July 19, 2021

More Damage, but Some Names Find Support

Current Market Outlook

The evidence has been steadily improving, but July has changed that—first came a lot of narrowing (most stocks below their 50-day lines even though the big-cap indexes were near new highs) along with a lack of breakouts, then came last week’s selling pressure (that saw many growth stocks show real slippage), and today we saw the sellers really start to hit things left and right. On the positive side of things, many growth titles were resilient today, and we still see a good number of setups out there; given that there are renewed fears of the virus, it’s possible many growth titles could do well even if the market has a rough go of it. But right now, the onus is on the bulls as the market’s intermediate-term trend has turned down and most stocks look iffy. We’re moving our Market Monitor to a level 5 but are keeping our eyes open for what comes next.

This week’s list is a mix of names, though some of the growth titles look like decent risk-reward situations on this dip. One of them is Marvell Technology (MRVL), a leading chip maker that’s pulling back normally after a persistent move to new highs.

Autodesk (ADSK)

autodesk.com

Why the Strength

Construction is booming and infrastructure spending is increasing in cities nationwide, which means design software for engineering applications is in high demand. Autodesk’s cloud-based, computer-aided graphic design tools (AutoCAD) are considered the global standard for architecture, engineering and construction, as well as for 3D modeling used in animation and video games. The sector itself is strong, but also playing into the firm’s strength was its shift to a subscription model years ago, which is still paying off today. Autodesk’s fiscal Q1 featured robust growth in new product subscriptions (after several quarters impacted by Covid), improving usage and renewal rates. The top line grew 12% while the bottom line improved to $1.03 (9 cents above estimates). Subscription revenue increased 18%, to $989 million, boosted by demand for AutoCAD and AutoCAD LT, while billings advanced 10%, helped by strong traffic growth and enhancements in the firm’s e-commerce sites. Meanwhile, remaining performance obligations (all the money Autodesk is due under contract going ahead) lifted 22% to $4.23 billion thanks to growth in new product subscriptions and increasing renewal rates. The company is also using strategic acquisitions to keep the growth story going, most recently purchasing Upchain, a manufacturing product lifecycle management firm, the latest in a series of acquisitions. Management sees $2.3 billion of free cash flow by next year (nearly $10.50 per share) as the subscription model continues to gain steam.

Technical Analysis

ADSK spent last June through September in a tight, lateral range between 220 and 260 before surging higher in the fourth quarter on anticipated higher infrastructure spending under the new administration. When that spending didn’t materialize, ADSK slid to start this year, falling from 320 back down to around 260 and hugging its 40-week line for a while after that. And after a pop higher, shares have again dipped to that support area. Granted, it’s not super strong, but ADSK has a nice setup; if you’re game, you could nibble here.

ADSK Weekly Chart

ADSK Daily Chart

Avantor (AVTR)

avantorsciences.com

Why the Strength

Companies that provide support for the global pandemic response have experienced tremendous growth in the past year. Among the leaders is Avantor, which provides lab products and services to customers in the life sciences, advanced technologies and applied materials industries. Covid tailwinds have accounted for a substantial amount of its recent growth, as the firm plays a critical role in providing products to support Covid testing workflows, head-to-toe personal protective equipment and customized materials needed to produce vaccines and therapies (including processing, purifying and packaging services; think of it as an “all-in-one” solution for life science companies). In Q1, per-share earnings grew 106% from a year ago, to 35 cents, while revenue rose 18%. Biopharma accounts for around half of Avantor’s sales and saw over 30% growth, driven by strength in chemicals and single-use technologies. Its healthcare segment experienced 20% growth, driven by hospital and clinical lab customers, as well as by continued Covid testing momentum and a strong rebound in elective procedures. Lab products also experienced strong growth, driven by positive trends in R&D activity; all segments experienced double-digit revenue growth in the quarter. Vaccine-related services are a big part of its business, and Avantor is expanding global capacity in single-use technologies to meet higher production demand. The firm is also expanding in China, recently acquiring RIM Bio, a biopharma lab products provider. Analysts like what they see and expect the firm to report 17% top-line and 62% bottom-line growth in Q2. Earnings are due July 29.

Technical Analysis

AVTR came public in July 2019 and spent the next several months bouncing between roughly 14 and 20 while making no net progress. The breakout came last July, and while the advance hasn’t been dazzling, it’s been relatively steady, with just two corrections along the way, the latest of which came in May. But the stock has pushed ahead nicely since that low, and AVTR remains perched right at new highs despite the market’s wobbles. You can enter here or on dips.

AVTR Weekly Chart

AVTR Daily Chart

Bruker (BRKR)

bruker.com

Why the Strength

They may not be glamorous, but firms that provide “picks and shovels” for the life sciences sector are performing well in this tough environment. Bruker makes precision scientific instruments, such as microscopes and spectrometers, that allow researchers to make observations on the molecular and cellular levels. Its products and services help support a number of healthcare-related (and non-healthcare) industries. Bruker’s huge product portfolio includes testing and diagnostics solutions used in microbiology and to study infectious diseases. Its product lineup also includes low-temperature superconducting materials and devices and processing equipment for semiconductor manufacturing. Bruker also has a new Covid test, and its equipment (like the timsTOF Pro mass spectrometer) is used in Covid research, both of which contributed to Q1 growth. During the quarter, revenue grew 31% thanks to biopharma products and solutions, as well as “robust” scientific instrument orders from academic, industrial and semiconductor customers. Per-share earnings of 44 cents were more than triple last year’s figure, which management attributed to its Project Accelerate high-growth and high-margin initiatives. Bruker also updated its fiscal 2021 guidance in mid-June, estimating revenue growth of around 17% and expecting per-share earnings between $1.84 and $1.89 (up 38% at the midpoint), both in line with analyst estimates. Reflecting this confidence, the company recently approved a two-year share buyback program worth up to $500 million. Earnings are due August 5.

Technical Analysis

From mid-2019 until last November, BRKR traded in a choppy range between roughly 30 and 50. It broke out in December, and since then it has trended persistently higher while respecting the 50-day line (kissing it four times this year without breaking it). The latest rally up to 80 has finally brought in a little selling—but just a little. We suggest aiming for dips if you want in.

BRKR Weekly Chart

BRKR Daily Chart

Burlington Stores (BURL)

burlingtoninvestors.com

Why the Strength

The pandemic and the relentless grind of web competition has put brick-and-mortar stores on their heels. Discount retailer Burlington Stores thinks the disruption spells opportunity for its 739 locations, as department stores and specialty retailers retreat. Originally named Burlington Coat Factory, the company has long been a cut-price Softline retailer, hawking clothes, home goods and knick-knacks at as much as 60% off full price, pitching offerings as designer goods at discount prices. CEO Michael Sullivan, who joined in 2019, spins the business as one that has never reached its full potential. That will come, he says, under its “Burlington 2.0” plan as management uses their strong balance sheet (debt is less than 10% of sales) to push quicker allotments of trendy products and to fund new, smaller-footprint stores that will reduce operating expenses. In a bid for greater market share, Burlington also plans to hold the line on prices after fellow discounters TJ Maxx and Ross Stores told Wall Street they’ll raise prices in the back half of the year. You can throw out 2020 financials because of COVID and compare to 2019 and see the business is executing: top-line sales improved 35% in the first quarter over 2019, while same-store sales rose 20%. Investors gained further encouragement after having fears assuaged that supply chain disruptions would make Burlington’s recovery much choppier. Looking ahead, with most parents getting advance child tax credit payments starting this month, some of that should end up in discount stores’ hands. The combination of factors has Burlington set up to post its best annual EPS yet, at $8.81 and more than $8.8 billion sales.

Technical Analysis

BURL broke out with most economically sensitive names last November and had a solid (though not spectacular) run, rallying to the 330 area in April. And since then it’s done … not much of anything, with a dip to 300 in May, a push back to its old highs and it’s now retreating with the market. It’s not super strong, but it’s still just a stone’s throw from virgin turf. We’d probably wait to see if BURL can find some support before entering, but for those that want to start small, you can do so here with a tight stop.

BURL Weekly Chart

BURL Daily Chart

Chipotle Mexican Grill (CMG)

chipotle.com

Why the Strength

Chipotle Mexican Grill is no longer the fast-casual restaurant upstart it was a few years back; today it has around 2,800 locations and revenues approaching $5 billion a year. But the firm’s earnings power seems to have taken a step function higher, which is keeping big investors interested. The driver is the firm’s digital operations, which is growing like mad (up 134% in Q1, making up half of sales) and has changed the entire financial model of the company: Whereas the top brass used to believe its revenue-per-store tally would probably max out near $2.5 million, they now think $3 to $3.5 million is more likely since so much of the business comes from digital/takeout orders. Moreover, the payback on new stores is about 10% higher than it was before the digital revolution, especially with restaurants that have a “Chipotlane,” a drive-thru lane for digital pickups only. Throw in a still-solid cookie-cutter story (management is opening 200 new locations this year; potential for 6,000 total restaurants down the road) and other moves that are boosting growth (including expanded menu offerings) and earnings are responding by going through the roof—while last year saw the bottom line dip with the pandemic, 2021 should see earnings rise 129% (and up 75% from 2019’s figure), with another 33% upmove next year. Of course, the valuation isn’t tepid, so expectations are high, but reliable cookie-cutter retail stories like Chipotle are rare merchandise, and historically institutions are willing to pay up for them, especially when something new is going on (the digital business) that’s causing the numbers to accelerate higher. The Q2 report is due out tomorrow after the close.

Technical Analysis

CMG had a big post-crash run through Labor Day of last year, but then stalled out for the next nine months—shares were still hanging around the 1,400 level in May before buyers reappeared. Shares rallied five weeks in a row (including three on above-average volume) before finding some resistance near its prior highs. You could nibble here if you want to roll the dice ahead of its report, or simply wait for the reaction—a solid gap higher would be tempting.

CMG Weekly Chart

CMG Daily Chart

CrowdStrike (CRWD)

crowdstrike.com

Why the Strength

While much of the market has been taken apart so far this month, a handful of glamour names still act fine, and CrowdStrike is one of them. And why shouldn’t it? The company has all the makings of the next big thing in cybersecurity, an industry that’s becoming a must-have for mid- and large-sized outfits that have moved their operations, data, applications and more to the cloud. CrowdStrike’s claim to fame is its cloud-native Falcon platform, which protects endpoints (any device connected to the network) and cloud workloads (a fast-growing cybersecurity area) from threats. The secret sauce is in the company’s name—Falcon crowdsources data and threats and applies what it’s learned to all clients across the platform, all told, “learning from” billions of threats each week and quickly bolstering its security. Impressively, Falcon is actually used by many other cybersecurity players (Okta, the leader in Identity Solutions, is a client!), and when things go really bad (like the Colonial pipeline hack), CrowdStrike is often the first one to get a call. The company’s customer base is exploding (11,420 subscription customers, up 82% from a year ago), while current customers expand their usage (same-customer revenue growth up 25%), with a gross retention rate of 98%! All of that is leading to soaring annualized recurring revenue (up 74%). Moreover, with less than half the Fortune 500 currently customers, and with lots of potential upside among current customers (as many sign up for more modules to better protect all of their activities), there’s little doubt CrowdStrike is set to get much, much bigger in the years ahead. This remains our top cybersecurity idea.

Technical Analysis

CRWD broke out of a huge post-IPO consolidation last summer and had a big run into the February growth stock top. The 33% correction was sharp, but shares held their 40-week line in May and began an impressive run to higher highs on good volume (three straight weeks of big volume) as the stock rallied north of resistance around 230. What’s interesting is that, so far, CRWD’s retreat has been very tame both price- and volume-wise, with the stock hanging near its 25-day line. Sure, the pullback could go farther, but if you’re aggressive you could start a position here or on further dips with a stop in the 225 area.

CRWD Weekly Chart

CRWD Daily Chart

Dexcom (DXCM)

dexcom.com

Why the Strength

It’s a competitive field for sure, but Dexcom has been the leader in continuous glucose monitoring (CGM) devices, an area that’s in a long-term growth phase as diabetes increases and as technology advances help CGMs greatly improve patient outcomes. Dexcom’s current system, known as the G6, is generally regarded as tops in the sector—it was the first CGM that eliminated the need for finger sticks (which are still prevalent for the many diabetics not using CGMs), constantly monitors blood sugar and transmits readings to any device (including your smartphone), with alerts and the like if glucose gets out of a set range. The system is integrated into many leading insulin pumps (including Tandem Diabetes’ and Insulet’s) and there’s still a ton of room for growth for Dexcom and others—just 40% of U.S. Type 1 diabetics use a CGM, while 20% of intensive Type 2 patients use one, and that says nothing about the giant non-intensive Type 2 market that’s just starting to adopt them. The biggest catalyst coming up, though, is the likely launch of the next-generation G7 CGM later this year: It’ll be 60% smaller, has a quicker warm up time (less time before it can start reading), combines the sensor and transmitter, is fully disposable and will have a longer wear time—plus early clinical trial results show more accurate readings. Again, there is competition (mainly from Abbott), but it looks like Dexcom’s next growth leg is set to begin. Earnings are due out July 29.

Technical Analysis

DXCM had a big run from November 2019 to May 2020, but that was it—shares stalled out for a few months and really couldn’t get going through mid-May, a year-long rest. (Interestingly, this was similar to the stock’s September 2018 to November 2019 rest period that launched the prior advance.) But DXCM has changed character of late, rallying nine weeks in a row, which is a very impressive showing considering how weak the broad market has been. Shares are bumping up against some resistance, and with earnings coming up, we suggest starting small and aiming for dips.

DXCM Weekly Chart

DXCM Daily Chart

Horizon Therapeutics (HZNP)

horizontherapeutics.com

Why the Strength

Horizon is a biopharma focused on acquiring and rebranding drugs to treat various inflammatory conditions in the U.S. market, with a pipeline that includes several rare disease treatments. Its top-selling Tepezza is the first and only FDA-approved treatment for thyroid eye disease, with revenue of $800 million last year. The drug’s success during the 2020 shutdown was the result of a direct-to-consumer ad campaign which brought in a million website visitors. And while supply chain disruptions led to a temporary halt in Tepezza production, the FDA recently authorized Horizon to boost output, with plans to add a second drug product manufacturer by the end of 2021, so the sour results last quarter should be in the rear-view mirror shortly. Horizon also reported strong Q1 growth from its chronic gout medicine, Krystexxa, and it expects accelerating sales in coming quarters (particularly if it sees positive results from a controlled study with results due in Q4 2021). Along those lines, Horizon just teamed up with Arrowhead Pharmaceuticals in a license agreement for ARO-XDH—a potential treatment for people with uncontrolled gout—for as much as $700 million. Horizon has also been growing by M&A; in March, it closed its acquisition of Viela Bio, adding four therapeutic candidates in nine development programs, including the FDA-approved Uplizna (for the treatment of a disease that attacks the optic nerve, spinal cord and brain stem). The deal is expected to boost full-year sales and earnings, with management guiding for 2021 revenue between $2.75 and $2.85 billion, up 27% at the midpoint from a year ago. Earnings are due August 4.

Technical Analysis

HZNP roared out of the gate following last year’s pandemic-crash low, rising from 25 in March to 87 by October. Shares encountered turbulence in the next three months and edged lower before taking off again in February and hitting a high of 96. Since then, HZNP has made scant progress while spending the last few months chopping around in a tightening pattern. Obviously, the market will have a near-term impact, but HZNP is set up nicely as earnings approach. You could start small here if you want in.

HZNP Weekly Chart

HZNP Daily Chart

Marvell Technology Group (MRVL)

marvell.com

Why the Strength

Marvell is a leader in fabless chip design, specializing in chips that play in some of the fast-growing digital trends. Marvell’s acquisition of networking equipment outfit Inphi, which was just approved in China, has been a big reason for the recent strength. Indeed, the deal is expected to increase Marvell’s cloud networking leadership and 5G position while boosting profit margins (management expects the deal to account for $215 million in Q2 revenue). Another source of strength is Marvell’s partnership with Samsung, as the two jointly announced a new system-on-a-chip (SoC) to enhance 5G network performance. (The SoC improves cellular radios by increasing their capacity and coverage, while decreasing power consumption by up to 70%.) Marvell’s revenue rose to $832 million in its fiscal first quarter (up 20%) while per-share earnings of 29 cents beat estimates by 7%. The latest results were driven by strong demand in both segments: Marvell’s networking business expanded 26% and was 60% of total sales, while the storage business increased 17%, accounting for 36% of sales. Within those, demand for the company’s data processing units remains high, and its automotive segment is growing rapidly with Marvell’s ethernet switch shipping into multiple model-year 2021 vehicles (and which it sees contributing “meaningfully” toward revenue growth in coming years). Management guided for Q2 revenue of $1.07 billion—up 47% and in line with estimates—with earnings expected to rise 50%. Looking ahead, Marvell said it sees the biggest opportunity in cloud (even bigger than 5G!) and sees tailwinds from the ongoing global chip shortage.

Technical Analysis

After breaking out of a multi-year base last May, MRVL rose in a choppy fashion to a record high before hitting the wall at 55 in January. Shares then dropped sharply and briefly penetrated the 40-week line before finding support by March. A couple more months of choppiness followed, but the stock retested its low in May, leading to a persistent push (up 7 weeks in a row) to new price highs last month. The pullback of late has been sharp (no surprise), but normal—if you’re aggressive, you could nibble here, or just watch to see if support appears.

MRVL Weekly Chart

MRVL Daily Chart

Revolve Group (RVLV)

revolve.com

Why the Strength

Revolve is an online specialty clothing, shoe and accessory retailer focused on GenX and Millennial consumers who want to be on trend. These shoppers find mass retailers too slow in reacting to trends and also too common – no one wants to run across someone else wearing the same dress or shirt out on the town. At the other end of the spectrum, brick-and-mortar specialty shops are usually too limited. Right now, investors are excited by the “revenge restock,” where Revolve’s very fashion-conscious consumers now have a reason to freshen their wardrobe to paint the town red after a year-plus sitting around in sweats. Revolve shoppers take their fashion cues from social media influencers, some 4,500 of which have a marketing relationship with the company. Revolve data mines social interactions and website clicks, watching up to 60 attributes for each item to see what consumers gravitate to and then using Netflix-like algorithms to personalize presentation. Feeding this is a huge slate of 49,000 items: last year, Revolve introduced a mind-boggling 900 new fashions a week. Costs are contained through strict inventory management, as Revolve orders a small amount to start and then loads up on what gains traction and uses automation to reduce returns processing. The result is that last year Revolve sold 77% of its product at full price, compared to the typical retailer’s 60%, and with an average sale of $236. In Q1, total sales and earnings were better than expected and Q2, to be released August 5th, should show net sales continuing to rise, to $185 million. For the year, Wall Street expects to Revolve’s top line to be up 23% over 2020, at about $715 million and EPS of 85 cents. Annual growth is expected to be strong double-digits for years to come.

Technical Analysis

RVLV went public in June 2019 but it didn’t break out of its first real consolidation until December of last year, when investors began looking ahead toward accelerating growth. The advance since then has been huge, albeit very volatile, with a couple of sharp shakeouts along the way. However, the recent weakness, while not pleasant, has come on light volume and so far held north of the 50-day line. It’s aggressive, but we’re game for starting a small position here with a stop in the upper 50s.

RVLV Weekly Chart

RVLV 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 July 26, 2021.