January 3, 2022

There have been some positive baby steps since the market’s early-December low, but there remain many yellow flags, too, such as the fact that growth-oriented funds and indexes remain iffy at best. All in all, we’re a smidge more constructive than we were a couple of weeks ago, but we don’t advise making any big commitments until we see more individual names let loose on the upside.

This week’s list is heavier on cyclical names, as those have been holding up (some even advancing) much better than the growth areas of the market. Our Top Pick is a shipping name that’s posting huge numbers and is near new highs.

Market Overview

Growth Still Struggling
There have been some positive baby steps since the market’s early-December low, including some short-term buying thrusts that generally portend good news and (more important) indicate that the overall intermediate-term trend has turned up. That’s not to be ignored, but neither are the continued yellow flags out there, such as the fact that growth-oriented funds and indexes remain iffy at best, while relatively few stocks are in great shape. We’ll see how it goes, but remember that early January is one of the most crosscurrent-filled times of the year as big investors reposition their portfolios; expect lots of volatility and fakeouts in the next few days. All in all, we’re a smidge more constructive than we were a couple of weeks ago, but we don’t advise making any big commitments until we see more individual names let loose on the upside—we’re nudging our Market Monitor up to a level 6, but are more interested in seeing how the market handles itself over the next couple of weeks.

This week’s list is heavier on cyclical names, as those have been holding up (some even advancing) much better than the growth areas of the market. Our Top Pick is a ZIM Shipping (ZIM), which posting unreal numbers as shipping rates are elevated. Keep it small and expect volatility, but we’re OK nibbling here or on dips.

Stock Picks & Previously Recommended Stocks

Stock 1

CF Industries (CF)

Why the Strength

The bull market in natural gas for much of last year has caused ag-related nitrogen costs to soar, with fertilizer prices increasing as much as 300% in some parts of the U.S. As the world’s leading producer of anhydrous ammonia, CF Industries is making proverbial hay from this trend. After posting third-quarter revenue that was 61% higher from a year ago, CF more recently raised adjusted EBITDA guidance, citing global nitrogen market strength. Additionally, the company predicted higher-than-expected sales volumes in Q4, driven primarily by favorable weather that has enabled the strongest fall ammonia application season of the past decade in North America. Also driving the stock’s strength is speculation from a widely read deal-making site that CF is a potential acquisition target (no buyer was named). It’s just a rumor at this point, though it was enough to push the stock up a couple of bucks as business is so good; CF management expects the global economic factors behind this to support elevated nitrogen prices until at least 2023 (based partly on the need to replenish global grain stocks). And while CF warned that “global nitrogen supply will remain constrained,” it also believes farm industry fundamentals are strong enough to counteract this. Analysts agree—after mushrooming last year, analysts see the bottom line nearly doubling in 2022.

Technical Analysis

After sliding into August and bottoming at 43 near the 40-week line, CF took flight in October and hit 63. There were a couple of zig-zagging moves after that, with shares pulling back to 55 in early November, then rallying to 68 later that month before dipping again—this time to a higher low—in early December. But the choppy autumn trading action paved the way to a fresh rally on another round of good-volume buying. Dips of a couple of points should provide a decent opportunity.

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Stock 2

Freeport-McMoRan Inc. (FCX)

Why the Strength

With copper inventories recently hitting a 47-year low and global use accelerating, the metal’s outlook is stronger than ever. (A major Wall Street bank estimates that “green” copper demand, for use in renewable energy-related projects, will increase five times from 2021 to 2025.) Topping the list of producers benefiting from this is Freeport, which mines copper, gold and other commodities in four continents and is the world’s third-largest copper producer. In the third quarter, Freeport topped earnings estimates thanks to copper prices that were 40% higher from a year ago and sales volumes of over a billion pounds. Per-share earnings soared to 89 cents from 29 cents in last year’s Q3, while revenue increased 58% to just over $6 billion. Consolidated copper sales were up 22% in the quarter, while gold sales jumped 72% (12% above the company’s estimates and significantly above the year-ago level); Freeport expects gold volumes to grow another 15% to 20% in 2022. In addition, the company benefited from molybdenum prices in Q3 that more than doubled from a year ago. Going forward, management pointed out that as the world becomes increasingly electrified, it should help the supply/demand picture, as 65% of global copper output is used to deliver electricity—simply put, management is bullish, saying “the outlook for the copper market is extraordinarily positive.” Freeport is also focused on shareholder returns, with up to 50% of free cash flow likely to be returned; the firm recently announced a $3 billion share repurchase program and the addition of a variable cash dividend. Analysts see earnings up another 17% this year, though copper prices will obviously be key.

Technical Analysis

Most of the gains FCX posted for 2021 were made in the first five months, when the stock gained 67% from its January level before peaking around 46 in May. Shares spent the next 20 weeks correcting, bottoming out at 30 in September and turning around. The net effect of this extended consolidation was a bowl-shaped pattern, and the tightness shown in recent weeks is a plus. FCX still has overhead to chew through, so start small and add if shares head up.

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Stock 3

Hyatt Hotels (H)

Why the Strength

The fourth quarter of 2021, to be reported next month, ends easy comparisons to COVID-affected periods for Hyatt, but the stock is strong as the re-emergence of travel demand should generate good results going ahead. Published Wall Street estimates predict a loss of 18 cents a share for the just-completed Q4, but no doubt investors are expecting better in light of a blow-out third quarter that saw $1.13 of earnings versus expectations of a loss. Beyond just a turnaround is a firm looking to growth: Despite the virus worries, the company is focusing on room growth again, which it emphasized in the five years prior to the pandemic, adding U.S. rooms at six times the industry average. Hyatt recently bought Apple Leisure Group, a 33,000-key business focused on luxury all-inclusive properties, timeshares and tours. All-inclusive properties have been a growth area for premium brands of late, as hotels see people wanting destination options with predictability when they’re not going the Airbnb route. Hyatt’s expansion in top-end properties will also include 31 new luxury hotels being built by 2023. In the vast standard hotel room sector, management scratches out additional value by selling older properties to raise cash for new construction while inking long-term management deals with buyers to keep the Hyatt name over the door. The omicron variant remains a concern, but as long as borders are open and flights are running, there’s little doubt that people have a pent-up demand for getting away. That has analysts expecting EPS of 76 cents for 2022 on sales of $5 billion, both of which we think could prove very conservative after the industry has cut costs to the bone (most extra travel will fall to the bottom line). We think Hyatt (and other hotel firms) is an interesting turnaround situation.

Technical Analysis

H’s post-vaccine rally petered out way back in February of last year as investors saw that the travel recovery would be lumpy; shares corrected as much as 27% and generally lagged for much of the year. But the recent action has our attention—the November breakout failed on omicron, but what’s impressive is that the dip was quickly erased, with shares motoring to new highs by year-end. We’re intrigued—you can start small here with a stop in the mid-80s.

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Stock 4

ICON plc (ICLR)

Why the Strength

Drug companies are increasingly outsourcing a large portion of their clinical trial and development efforts, which is where ICON comes in. This Irish firm is a major provider of development services to the healthcare sector, helping companies bring new drugs and devices to market faster. Drug development is ICON’s main segment, and it offers products and services across the entire spectrum, including clinical development and trial site selection, patient recruitment and regulatory assistance. The firm’s technology platforms and data analytics are cutting edge, thanks to a partnership with artificial intelligence platform Deep Lens (to improve patient recruitment). The company also has partnerships with Intel and Oracle, which have decreased clinical site numbers and double patient enrollment. ICON’s efforts in advancing several new drug approvals (including Covid therapies) has caught Wall Street’s attention, but the biggest move was its purchase of PRA Health Sciences last year, which management says will leverage data and speed up drug development times. Although per-share earnings missed estimates in Q3, ICON posted revenue of $1.9 billion that was a whopping 166% higher from a year ago (mostly due to the acquisition), beating expectations by 19%, while adjusted EBTIDA was up 143% higher. The company recorded net business wins of nearly $2.4 million, as well as ending with a consolidated backlog of over $18 billion. All told, analysts see earnings growth slowing some after a heady 2021, but still lifting 17% year-on-year, with steady growth for years to follow as PRA bolsters the firm’s offerings.

Technical Analysis

After hitting 224 last January, ICLR sank over 20% and fell under the 40-week line before bottoming out around 170. The stock promptly reversed course in March and proceeded to make a series of higher peaks and valleys before stalling out in late September. Ten weeks of backing and filling followed, with shares meeting resistance around 290. But ICLR finally punctured this ceiling last month and is still above there even after today’s slippage. We’re OK nibbling here with a tight stop.

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Stock 5

Jabil Inc. (JBL)

Why the Strength

Jabil is helping some of the world’s biggest brands navigate today’s turbulent supply chain environment. The global contract manufacturer makes a huge variety of products and offers electronics design engineering and consulting services for clients across several major industries—including healthcare, automotive and semiconductors. But it’s Jabil’s supply chain insights that are garnering interest right now, as touted in the firm’s results for fiscal Q1 2022 (released in mid-December). The Q1 top line of $8.6 billion rose 9% from a year ago and was 4% above estimates, while the bottom line of $1.92 per share beat the consensus by 12 cents. The firm was confident enough in its outlook that it also raised its fiscal 2022 (which ends in August) earnings outlook by 20 cents per share, to $6.55, while predicting sales of around $32 billion; if both are realized, that would amount to year-over-year growth of 17% and 9%, respectively. A major driver is Jabil’s biggest customer, Apple, for which Jabil makes iPhone and iPad casings, and which is expected to increase its iPhone offerings in the coming years. (Additionally, Jabil just announced a partnership with Carnival to make the cruise line’s wearable electronic boarding pass for passengers.) Buybacks remain a high priority as well, as Jabil repurchased 2.1 million shares in Q1 and has around $830 million left on its $1 billion buyback authorization. Looking ahead, management guided for Q2 revenue of $7.4 billion and per-share earnings of $1.45 at the midpoint, both in line with estimates. The last attraction here is certainty, as the firm booked 98% of its estimated current-quarter revenue in the first 16 days of the quarter(!). It’s not a great growth story, but the combination of a cheap valuation (12 times earnings) and steady, predictable results should keep big investors interested.

Technical Analysis

After breaking out of a big-picture base last March, JBL has been stair-stepping its way higher. The latest rest saw the stock consolidate for 12 weeks starting in September, which ended with shares kissing the 40-week line in November. And JBL has been strong since, with a positive earnings reaction boosting the stock to new highs. If you want in, aim for dips of a couple of points.

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Stock 6

Red Rock Resorts (RRR)

Why the Strength

Much of Las Vegas is geared toward tourists – the bachelor/bachelorette party weekend and week-long conventions. Red Rock Resorts, though, ignores the famed Strip in favor of servicing the locals through casinos and resorts ranging from cut-rate to luxury. There are 19 Red Rock casinos in greater Las Vegas and 90% of the city’s population lives within five miles of one. The growth proposition is two-fold: One is that Las Vegas itself is quickly expanding, now ranking as the fifth-fastest expanding region in the country. The other is that 20% of the city’s 2.4 million people are retirees, a demographic that loves gambling, which generates 70% of Red Rocks’ revenue. (Strip casinos by contrast, get three-quarters of revenue from non-gambling offerings.) Since 62% of business comes from locals, the firm weathered the pandemic’s tourism and convention plunge fairly well. The local focus is a moat of sorts, too, because Nevada law heavily restricts the opening of new casinos outside of the Strip, locking in Red Rock as the largest casino rights holder outside of downtown. (Longer term, the company has another 460 acres of real estate in Vegas and Reno it can develop.) Management is helping shares along by buying back shares – in December they closed a tender that bought back a whopping 10% of the entire company at $51.50 a piece. They also raised cash by selling the Las Vegas Palms, just off the Strip, for $650 million. The company took a loss on the sale, but it unloaded its most Covid-harmed casino and provided funding for a new Nevada luxury resort, the Durango, which will be completed by 2024. Growth has been solid here (revenues up 17% in Q3, with EBITDA up 15%), and Wall Street expects more of that going ahead.

Technical Analysis

RRR had a major run into June of last year, which resulted in a decent-looking launching pad that produced another run in September and October. But then came another base-building effort, which RRR is trying to put the finishing touches on—shares popped higher in the second half of December and are near new highs, but still have some resistance to chew through. We suggest aiming for dips if you want to start a position.

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Stock 7

Tesla, Inc. (TSLA)

Why the Strength

Tesla (covered in the October 18 report) is one of today’s most news- and rumor-driven stocks, and for that reason isn’t our favorite situation. What’s more, some of the news isn’t encouraging, such as its voluntary recall of a half million Model 3 and S sedans; the defect is a minor one, however (rearview camera cable harness may be damaged by the opening and closing of the trunk lid), and Wall Street has taken it in stride. In fact, several institutions raised their price targets based on the new U.S. infrastructure bill, believing it will usher in an era of electric vehicle dominance (due to the bill’s charging station and tax credit support). The company’s growing solar and power storage business, meanwhile, both increased substantially in Q3, with demand far exceeding production capacity. But other factors are driving Tesla’s momentum as well, including increasing EV market penetration and sales growth in China, margin expansion and higher production rates. Adding to the bullish case was the announcement that Q4 vehicle deliveries totaled 308,000, which crushed Wall Street’s estimates by 17%. Tesla’s Model 3 sedan and Model Y mid-size SUV remain the big business drivers today, and the company knocked it out of the park in Q4, with combined deliveries increasing a whopping 83% from a year ago (up 28% sequentially). For all of 2021, the company delivered over 936,000 vehicles, up 87% from a year ago, and analysts see a lot more where that came from as Tesla continues to boost capacity to meet demand—Wall Street sees earnings up another 46% in 2022, which will likely prove conservative.

Technical Analysis

After a massive run-up from late 2019 through early 2021, TSLA caught a much-needed breather last year, correcting as much as 40% and coming out of the public’s eye for a while (a good thing). The stock tightened up considerably during the summer, finally breaking out in October and running up to around 1,200 by early November. There was another sharp pullback with growth stocks (29% deep!) the past two months, but TSLA seems to have bottomed and is working on a new base. After today’s pop, we’d advise entering on weakness.

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Stock 8

Trex Company (TREX)

Why the Strength

There are a lot of uncertainties about the economy heading into 2022, from inflation to supply chains to virus-related effects, but there’s really no question that the housing market remains strong—in November, housing starts were up a solid 8% from a year ago, while single-family starts rose 11% and, of course, prices are going bananas. Trex is the leading player in composite wood products, and it’s one of the big plays on the housing theme, both in terms of new construction and remodeling. (38% of home improvement spending is on exterior products; 70% of new homes don’t even have a deck, though that figure is shrinking in the pandemic world.) However, while the housing market is certainly a tailwind, at its core this is a longer-term growth story in and of itself—more people are opting for the low/no maintenance Trex offerings (no splinters, no need for seasonal painting doesn’t fade much, etc.), which offer lower long-term costs yet still make up just 22% of the market, so wood (the other 78%) is really the main “competitor” out there. Thanks to that and top-notch management, earnings have lifted many years in a row, and growth has picked up as the environment has provided an even-stronger tailwind: Sales have lifted north of 40% each of the past two quarters while earnings have advanced nicely, and after a 36% earnings gain in 2021, analysts see another 22% bump in 2022, which we think will prove conservative. Indeed, the top brass sees greater demand ahead, with a third production facility announced (in Little Rock), with output beginning to be cranked out in early 2024. The valuation is up there, but big investors see years of steady growth ahead.

Technical Analysis

When we last wrote about TREX, it had just broken out of a nine-month rest period after Q3 earnings and the outlook topped expectations. The power of that move was impressive, and the action since then looks like a normal catch-your-breath phase, with shares chopping sideways, and with the dip in December finding support north of the 50-day line. We think TREX offers a solid risk-reward entry point in this area.

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Stock 9

WillScot Mobile (WSC)

Why the Strength

WillScot Mobile isn’t a name you’re going to brag about at a cocktail party, but thanks to a bold acquisition and excellent management, it should be cranking out steady growth for a long time to come. The company is the top player in modular work space and portable storage solutions (often seen at huge construction projects); with its acquisition of Mobile Mini (completed in the summer of 2020), it now has north of 121 million square feet of space for clients in North America, many times larger than any of its regional competitors. Industrial, commercial and construction projects make up 90% of the total, though government, education and even energy projects use them, and increasingly it’s not just for “boxes” either—WillScot is basically a one-stop shop, with value-added services (office furniture, appliances, lighting and the like) making up a larger (and higher-margin) share of the pie. The healthy economy and construction industry is obviously a tailwind here, but another growth avenue comes from a roll-up aspect—just in the past two months, the company has snatched up regional operators in Los Angeles (adding 3,000 storage units), New Jersey (2,000 storage units) and the Midwest (1,300 modular units and 300 storage units), expanding the size and breadth of its business. At a recent Investor Day, management thinks EBITDA will advance at double-digit rates for the next three-plus years, with free cash flow growing at a faster clip and eventually getting to $4 per share. Exciting? Not really. But barring an economic implosion, it’s a very good bet that WillScot will be posting solid results both organically and via acquisitions for a while.

Technical Analysis

If you didn’t know anything and looked at WSC’s chart, you’d have no idea the broad market had been battling through a correction and suffering from lots of volatility. The stock decisively got going from a multi-month rest in October, rallying six weeks in a row to new highs near 40—and since then, shares have had just one down week as they’ve crawled higher, mostly ignoring the market’s ups and downs. We can’t rule out a dip, of course, but we think a small buy here or on a retreat, with a stop in the mid/upper 30s, makes for a solid risk-reward situation.

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Stock 10

ZIM Integrated Shipping Services (ZIM) ★ Top Pick

Why the Strength

ZIM Shipping is the 11^th largest shipping liner in the world and has been going at it since 1945. The company does have some unique aspects to it, operating in an asset-light model, mostly chartering-in other vessels (they lease their entire fleet instead of owning it, which lowers costs and increases flexibility) on shorter-term contracts and focusing mainly on some niche-ier routes (less competition from the big boys). It also seems more technologically savvy than the old guard in the industry, helping to optimize its cargo mix and more efficiently book contracts and service clients. That’s all to the good, but the main reason the stock is strong has less to do with its model and more to do with the boom going on in the entire industry, with shipping rates going ballistic because of supply chain issues and port congestion, leading to ridiculous earnings performance for ZIM: in Q3 alone, the firm earned north of $12 per share (!), with a similar performance likely occurring in Q4. Yes, most believe prices will ease from nosebleed levels in 2022, but like many cyclical stocks, it’s looking like the bottom line is going to be much higher than folks thought a few months ago—Wall Street sees earnings of around $20 per share next year! Moreover, a lot of that could be coming back to shareholders, as ZIM is now net-debt free and has a new dividend policy of paying out 20% of net income each quarter (it just paid a $2.50 per share dividend in late December!) and 30% to 50% of income for the entire year, meaning $6 to $10 of dividends in 2022 assuming estimates are right. To be fair, things can change fast with shippers, so there’s no surety, but ZIM’s earnings potential is gigantic if things go well.

Technical Analysis

ZIM came public in the U.S. last January and immediately began to soar as earnings did, with a peak near 45 at the end of June, and after a sharp correction to 30, another eight weeks up in a row that took the stock near 60. The stock has corrected and consolidated since mid-September, but despite the market’s wobbles and virus worries, investors are now back in a buying mood, with ZIM moving back near the top of its range. We’re OK starting small here.

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Previously Recommended Stocks

Below you’ll find Cabot Top Ten Trader recommended stocks. Those rated HOLD are stocks that traded within our suggested buy range within two weeks of appearing in the Top Ten and still look good; hold if you own them. Stocks rated WAIT have yet to dip into our suggested buy range … but can be bought if they do so within the next week.
Those stocks rated SELL should be sold if you own them; they will no longer be listed here. Finally, Stocks in the DROPPED category are those that failed to trade within our buy range within two weeks of our recommendation; that’s not a bad thing, we just never got the price we wanted. Please use this list to keep up with our latest thinking, and don’t hesitate to call or email us with any questions you may have. New recommendations each week are in bold.

The next Cabot Top Ten Trader issue will be published on January 10, 2022.