July 6, 2021

Partly Sunny, Chance of Thunderstorms

Current Market Outlook

It was a relatively quiet, but bullish, pre-holiday week, with the major indexes acting well and many stocks resting nicely. That said, there was still rotation evident, with growth stocks finally easing a bit while money sloshed into some other areas, before that situation reversed today. Overall, not much has changed with our thoughts—we’re generally encouraged, and actually think further pullbacks in growth titles could provide some tempting entry points (the Nasdaq is pretty extended short term), though there remains plenty of tricky and narrow action (just over half of all stocks are even above their 50-day lines and there are lots of potholes on a daily basis), so picking your stocks and buy points is important. We’ll keep our Market Monitor at a level 7.

This week’s list has a nice collection of stocks from different sectors and themes that have all shown some good-volume accumulation of late. Our Top Pick is Carvana (CVNA), which is near the top of a six-month launching pad.

Asana Inc. (ASAN)

Why the Strength

Cloud software stocks have been in a long-term uptrend for years, but each new upmove tends to have one or two newer names that lead the way. This time around, we think one of those winners will be Asana, which has come up with a better mousetrap in the work management software space, an area that’s booming now that so much of the white collar workforce is working remotely. Yes, there are other solutions out there, but many (like Smartsheet) are basically spreadsheet replacements. Instead, thanks to its proprietary data modeling engine, Asana allows clients to track and monitor task progress across teams and departments, as well as integrate those into larger missions and objectives. And, of course, it serves as an online system of record with real-time reporting, so the top brass can see what’s what at any time via graphical layouts. The big idea here is to replace (or cut back on the number of) meetings, emails and the like that are needed to keep people up to date on what’s going on and what needs to be done. The numbers are certainly bullish, but more than just sales growth is what big clients are doing—while the overall same-customer revenue growth rate is north of 15%, those spending at least $50,000 per year with Asana are boosting their spending by north of 40% annually (!) as they expand usage across departments. We think Asana is destined to get much, much bigger, and the firm’s CEO agrees—he bought 500,000 shares (nearly $20 million worth) in early June and now owns a whopping 4.1 million shares. Overall, it’s a big idea.

Technical Analysis

ASAN came public a few months ago, built its first launching pad from February through May, broke out in June and has gone on a truly stunning advance—from new highs at 44, it’s risen more than 50% in just a few weeks on massive weekly volume. Short term, yes, it’s extended, but given the story and the stock’s newness, we’re viewing this as an initial kickoff to what should be a larger advance. We’ll set our buy range down a fair amount and see if we can catch a shakeout during the next couple of weeks.

ASAN Weekly Chart

ASAN Daily Chart

BioCryst Pharmaceuticals (BCRX)

biocryst.com

Why the Strength

Because most orphan diseases (those afflicting less than 200,000 patients per year) are underserved, there’s a massive opportunity for drug firms specializing in this field—especially if they have viable treatments. One such company is BioCryst (covered in the June 1 report), a late-stage biotech that develops treatments that inhibit enzymes in an effort to treat rare diseases such as hereditary angioedema (HAE). Orladeyo, the company’s oral treatment for painful swelling related to HAE, looks to be a potential blockbuster—BioCryst reported $11 million in sales during the drug’s first quarter on the market, but the drug’s addressable market is estimated to be $1.5 billion and management is targeting annual sales of $500 million in the coming years. The company has recently garnered several new regional approvals (including in the E.U. and Japan) for Orladeyo, which should keep growth in high gear. Management anticipates that most suffering from HAE will have access to Orladeyo this year, with the possibility that over 40% of patients could have it prescribed to them. Another big potential treatment for BioCryst, longer term, is the neuraminidase inhibitor, Rapivab, which is approved in several countries to treat acute influenza. The company also has several drug candidates in Phase 1 clinical trials that could reach mid-level development over the next couple of years, including BCX9930 for treating paroxysmal nocturnal hemoglobinuria (PNH) and the broad spectrum antiviral Galidesivir (a potential Covid treatment). We like what we see here, and so does Wall Street, which is looking for revenues to lift from basically zero to $100 million this year and $175 million in 2022.

Technical Analysis

BCRX took flight in December, soaring from 5 to 9 that month, then rose to 14 in March before its first (very sharp) correction, dipping under 10 and temporarily falling below the 50-day line. After fidgeting around, the stock became reenergized in April and hit a 15-year high last month. We missed our entry price a month ago, but the stock has now chopped a bit lower for the past three weeks as the 50-day line (now near 14.7) catches up. You can buy some here with a stop under that 50-day line.

BCRX Weekly Chart

BCRX Daily Chart

Carvana (CVNA)

carvana.com

Why the Strength

There have been a few online firms that have tried to disrupt the auto sales sector, but most have been unable to break the dealer model; these outfits basically end up being simple sales-lead generators. But Carvana has something special, eliminating the dealer-lot experience altogether for the used car buying process (and adding a bit of fun, too). The company buys and refurbishes cars, takes detailed photos to provide a seamless 360-degree interior and exterior view on the web, and sells them for a set price. It also offers a seven-day “test drive” period so customers can always change their mind. For most customers, Carvana delivers the vehicle the next day to buyers on a flatbed truck–or, for those living near 24 car “vending machines,” they can pick it up. For that, buyers are sent a comically oversized token they bring to Carvana’s automated glass-enclosed garage; they drop the token in a slot and watch an automated elevator bring their car to them. Carvana also arranges trade-ins and cash buys of a consumer’s car through the website, as well as vehicle financing, extended warranties and gap insurance coverage. Dealers don’t like it, but consumers do, and as the company has expanded across the country (and as the pandemic pushed more of everything online), it’s proven to be a hit: Carvana sales more than doubled to $2.2 billion in the first quarter (despite inventory running at half year-ago levels!), while other sub-metrics impressed, including the facts that retail units sold were up 30% from the prior quarter and gross profit per unit sold rose 38%. Of course, heavy expansion costs (new reconditioning facilities, vending machines and entering new markets) are keeping the bottom line in the red, but there’s no question the potential here is enormous as used car sales in the U.S. are north of $700 billion annually. Sales are forecast rise 78% this year and 35% next.

Technical Analysis

CVNA had a huge post-crash run last year but began a very sloppy consolidation in December, with myriad big swings down and up during the next six-plus months. The shakeout in May to multi-month lows was ugly, but the snapback since then is a good sign most weak hands were taken out. CVNA could still use some seasoning, and big swings will likely be the norm for a while, but starting a position on dips with a loose stop sounds good to us.

CVNA Weekly Chart

CVNA Daily Chart

Diamondback Energy (FANG)

diamondbackenergy.com

Why the Strength

Diamondback Energy has long been one of our favorite stories in the oil patch, thanks mainly to its history of execution (it’s been solidly profitable for years, even during the worst times in the sector), which is driven in part by its best-in-class acreage position, including 418,000 acres in the Midland and Delaware basins that have more than 11,100 potential drilling locations (figures that have been bolstered by a couple of recent acquisitions). And it’s following the sector’s dance of keeping production steady (oil production flat this year) while keeping costs in check (10% drop in capital spending), which will lead to mountains of free cash flow: Even at $60 oil, the company sees after-CapEx cash flow of $1.45 billion (nearly 9% of the current market cap), some of which it’s paying out as a regular dividend (1.7% annual yield), the rest of which (along with proceeds from some small divestitures) should cut debt by $1.2 billion this year alone (it just redeemed $191 million in late June). And, of course, that is based on an oil price that is currently about 20% below the market! Unlike some of its peers, Diamondback isn’t offering a longer-term cash flow outlook, but big investors see the writing on the wall—even if oil prices slip, the firm is likely to boost its base dividend nicely going forward, with further debt reduction and possible one-time special dividends, too. Beyond the cash flow, it’s worth nothing that, while growth desires are on the back burner now, Diamondback has such great acreage and sports great returns on its wells at $60-plus oil prices that some add-on drilling could come if these prices stick. All around, this remains a solid story.

Technical Analysis

FANG ended its off-the-bottom recovery in early March and entered what turned out to be a 12-week consolidation; it lagged its peers for a bit in May, but kicked into gear nicely in early June. The advance was a bit choppy early on, but shares accelerated into the 100 level last week as volume picked up. Today’s dip with the group (on a minor retreat in oil prices) looks buyable to us.

FANG Weekly Chart

FANG Daily Chart

International Game Technology (IGT)

igt.com

Why the Strength

International Game Technology is both a reopening play and also a sports betting play. The company recently announced its systems will be the technology behind sports betting at the largest casino in Louisiana, another step for the firm to establish itself in the quickly expanding North American sports betting field. The new deal, at the Coushatta Casino, marks International Game’s 41st sports betting customer in 17 states. Gambling on sports is increasing as states (eager for new revenue sources in light of the pandemic) have supercharged its expansion across the country, while Ontario’s recent legalization is expected to lead to acceptance across Canada. And there’s still huge growth to be had: One-third of the U.S. population has no access to sports gambling, most notably in California, where there are rumblings of legalization. As for the here and now, the bulk of business is with lotteries, which provide 80% of the company’s $1 billion EBITDA in 2020; this segment includes the software to run state and national lotteries, as well as producing scratch-off cards, running second-chance drawings and licensing content. Business can be variable—the occasional mega jackpot is a wild card that generates more revenue, for instance—so Wall Street’s expectations for Q2 earnings, to be announced in early August, range from a low of 7 cents to a high of 42 cents a share. Still, the major trend here is up, and the sports betting angle gives the firm plenty up upside—analysts seeing International Game Technology returning to a yearly profit of 81 cents per share this year with a big 68% boost in 2022.

Technical Analysis

IGT chugged to a three-year high of 26 in early June, a good advance after the stock’s solid breakout above 20 one month before. Shares have since eased back on mostly tame trade (the one big-volume day was options expiration) as the 50-day line (now near 22.5) catches up. This looks like a classic early-stage pullback after a solid breakout, offering up a solid risk-reward situation.

IGT Weekly Chart

IGT Daily Chart

Ford Motor Co. (F)

ford.com

Why the Strength

Legacy automakers are moving more production to the electric vehicle (EV) market, and Ford has a big lead on many of its rivals. Ford’s gas-fueled F-150 is currently one of America’s top-selling vehicles, but its soon-to-be-released electric F-150 Lightning has just secured over 100,000 reservations from interested customers. And it recently introduced the Mustang Mach-E all-electric crossover SUV to great fanfare, earning an award for the best utility vehicle of 2021 from a panel of U.S. and Canadian journalists. As Ford pivots toward greater EV production (it plans to make EVs account for 40% of its global sales by 2030), it’s already making good progress in this new field: Ford’s electric auto sales surged 184% in May to a record 10,364 vehicles, with the F-150 PowerBoost and Escape hybrid models boasting sales of 2,852 and 3,617, respectively. Mustang Mach-E sales totaled 1,945 for the month, while Explorer hybrid sales increased 132% to 1,156 SUVs. It’s not all rosy, though, as Ford is battling the chip shortage along with its peers; the just-finished Q2 probably will produce sour numbers due to limited supply. But the firm also believes the second quarter will prove to be the trough for this year and is “seeing improvement” since late April despite the chip supply concerns. After a big dip last year, Wall Street sees earnings rebounding back above 2019 levels despite the headwinds, with another 44% boom in 2022.

Technical Analysis

After last year’s post-crash turnaround, F has had a solid year so far. Beginning with a big-volume surge in January, it consolidated in March and April before taking off again in May and hitting record highs into early June. We missed our entry price a month ago, but as cyclical stocks have consolidated, F has done the same, but this four-week retreat looks reasonable and sets up what looks to be a solid risk-reward situation. We’re fine entering here.

F Weekly Chart

F Daily Chart

Roku, Inc. (ROKU)

roku.com

Why the Strength

Roku has long been the most direct play on the cord-cutting movement, as millions of people leave behind pricey cable for streaming services. The story has become a bit more complicated of late, as Roku has made the move into producing/buying (spending $1 billion over the next year according to reports) some original content (free for users but ad-supported), with 30 original series launching in late May (and 45 more series to come by year end), bringing with it big potential but also more costs and competition. Still, so far, that move is going well—the firm’s own Roku Channel saw record viewership in the two weeks after the original series launched, with each the top 10 most watched shows being one of these new series. But even better is the core business, where the company sits as a neutral hub for those that are using more and more streaming services; it’s benefiting as advertisers finally shift dollars away from linear (regular) TV and toward Roku’s platform. Indeed, revenue growth has been accelerating thanks to platform revenue (up 101% in Q1), while active accounts (53.6 million) were up 35%, streaming hours rose 49% and revenue per user boomed 32%. As for recent news, there are items that account for the recent strength—Apple has reportedly “bought” a button on Roku’s new remote control (along with Disney+, Netflix and Hulu), while there are rumors floating around that Roku could be a buyout target for a huge cable operator like Comcast. We don’t like to play the M&A guessing game, and the move into original content introduces some uncertainty, but there’s no question the underlying story and numbers are very strong.

Technical Analysis

ROKU had a big run from its original breakout last September through the February growth stock top, but it also had a deep correction (44% top to bottom) in the spring and was still languishing in mid-June. But the past three weeks has changed things—ROKU enjoyed a very impressive volume cluster, with the stock racing from 350 to 430 on a few days in a row of big volume, eventually reaching 460 before finally pulling in. It probably needs more of a rest, but we’re OK starting small here or on weakness.

ROKU Weekly Chart

ROKU Daily Chart

Snap Inc. (SNAP)

snap.com

Why the Strength

The Snapchat app is popular with members of the Gen Z demographic and younger Millennials, who are more likely to communicate with pictures than with words. (A recent Piper Sandler survey found that 31% of U.S. teens preferred Snap to other apps, even topping popular rivals TikTok and Instagram.) Snap’s features include Cameras (used to create over five billion “snaps” per day), Filters and the reality augmenting Lenses, but a new feature adds to the excitement: Snap recently launched a “Sounds” feature that allows users to add music to their snaps, and it has been a big hit, with 521 million videos created with Sounds and 31 billion (!) views. Playing into that, the company just inked a new licensing deal with Universal Music Group (the world’s largest record label) to include their artists’ music in Snap’s library and to be featured in Sounds, Lenses and other tools. The firm also just released its fourth-generation augmented reality (AR) glasses that allow users to experience virtual transportation; though the glasses aren’t available to consumers yet (they’re being given to AR effects creators for testing), the company believes it could become a major future growth driver. The company’s top line is also making impressive strides. In Q1, revenue was up 66% from a year ago, and the company has eked out small profits each of the past three quarters. Moreover, management is guiding for sales to grow 81% to 85% in Q2 with analysts predicting a third straight year of accelerating revenue growth. And, longer term, management’s view of 50%-plus annual revenue growth for many years is like catnip to big investors.

Technical Analysis

After an earnings-related blastoff last October, SNAP ran to north of 70 before pulling in with the growth stock crowd. Three months of choppiness followed, with shares bouncing between 50 and 65, though it never came very close to its 200-day line (unlike many growth titles). SNAP finally found its stride again last month, and while the upmove has had a couple of hiccups, we like the accumulation two weeks ago and last week’s tight trading. You can start small here and aim to add if (and only if) shares work their way higher.

SNAP Weekly Chart

SNAP Daily Chart

Tempur Sealy (TPX)

www.tempursealy.com

Why the Strength

Over 20% of Americans have a sleep disorder, with insomnia being the most common one. Not surprisingly, getting a good night’s sleep is big business these days, with an increasing focus on quality mattresses. Tempur Sealy is the number one mattress brand in the U.S. and also offers adjustable bases, pillows and other sleep and relaxation products. Consumers’ growing focus on designer beds that promote comfortable rest has shrunk the replacement cycle for beds in recent years, and Tempur has kept ahead of this trend by developing cutting-edge mattresses that adjust to the individual’s sleep specifications. Most recently, the company introduced the Ergo Smart Based Sleeptracker, the only sleep system on the market with technology that automatically detects and responds to snoring. (It also monitors key health metrics and sends personalized sleep analytics and coaching to consumers via a personal app.) Robust order trends allowed the firm to increase its advertising investment by an additional $50 million, to a projected $450 million this year, which represents the largest ad spend in its history and should provide more momentum for future growth. The pandemic, moreover, accelerated an existing trend toward greater demand for high-quality beds among consumers, resulting in double-digit same-store sales growth in Q1, while web sales grew over 100% (including robust triple-digit growth in Tempur’s bedding products). Overall, Q1 results were great and topped expectations, and while there’s been no specific news for the stock’s latest strength, the retail sector as a whole has been catching a bid as consumer spending should remain strong as the economy cranks ahead. Analysts see earnings taking a step function higher this year with more growth in 2022.

Technical Analysis

TPX spent several years trapped in a range between roughly 10 and 20. The post-pandemic rally changed that, though, with shares hitting new highs last November and eventually soaring to 40 before finally taking a breather. That 40 area proved to be a wall for 14 weeks, but last week saw the buyers return—TPX pushed to new highs on two solid days of volume. Granted, it’s not the biggest blastoff of all time, but it’s still in good position even after today’s dip.

TPX Weekly Chart

TPX Daily Chart

Urban Outfitters (URBN)

urbn.com

Why the Strength

Many “turnaround” retailers—those that suffered in the pandemic but are now thriving as the economy booms and as they made changes to adjust to the new reality—looked ragged a few weeks back, but are now seeing impressive buying as prospects continue to improve. Urban Outfitters is one of the better looking names: The lifestyle retailer specializing in fashion apparel, footwear and accessories for younger adults outperformed many of its peers by making a smooth transition from storefront to online sales. The firm’s heavy emphasis on digital sales is boosting results in a huge way, as shown in its first-quarter report. Urban’s top line boomed 58% in Q1 from a year ago to a record $927 million, thanks largely to double-digit growth in digital sales channels and a 51% increase in comp sales (obviously vs. easy comparisons a year ago). All three of Urban’s main brands posted strong revenue growth, including Free People (up 98%), Anthropologie (up 51%) and Urban Outfitters (up 47%). Urban also posted record per-share earnings of 54 cents, beating the consensus by a whopping 37 cents! Beyond just the turnaround, there’s some interesting new business lines; the top brass launched a subscription-based premium clothing rental business, Nuuly that saw a “positive shift” in customer behavior this spring as the country began reopening, as many customers who had paused their subscription last year resumed monthly deliveries in Q1. Combined with new subscriber growth, the company sees Nuuly on course to meet its goal of ending fiscal 2022 with an impressive 50,000 subscribers. Back to the big picture, the driver here is that things are getting better in a hurry—analysts see earnings of $2.63 per share this year, up from an estimate of just $1.87 two months ago. We expect more positive surprises ahead.

Technical Analysis

URBN’s upmove finally hit a wall in mid-March around 42 and began a well-deserved rest. Still, the sellers seemed to be getting the upper hand in late May, when shares dove to 33.5 on a pickup in volume. But the action since then has been encouraging—URBN immediately surged back toward 40 on earnings, steadied itself for a couple of weeks and then enjoyed more good-volume buying two weeks ago. It backed off today, but you can start a position around here with a tight-ish stop.

URBN Weekly Chart

URBN 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 12, 2021.