, you’re probably looking more at $22 to $23 per share. The one drawback here is that Diamondback is behind some of its bigger-cap peers in terms of debt reduction (still $6 billion on the books), and thus, Diamondback will “only” be returning half or so of that free cash flow this year in terms of dividends and share buybacks—though it’s worth noting that 50% figure is likely a floor, not a ceiling, and if debt reduction efforts accelerate (and they should given the elevated prices in recent months), a greater share of the free cash flow will be paid out, especially via more dependable base dividend hikes. It’s a great situation that should only get better as time goes on. Earnings are due February 23.

Technical Analysis

FANG has had its ups and downs in recent months, including the sector’s push to new highs in September, the grudging pullback in the fourth quarter despite virus and Fed worries, the early-year move to new highs and last week’s market-induced pullback. Could this dip get out of hands? It’s always possible, but there’s lots of support in this area, and we think the odds favor big investors using this pullback to add positions. Keep it small, but we’re OK nibbling here.

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Stock 5

KBR Inc. (KBR)

Why the Strength

KBR is a big player in the engineering and construction field, providing a variety of services to firms across several major industries (including aerospace, defense, industrial and intelligence). Helping the stock has been a string of significant contract wins, including a digital advisory services contract with explosives firm Dino Nobel; an engineering design contract for Hanwha Solutions for its new production facilities in South Korea; a joint contract with South Korean plastics firm LG Chem for its plastics recycling technology; and a $20 billion household goods contract with the U.S. Transportation. KBR has been able to beat EPS estimates 88% of the time and revenue estimates 50% of the time in the last two years, and that continued in its third-quarter report. Revenue of $1.8 billion in Q3 was 34% higher from a year ago and beat the consensus by a whopping 19%, while per-share earnings of 64 cents beat by 6 cents. The company cited “impressive” organic growth across each of its government businesses, momentum across its entire portfolio and a significant award in the quarter to provide humanitarian support under the U.S. federal government’s Operation Allies Welcome. Big picture, the firm’s move to higher-margin service deals and longer-term contracts has management thinking 20%-ish earnings growth is likely through 2025, lifting earnings into the $5 per share area and leading to some dividend hikes (current yield 1.0%) and share buybacks. Wall Street forecasts top- and bottom-line growth of 75% and 29%, respectively, for Q4. Earnings are due out February 22.

Technical Analysis

KBR saw its post-crash comeback accelerate with everything else in November 2020, with another big pop in March on earnings. But soon after it started a big, shallow consolidation, with shares correcting 14% and nearly touching its 200-day line in September. Since then, though, the buyers have created a choppy uptrend, with a solid advance with three sharp corrections interspersed—including the latest market-inspired one. We’re going to place our buy range above the current price, thinking a snapback will imply this move was a shakeout.

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Stock 6

Newmont Mining (NEM)

Why the Strength

Newmont is the world’s largest gold miner by production, with operations in North and South America, Australia and Africa. The company boasts the industry’s largest gold reserves, also producing copper, silver, zinc and lead. Last year was a challenging one for Newmont, which included a virus-related shutdown and rainfall-related setbacks at two of its Australian mines, a mechanical failure at a Nevada mine, plus rising cost pressures, labor shortages and supply disruptions. But the company worked through these problems (the Australia shutdown ended in July and the Nevada mill was repaired in September). Moreover, Newmont still managed to log a respectable third quarter, with gold production of 1.4 million ounces (down 6% from a year ago but unchanged from Q2) and 315,000 gold equivalent ounces from its base metals (up 15% from a year ago and 4% higher sequentially). And though revenue of $2.9 billion was off 9% and per-share earnings of 60 cents missed the consensus by 13 cents, it upped its production guidance for 2022 and completed $99 million of share repurchases from its $1 billion buyback program. Newmont expects to produce 6.2 million gold ounces in 2022 (a 3% improvement from last year) at an all-in sustaining cost of $1,030 per ounce—well under the current gold price of $1,830, allowing for plenty of profits. The company is also targeting gold production of as much as 6.8 million ounces annually over the next five years, with costs projected to decline starting in 2023 (as investments in profitable projects pays off). For Q4, Wall Street expects revenue to rise 1%, increasing to 10% in the next quarter. A 3.5% dividend yield is an added attraction.

Technical Analysis

NEM kicked off a long-term upward trend in May of 2019, rising from a multi-year low of 30 and reaching 72 by the following year’s August. Shares ground lower for the next six months, bottoming at 54 last February. From there the stock zoomed nearly straight up in what ended up being a false rally, with NEM peaking at 75 in May and starting on another six-month decline. But shares began bottoming out months ago, and it’s hard to ignore the big-volume buying that started in December. It’s not in a true uptrend yet, but we think NEM’s path of least resistance might be turning up.

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Stock 7

Palo Alto Networks (PANW)

Why the Strength

Even with a (generally) fading pandemic, remote work is likely here to stay. This, plus cloud adoption and elevated hacking threats, are tailwinds for cybersecurity giant Palo Alto. In terms of the latter trend, a major Wall Street firm has predicted the year ahead could witness “massive strength” for cyber companies due to the current “threat landscape and bad actor-nation state backdrop,” listing Palo Alto as one of its two top cybersecurity picks for 2022 (a reason for the strength). But sales momentum is the main attraction here, with revenue swelling by a consensus-beating 32% in fiscal Q1, along with a seven-cent beat in per-share earnings of $1.64, driven by strength in its security business and 28% total billings growth (prompting management to raise revenue and billings guidance for fiscal 2022, ending in July). All of this was driven by adoption of the firm’s newest products: Revenues from its Prisma SASE platform rose 68% from a year ago, with 1,805 Prisma customers at the end of Q1 (up 80%!); more than a quarter of those customers were newly acquired over the past year, which suggests Palo Alto has a meaningful opportunity on its hands. Prisma Cloud customers jumped 30% in Q1, and Palo said its cloud security customers increased their usage, as evidenced by a 69% surge in the use of Prisma Cloud credits. Palo Alto’s Cortex security automation platform customers, meanwhile, soared 80%, to 2,859. More broadly, the company also reported a 29% increase in active customers (to 1,025) who spent at least $1 million over the past year. Forward-looking metrics (remaining performance obligations of $6 billion, up 37%) also support the long-term growth story. For fiscal 2022, Palo expects sales to increase 27%, with most of the growth drive by its cloud and artificial intelligence (AI) services.

Technical Analysis

PANW’s coming-out party occurred after earnings in August, when shares gapped up 19% on nearly 10 times average volume, and the advance from there was solid, as the stock rode its 50-day line higher until a peak just before the calendar flipped. PANW has certainly taken its lumps since then, but it’s also putting up a fight, sitting “only” 15%-ish off its high and miles above its 200-day line (while 85% of other Nasdaq stocks are below the 200-day line). We’re going to put our buy range above the current price, thinking a strong rally from here could mark a turnaround.

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Stock 8

PDC Energy (PDCE)

Why the Strength

If forced to choose, we prefer the bigger-cap energy explorers that have great acreage and have already slashed their debt levels; these seem most likely to be the ones big investors will gravitate toward. But we’re also seeing more smaller names perk up, like Marathon Oil (great story) and now PDC Energy (just $5.3 billion market cap), which nearly hit a relative performance peak today. While PDC does get about 15% of its output from Texas, the vast majority comes from the Wattenberg Field in Colorado, though the general story (cost reductions, limited production growth, increasing free cash flow) is similar to its peers. What might put PDC a step above its peers, though, is that it’s on the cusp of big payouts—for much of last year, debt reduction was the main focus (net debt down a whopping 40% in the past year; no maturities until 2024), but as that’s occurred, returns to shareholders have risen, including $113 million worth (2.1% of the market cap) in Q4 alone (a 50 cent bonus dividend was part of that). And 2022-2023 looks at least as fruitful: While management hasn’t committed to a shareholder return target, free cash flow is likely to average more than $8 per share even at $60 oil/$3.25 natural gas, while $70 oil/$3.75 gas will see that figure at nearly $11 per share—and there’s little doubt a ton of that cash flow will be returned to shareholders, specially given the firm’s net debt at this point is “only” $950 million (likely equal to just one year of free cash flow). If you’re looking for a negative, it could be that PDC is nearly 50% hedged on this year’s oil output at just a $50 price; also, Colorado isn’t the most drilling-friendly state. But all in all, there’s little chance the company doesn’t crank out a ton of money even if the energy patch hits a rough spot. It’s a very good, smaller-cap story.

Technical Analysis

PDCE has followed the general path of its energy peers, with a huge rally into early last year before some ups and downs in the months after; net-net, the stock made nearly no progress from its peak of 43 in March to its low of 44 near Christmas. Shares have picked up since then, and while shy of their former high, PDCE has actually held up better than other energy names in recent days, which is encouraging. A small buy around here is fine by us.

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Stock 9

Schlumberger (SLB) ★ Top Pick

Why the Strength

Last week, Halliburton made the cut for Top Ten (and that firm reported a very solid quarter and dividend hike this morning), and this week it’s Schlumberger’s turn. The story, of course, is very similar, as the company has its hand in most drilling-related cookie jars, with offerings that help explorers construct, drill and manage wells, including some new, advanced technology solutions that improve data management, workflows and speeding up analysis. (In Q4, digital-related revenues made up one-third of pre-tax profits, with users up many-fold since the offerings launched two years back.) But the real driver here is the industry, and management is very optimistic on that front—in last week’s quarterly report, the top brass said it anticipates oil demand reaching pre-Covid levels before year end, and sees double digit capital spending increases among clients both in North America and overseas. And of course this is on top of what is already a pretty solid turnaround—sales (up 13%) and earnings (up 86%) did great in Q4, and that actually understates what’s going on, with free cash flow totaling $1.3 billion in Q4 (93 cents per share) and $3 billion for all of 2021 ($2.14 per share). Of course, the debt load here is still pretty hefty ($11 billion worth, compared to a market cap of $51 billion), but if business picks up as expected, earnings (projected to rise 33%) and cash flow should surge, which could easily lead to some dividend hikes (1.4% yield currently) and/or share buybacks. Sure, the market meltdown could affect things, but so far, energy prices remain resilient. We think it’s the start of a solid turnaround.

Technical Analysis

SLB’s post-crash recovery was up and down, but the stock did rally back to 37 by June before the consolidation began—shares had two good-sized dips (30%, then 21%) that brought SLB down to a bit below the 40-week line before finding support. But now we think perception is changing, with the stock popping higher on two straight weeks of excellent volume, and the market-induced weakness looks normal to us. We’re OK starting a position here with a stop in the 32 area.

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Stock 10

Vertex Pharmaceuticals (VRTX)

Why the Strength

Vertex is the dominant provider of therapeutics for cystic fibrosis (CF), a genetic disease that is often life-shortening, attacking the lungs and other organs. CF affects some 83,000 people in North America, Europe and Australia, Vertex’s primary markets. In late 2019 the company introduced Trikafta, a triple combination therapy of VX-445, tezacaftor and ivacaftor indicated for most CF patients. The treatment was an immediate success, replacing prior Vertex offerings for most of its patients and expanding the addressable market in a big way, too—management believes pending regulatory approvals can get Vertex treating 90% of CF patients, up from 55% prior to Trikafta. The company is testing new treatments it thinks will allow it to address the remaining 10% of CF patients, too, which it expects can be approved this year. Trikafta continues to have tailwinds as Vertex strikes agreements with insurance companies and governments to pay for the drug, which costs patients more than $300,000 annually in the U.S. Right now, Vertex is all CF–its 2021 sales of $7.5-ish billion were all from CF treatments, a figure that should rise another $800 million this year. Vertex is looking to expand beyond CF with new potential treatments being explored through a license to use CRISPR gene-editing knowledge from Arbor Biotech. Vertex is researching engineered cell therapies to treat diabetes, sickle cell disease and beta thalassemia, a disorder of hemoglobin production. Coming into this year, Vertex has a lot of resources to deploy for shareholders: $7 billion in cash and operating margins greater than 50%.

Technical Analysis

VRTX peaked in July 2020 on Trikafta momentum, hitting an all-time high of 303. The market has been concerned about the future product pipeline since, however, and the failure of a liver treatment later in 2020 lopped 50 points off in a day, creating large gap resistance that remains a headwind for shares. However, the market’s appetite for dependable businesses is helping shares, which tightened up in October and November and have been pushing higher since. If you’re game, dips of a few points could be worth a shot.

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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 green.

The next Cabot Top Ten Trader issue will be published on January 31, 2022.