July 26, 2021

Still Crosscurrents, but Plenty of Opportunities

Current Market Outlook

Looking at just the major indexes, things couldn’t be better right now. The S&P 500 and Nasdaq are both at all-time highs, while growth stocks look good for the most part. But a peek below the surface reveals that some crosscurrents still abound. There’s still an above-normal amount of Nasdaq stocks making new 52-week lows, while new highs aren’t as expansive as they could be—especially given the strength of the leading mega-cap names. Meanwhile, only around half of S&P stocks are above the 50-day line, and the advance-decline line could be stronger. That said, we’re still seeing lots of nice setups in growth stocks, and while we likely haven’t seen the end of earnings-related volatility, the latest earnings season has been mostly kind to growth stocks. We’re moving our Market Monitor to a level 6 but are keeping our eyes open for what comes next.

This week’s list includes a nice mix of sectors, including a few that have had spectacular earnings reactions. Our Top Pick is Trane Technologies (TT), an HVAC company benefiting from the return-to-office trend.

Arvinas, Inc. (ARVN)

arvinas.com

Why the Strength

Arvinas is a clinical-stage biopharma specializing in the emerging science of targeted protein degradation (which utilizes the body’s natural waste-disposal system to selectively degrade and remove harmful proteins, curing diseases where other treatments have failed). Using small molecules that can be tailored to tag select proteins, Arvinas’ proprietary technology binds a naturally occurring protein to destroy a harmful one, thereby targeting cancers and other hard-to-treat diseases. A collaboration with Pfizer is the reason for the latest strength. It was announced last week that both companies will jointly develop and market Arvinas’ ARV-471, an investigational therapy for breast cancer currently in Phase 2 (with Phase 3 studies expected next year). The deal includes an upfront payment of $650 million to Arvinas for shared marketing rights for the drug, a potential $1.4 billion in milestone payments and a $350 million equity investment. (The collaboration inspired at least one big-name institution to raise its price target for Arvinas.) The company also reported progress on ARV-110 (for metastatic chemotherapy resistant prostate cancer), including interim data from a Phase 2 dose expansion and the initiation of combination trials with standards-of-care. Additionally, Arvinas has a portfolio of revenue-contributing license agreements and collaborations with several major drug companies, including Bayer. Analysts see the top line exploding 358% higher for 2021 and expect the underserved breast cancer drug market to possibly double in the coming years, to $40 billion. With plenty of liquidity and lots of high-potential products in the pipeline, Arvinas has a sizable growth runway. Earnings are due around August 3.

Technical Analysis

ARVN more than tripled on bullish test trial results for ARV-471 in mid-December, rising from 30 to over 90 by January. From there, it gradually pulled back, hitting its nadir at 60 in April before rounding out a base in the following months. Last week’s Pfizer collaboration news was the catalyst for the blastoff to new highs, and it occurred on healthy volume. We favor using minor weakness to nibble.

ARVN Weekly Chart

ARVN Daily Chart

ASML Holding (ASML)

asml.com

Why the Strength

ASML Inc. has been called the most important technology company in the world—it’s a classic picks-and-shovels outfit, being a sole provider of one of the most important pieces of technology out there. The product is known as an extreme ultraviolet (EUV) lithography machine, which was launched in 2017 and uses light with wavelengths of just 13.5 nanometers to etch smaller and smaller integrated circuits, which are needed for today’s most advanced and fastest-growing applications. All of the big chip makers are customers and demand is going through the roof as many huge foundries have committed to making massive expansion commitments (we’re talking hundreds of billions of dollars over the next many years), which will surely help ASML. (The firm also does good business supporting its installed base and it makes other lithography systems, but the real driver here is demand for new EUV machines.) As for the here and now, business is excellent—in Q2, sales rose 28% and earnings lifted 49%, and that was despite some revenue not being recognized yet as customers wanted their machines before completing acceptance testing, while the order book came in at record levels. Encouragingly, the firm’s total EUV backlog is now 10.9 billion Euros (ASML is a Dutch firm), which covers 80% of planned EUV output through 2022, and the firm is aiming to expand output potential beyond that. The top brass now sees revenues up around 35% this year with years of growth down the road.

Technical Analysis

ASML is definitely rare merchandise, and the stock has acted that way, rallying nicely during the past year with just one prolonged rest (last July through October) along the way. That doesn’t mean it’s been all up—shares have had three pullbacks or rests in recent months, with the latest being a tight five-week flat zone ahead of the Q2 report. But now ASML is back on track, leaping to new highs on good volume; we’re OK buying some here with a stop a bit under the 50-day line.

ASML Weekly Chart

ASML Daily Chart

AutoNation (AN)

autonation.com

Why the Strength

We’ve seen a few well-known names that are seeing earnings take a step-function leap higher in the new economic reality, which is keeping the stocks in favor. AutoNation is America’s largest automotive retailer, with more than 300 locations in the U.S. that sell new and used cars and auto supplies, provide financing, and buy cars from customers and more. Historically, it has been a steady-but-slow growth situation, but there are a few bullish factors that are changing that today. One, the virus has increased people’s demand for personal transportation; two, low interest rates are lowering the cost to get a new or used car; and three, the supply of cars remains somewhat limited due to supply chain issues (including the lack of chips available). And the result can be seen in AutoNation’s numbers, with management making some bold moves with the cash it has: In Q2, not only did sales (up 54%) and earnings (up 243%; $4.83 per share was $2 above estimates!) explode, but same-store sales were up in the 40% range and gross profit per vehicle sold lifted 24% for used car sales and 89% for new car sales. “Yeah, that’s great, but what happens when the supply of new vehicles gets back on track?” you ask. Well, some costs (like inventory) should remain lower going forward, but even so, AutoNation is taking the money it’s making today and permanently increasing its earnings power via share buybacks—through July 15, the firm has repurchased a ridiculous 15% of all shares outstanding, and there’s a new $1 billion buyback authorization that just got put in place (market cap is $8.3 billion). We’ll see how it plays out, but after years of earnings in the $4 per share range, analysts see the bottom line rising to $14.44 per share this year and remaining near $13 next year.

Technical Analysis

AN has had a big run during the past year as the bottom line picked up steam, with a beautiful, smooth advance through April of this year, riding its 10-week line higher. Shares finally had a “real” correction after that, dipping 17% from high to low, but the recovery was swift and AN broke out on huge volume (biggest weekly volume since July 2019!) after the Q2 report. We think the stock is buyable here or on dips of a couple of points.

AN Weekly Chart

AN Daily Chart

BioNTech (BNTX)

biontech.de

Why the Strength

Pfizer’s Covid vaccine is actually co-owned by BioNTech, a German drug researcher that collects half the profits Pfizer earns on the treatment. BioNTech also collects profits from partners in other countries and all revenue from sales in Germany and Turkey. The Covid-19 vaccine is the first proof-of-concept for BioNTech in the still-nascent messenger RNA (mRNA) research field. Shares are strong because there remains plenty of demand for the vaccine; even with 49% of the total U.S. population vaccinated (including children under 12 who have no vaccine option), the U.S. government just ordered another 200 million doses. Separately, the company signed a deal last week with a South African firm, The Biovac Institute, to manufacture and distribute the vaccine throughout the African Union. The deal covers nearly all of Africa—a group of 55 countries with 1.25 billion people. (Only 1% of Africa’s people have been vaccinated, meaning the agreement should generate revenue for multiple years.) All told, probably $21 billion in gross sales of the vaccine will be booked this year, rising to $24 billion next year. Longer term, investors also like that BioNTech doesn’t appear to be a one-drug company. Indeed, the business is working with the Gates Foundation to develop treatments for HIV and tuberculosis (currently in testing), and investors think mRNA’s promise of personalized cancer treatments could turn BioNTech into one of pharma’s great success stories. That’s still a long way off, and a lot can go wrong in drug development, but for now analysts see full-year sales of around $14 billion—a massive improvement from a year ago—and per-share earnings of $34. Earnings are due on August 9.

Technical Analysis

BNTX came public in October 2019 at 16 and never experienced the correction common to most IPOs. Shares immediately began drifting higher and it was one of the few stocks to actually rally during the March pandemic panic, soaring 280% in just four days(!). BNTX quickly corrected, however, and spent the next few months consolidating between 40 and 60 before beginning its next leg higher in June. Since then, the stock has established a stair-stepping pattern of higher highs and lows, most recently pivoting off the 50-day line before running to its latest high. If you’re game, use pullbacks to nibble.

BNTX Weekly Chart

BNTX Daily Chart

Dropbox (DBX)

dropbox.com

Why the Strength

Dropbox (covered in the March 15 report) is helping to smooth the transition to work-from-home through its popular content collaboration and file-sharing platform. After becoming a “Virtual First” company late last year and focusing heavily on its remote work capabilities, Dropbox has since launched a new service as the economy reopens. Dropbox Studios is designed for in-person teamwork and allows for strengthening connections with colleagues. Sites previously involved with a Dropbox office (including San Francisco, Seattle and Austin) will have access to Studios, and it plans to add more spaces in the future. Moreover, Dropbox made some serious waves last month when a well-known activist investment firm bought a more than 10% stake in the company worth potentially over $800 million (a big reason for the strength). Key trends have been user growth and higher average revenue per user, allowing the firm to generate steady cash flow. Both trends also helped Dropbox achieve record revenue of $512 million in Q1 (up 12% from a year ago), while annual recurring revenue was $2.1 billion (up 13%), driven by the release of value-enhancing features and the March acquisition of document-sharing and analytics firm DocSend. Dropbox entered the second quarter with 16 million paying customers after adding around 350,000 new paying customers in Q1, with an average revenue per user of $132. The firm is also focused on shareholder returns and has increased the pace of share buybacks, ending a $600 million authorization in Q1 and announcing a new $1 billion repurchase program. For Q2, analysts expect top- and bottom-line growth of around 12% and 50%, respectively. Earnings are due August 5.

Technical Analysis

After hitting a high of 44 in 2018, DBX entered a two-year bear market that ended shortly after last year’s pandemic-related panic when the stock hit rock bottom at 15. Since then, the stock had a character change and has shown consistent vigor in climbing to new highs earlier this month. We’re OK nibbling here or (preferably) on dips.

DBX Weekly Chart

DBX Daily Chart

HCA Healthcare (HCA)

hcahealthcare.com

Why the Strength

As the demand for elective procedures and other healthcare services rebounds from last year’s pandemic, health service providers are experiencing something of a renaissance. HCA operates 186 hospitals and 2,000 healthcare facilities, including surgery centers, emergency rooms, urgent care centers and physician clinics, in 21 U.S. states and the U.K. The company’s second-quarter earnings report obliterated Wall Street’s expectations last week, accounting for the latest strength. HCA saw revenue of $14 billion, 30% higher from a year ago and 6% above the consensus, while per-share earnings of $4.37 blew past expectations by an eye-popping 38%. Outpatient revenues were a standout in the latest quarter, growing 59% amid a resurgence in outpatient demand across most categories (including outpatient surgeries and cardiology procedures). The company also just completed a majority stake purchase of Brookdale Home Health and Hospice in a bid to expand into the home health market (the deal adds 80 sites of care for HCA). And there are additional transactions in HCA’s pipeline to expand its regional delivery networks, including over 15 surgery center additions, as well as several urgent care and physician practice acquisitions. HCA is also engaged in an aggressive share repurchase program, just completing over $2 billion of share repurchases in Q1 with around $5 billion remaining on its buyback authorization. Management was sanguine on the full-year outlook and raised its guidance for the rest of 2021, predicting annual sales of around $57 to $58 billion (up 12%) and per-share earnings between $16.30 and $17.10, up around 40% at the midpoint and roughly in line with expectations.

Technical Analysis

HCA was in bull mode from 2012 through 2018, rising from just under 30 to around 150 before hitting a wall. It spent most of 2019 in a lateral range, bouncing between 110 and 150, then took a nosedive in early 2020. It found bottom at 60 and commenced a gradual recovery over the next several months. Shares didn’t start popping again until November, when it became obvious that the economic reopening would be good for outpatient services. After the earnings-induced rally, we’re fine starting small here but pullbacks are preferable.

HCA Weekly Chart

HCA Daily Chart

Morgan Stanley (MS)

morganstanley.com

Why the Strength

Dramatically rising dividends and share buybacks, combined with an increasing appetite for retail stock trading, have turned the once-stodgy Morgan Stanley into one of the banking industry’s sexiest names. The established multinational commercial and investment bank also engages in institutional trading and offers asset and wealth management. Last year, Morgan acquired online stock trading platform Etrade, enabling it to expand its direct-to-consumer wealth management business while increasing cross-selling opportunities to retail trading clients. And after the last year’s Covid-related buyback and dividend restrictions, the nation’s biggest banks are now being allowed to return capital to shareholders once again. After recently passing its Federal Reserve stress test, Morgan announced it would double its dividend to 70 cents (the result of an accumulation of “significant excess capital” in recent years), while authorizing a $12 billion share repurchase program. Last week, Morgan released its second-quarter results which featured impressive top- and bottom-line beats. Revenue of $15 billion rose 8% from a year ago and exceeded expectations by 6%, while per-share earnings of $1.89 were 14% above consensus. Equity revenue was 8% higher, investment banking revenue rose 16% and advisory revenue increased 44% on strong M&A activity and record industry volumes. Most impressive, however, was the mouth-watering 92% increase in investment management revenue, to $1.7 billion, with assets under management growing to $1.5 trillion, thanks to its acquisition of Eaton Vance. Looking ahead, analysts see 19% top-line and 13% bottom-line growth for 2021. A 2.9% dividend ties a bow on this package.

Technical Analysis

Like most bank stocks, MS took a while to gather enough strength to fully recover after last year’s pandemic panic. From a peak of 57 last January, shares tumbled to 27 during the March crash and spent the next eight months edging higher in a stair-stepping fashion. It wasn’t until December that the stock took flight, with MS finally breaking above the old resistance and galloping ahead to new highs this summer. Aim for dips if you want in.

MS Weekly Chart

MS Daily Chart

PTC Inc. (PTC)

ptc.com

Why the Strength

The so-called “fourth industrial revolution” is heavily predicated on the digitization of the industrial sector. A major player catering to this development is PTC, which operates in two segments—software products and professional solutions—and provides cloud native computer-aided design (CAD) and product life-cycle management (PLM) software. Its product offerings also accommodate the emerging Internet of Things (IoT) by allowing clients to create digital models and simulate their machines and equipment to enhance productivity. PTC further provides augmented-reality-based assistance to machine technicians, enabling them to service equipment without being physically present. In the second quarter, PTC delivered revenue of $462 million, up 28% from a year ago, along with per-share earnings of $1.08 (54% above expectations). PTC’s annual run rate (or backlog of future revenue, which the company considers a key metric) grew 18% to $1.4 billion, reflecting strong performances in its core and growth businesses. A major partner for PTC is Rockwell Automation, with both offering a turnkey SaaS solution for industrial customers. PTC reported one of its strongest bookings quarters ever in Q2 in its alliance, and expects additional growth in Q3. Going forward, PTC anticipates its CAD and PLM software to keep growing at a high-single-digit to low-double-digit annual clip and upped its 2021 EPS guidance to $3.29 at the midpoint (up 28% and in line with analysts’ estimates). Revenue, meanwhile, is expected to increase 19% for the full year. Management also foresees free cash flow of $850 million by 2024 (around 6% of the current market cap). Earnings are due July 28.

Technical Analysis

PTC hit a long-term peak at 105 in late 2018 and spent the next year-and-a-half grinding lower before finally bottoming out at 45 at last year’s crash low. By August, the stock had doubled but it ran out of steam and spent three months tightening before blasting off again in November. PTC reached a new high at 150 in April, followed by three more months of consolidation. Last week’s breakout ahead of earnings is encouraging, and though it’s extended, we’re fine using pullbacks to nab some shares.

PTC Weekly Chart

PTC Daily Chart

Snap Inc. (SNAP)

snap.com

Why the Strength

We just wrote up Snap a few weeks back, but the market’s early-July shakeout appeared to have ruined the chart—but a massive Q2 earnings beat and outlook brought in the buyers and now Snap looks like a leader again. From a big-picture perspective, there are many reasons Snap is strong today and should remain so for a long time to come: First, the company continues to expand its core camera offering (see more in our July 6 writeup) to attract and deepen engagement among both younger users (75% of 13-to-34-year-olds in the U.S., U.K., Australia, France and the Netherlands use Snap!) and others, with Q2 seeing 293 million global active users (up 18% from a year ago despite lapping the pandemic boost from a year ago), including 95 million in North America. Second, revenue per user continues to skyrocket (up 116% in North America in Q2) thanks to better ad tools and the fact that money is shifting to online advertising (and not just to Facebook and Google) in a big, big way. (Management thinks it could be making inroads into the huge online travel ad market now.) Despite this upmove, revenue per user is just a fraction of its peers (in the U.S., $22 for Snap, $59 for Twitter, $233 for Facebook), and management has been clear that it thinks this can be a driver of rapid growth for many years. These factors led to a blowout Q2 report—not only did revenues soar 116% from the pandemic-impacted quarter of a year ago, but they surged 28% from Q4(!), crushed estimates, and the profit of 10 cents per share was 28 cents better than expectations. Overall, the top brass thinks the top line here can grow at 50%-plus rates for many years, and the Q2 report backs that up. We like it.

Technical Analysis

SNAP had a deep correction like other growth stocks in the spring, but it actually showed some relative strength, holding well above its 40-week line unlike many peers. And then it approached its highs around Independence Day, which looked good. However, the dip from there was a doozy (over 70 to under 58 in less than two weeks!), but now that looks like the final shakeout—SNAP gapped to new price highs on six times average volume on Friday. Yes, near-term wiggles are possible (even likely), but we think you can buy SNAP here or on minor weakness.

SNAP Weekly Chart

SNAP Daily Chart

Trane Technologies plc (TT)

tranetechnologies.com

Why the Strength

Trane is a return-to-the-office play, as companies upgrade their HVAC systems to assure a safe return for workers. Trane’s business suffered more than its peers last year given its reliance on new office buildings, but as construction picks back up it’s expected to help Trane more than its competitors. Led by its Thermo King brand, Trane is a global interior climate and refrigeration business and has been positioning itself as a company that can help customers combat climate change (given that building emissions and food waste contribute 25% of worldwide greenhouse gas emissions). Trane has recently entered deals to use its engineering expertise to develop renewable and distributed energy assets across North America with Brookfield Renewable Partners (BEP) and is testing environmentally friendlier refrigerants, since the hydrofluorocarbons used in typical cooling systems are 1,000 times more potent greenhouse gases than CO2. The cleantech tailwind, along with the global shift to more people living in cities, are the macrotrends management says will continue to grow sales. Trane is valued by Wall Street in part by being a predictable grower in recent years, using capital investment and M&A to keep returns churning in mid-to-high single digits. Trane is executing well, beating Q1 earnings estimates and raising guidance for 2021 to about $6 per share and sales of around $14 billion (up 9%). Earnings are due August 4.

Technical Analysis

TT has drawn in institutional support since last year, with fund ownership increasing nicely and shares advancing in tandem. After plateauing around 140 from November through February, TT made a new leg up on improving volume and eventually hit 180 before pulling back. A sharp dip under the 50-day line in June shook out the weak hands, and there has since been evidence of strong buying as TT recovered to new highs. It’s a bit extended from the moving averages, so aim for dips if you want in.

TT Weekly Chart

TT 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 August 2, 2021.