June 1, 2021

More Improvement

Current Market Outlook

If you had told us three weeks ago that growth stocks would bounce decently, a collection of names would show some big-volume upmoves and other names would start to tighten up, we’d have taken it in a heartbeat. As we’ve written in recent days, the action is encouraging, though not decisive yet, and the next week or two will be key—many prior winners have pushed into resistance, while in recent months most good-looking names have quickly found sellers, so if the buying pressures can continue it would be a sign that the market’s character has changed. As it stands now, the evidence has improved, so you can start putting more money to work if you’ve been relatively defensive. But we think going slow and building as you develop profits is the way to go.

This week’s list has many interesting names, including a few more growth-y titles than we’ve seen recently. For our Top Pick, we’ll take another swing at Nvidia (NVDA)—it’s had two failed breakouts this year, but we think the 3rd time could be the charm.

Adient (ADNT)

adient.com

Why the Strength

As the economy reopens, a dual trend in the transportation industry has emerged: In the auto space, demand for new vehicles is outpacing supply, while on the airline front, passenger flight activity is recovering while new plane orders increase. Both developments are boosting Adient, which manufactures seats for automobiles (it’s the world’s largest auto seat maker) and airlines. As part of its China-focused growth strategy, Adient recently announced it will sell a 50% stake in the Yanfeng Adient Seating joint venture back to its partner for $1.5 billion (a big reason for the stock’s latest strength). As part of the transaction, which is expected for completion later this year, Adient will acquire Yanfeng’s 50% stake in Chongqing Yanfeng Adient Automotive Components along with a 100% stake in Yanfeng Adient (Langfang) Seating. The result of all these moves is expected to give Adient greater independence to pursue its China-focused growth strategy, and management said it would provide “immediate value” to the firm’s shareholders. (The company projects annual sales of about $4.5 billion in China and expects to remain a leader in this market.) Meanwhile, Adient’s ongoing turnaround is humming along, as reflected in its fiscal Q2 report. Revenue was 9% higher from a year ago and beat estimates by 6%, while the bottom line of $1.15 per share was 85% higher and more than double expectations. Looking ahead, analysts see earnings lifting in a big way both this year and next (up 53% in 2022) as the top brass cuts debt and costs while making new deals with automakers in its core, high-volume seating business. It’s not changing the world but Adient should be doing big business for many quarters to come.

Technical Analysis

ADNT broke out from a low-level consolidation last October and enjoyed a great run to the mid-30s (and multi-year highs) in December. What followed was lots of ups and downs, but the sellers never really gained control and, after sneaking up to the 50 level last month, shares have tightened up—and we’ve started to see some buying volume come in. It’s a solid risk-reward situation—we’re OK buying some here with a tight stop in the mid-40s.

ADNT Weekly Chart

ADNT Daily Chart

Bentley Systems (BSY)

bentley.com

Why the Strength

The market for global workflow management systems is expected to reach $22 billion by 2027 as cloud migration continues; add to that a projected increase in infrastructure development and firms like Bentley are poised to do well. Bentley offers computer software solutions for infrastructure and architectural companies, with a focus on structural, geotechnical and civil engineering applications. Its CAD software products facilitate omni-channel workflow management to help engineering firms generate efficient designs for any size data set, as well as manage complex building projects. (Bentley also provides post-construction asset management tools to assist customers with risk mitigation, operational efficiency and regulatory compliance.) Bentley has established itself as a leader in CAD software offerings, with several large-scale clients including petrochemical giant Shell and top steel maker ArcelorMittal, though it’s focused on growing its small and mid-sized customer base (clients who spend under $100,000 on Bentley’s products). Bentley’s business is mainly subscription-based, making it a strong recurring revenue generator; same-customer growth was 7% in Q1, while annualized recurring revenue rose 10%, contributing to sales that were 14% higher, along with per-share earnings of 20 cents. The company recently announced the release of OpenToweriQ, a solution which accelerates the digital transformation required for 5G communication tower implementations. Bentley also just acquired global industrial Internet of Things (IoT) and cloud firm Sensemtrics, which will be used to incorporate real-time sensor data to Bentley’s iTwin Platform. Analysts see low double-digit growth, though given the stock’s action, that’s probably too low.

Technical Analysis

BSY came public last September at 28 and avoided the post-IPO decline that typically follows the initial excitement. The stock rose to a high of 55 by January before pulling back to 40 and spending the next few months gathering strength. The shakeout on earnings was a doozy, but BSY has been all up in recent days, breaking out two weeks ago and following through nicely on the upside. Weakness would be tempting.

BSY Weekly Chart

BSY Daily Chart

BioCryst Pharmaceuticals (BCRX)

biocryst.com

Why the Strength

BioCryst is a biotech company that develops small molecules to inhibit enzymes, treating rare diseases such as hereditary angioedema (HAE) and fibrodysplasia ossificans progressiva (FOP). The company earned its first FDA approval in December with Orladeyo, an once-daily oral treatment to prevent painful swelling related to HAE; it’s a crowded market but the once daily/oral delivery is attractive, and BioCryst reported $11 million in Orladeyo sales during the drug’s first quarter on the market. And there’s upside ahead, with the addressable market estimated to be $1.5 billion and management is targeting an annual take of $500 million in sales in the coming years. Even better, recent approvals in Europe and Japan are expected to bump sales of the drug in the coming months. As for the pipeline, a strong candidate for BioCryst is BCX9930, which is designed as a treatment for paroxysmal nocturnal hemoglobinuria (PNH) and will begin a pivotal late-stage trial in the second half of this year. An earlier study of the drug found that it significantly increases hemoglobin levels for PNH patients, which means it could become the first oral treatment for this rare, life-threatening blood disorder (and a potential blockbuster). On the financial front, the company is just seeing its top line begin to lift off, and it’s a promising sign that BioCryst obliterated revenue estimates in Q1 (double estimates) driven by strength in the Orladeyo. But this is just the tip of the iceberg, with sales expected to be near $100 million this year and $175 million next. It’s a solid story from a firm that’s leaping into the commercialization stage.

Technical Analysis

BCRX began to soar in December from low-priced territory, hitting 9 that month, 13 in early February and 14 in March before it finally took a real hit; shares finally got taken down by the market, dipping back into the 9 to 10 area for a while. But the rest didn’t last long, and since the Q1 report early last month, the buyers have been active, with many big-volume up days and, late last week, a burst to new highs above 15. BCRX is volatile, but a little weakness should provide a solid entry point.

BCRX Weekly Chart

BCRX Daily Chart

CrowdStrike (CRWD)

crowdstrike.com

Why the Strength

Cybersecurity stocks fall out of favor every now and then and many fall by the wayside when their offerings get out of date. But long term, the buyers keep returning because the hacking of sensitive data and (as seen with the Colonial pipeline hack) infrastructure continues to increase. CrowdStrike has emerging blue chip written all over it, with a comprehensive, cloud-based platform (dubbed Falcon) that stops breaches for endpoint devices (anything that connects to the network); the secret sauce here is (as the name suggests) the crowdsourcing element, with all devices on the network communicating to the firm’s central system, which analyzes and updates its capabilities trillions of times each week! As customers see how well it works (after the infamous SolarWinds hack last year, that firm quickly installed the Falcon platform, which warded off ensuing attacks), more are signing up (nearly 10,000 customers now, up 82% from a year ago, yet “only” 177 of the Fortune 500 are customers) and current customers are adding capabilities (same-customer revenue growth has been north of 20% for the past couple of years; renewal rates are 98%). As for competition, there’s some, but note that many actually rely on CrowdStrike; Okta is a customer and Zscaler has integrated Falcon into some of its offerings. The numbers are fantastic, with rapidly growing recurring revenue, earnings and cash flow; the next big event will be earnings, which are due out this Thursday (June 3).

Technical Analysis

CRWD hit new all-time highs last June near 100 and had a huge run from that point until its top in February near 250. The correction and consolidation since then has been tedious but reasonable, retreating 33% from high to low and (unlike so many glamour peers) holding its 40-week line. And now it’s perking up, rallying back toward resistance as earnings approach. We’re OK nibbling here and buying more if earnings prompt a strong gap up in the stock, though if you want to wait to buy until seeing the stock’s earnings reaction, that’s fine as well.

CRWD Weekly Chart

CRWD Daily Chart

Dicks’s Sporting Goods (DKS)

dickssportinggoods.com

Why the Strength

Brick-and-mortar retailers faced a lot of turmoil in the pandemic and it’s clear some used the disruption to their benefit. Dick’s Sporting Goods, the largest sporting goods retailer, thinned out inventories and polished its digital retail efforts in 2020, resulting in strong trends that seem to be accelerating in 2021. That’s the main reason for the stock’s strength today: The big box retailer reported a very strong first quarter, posting $3.79 earnings per share, demolishing expectations of $1.19. Part of the reason for the results came from the latest round of stimulus payments, but Dick’s appears to have more mojo than that. Management has been able to negotiate carrying more product offerings from premium brands and has expand into more fashion-focused apparel, like CALIA by Carrie Underwood (for women) and an in-house brand, VRST (for men); both offer clothes designed for the person on-the-go, running errands or dashing into the office. Such differentiation is key, allowing Dick’s to compete more than just on price, with discounts not expected to be troublesome all year. Moreover, e-commerce now makes up 20% of revenue (up from 14% in Q1 last year; was 30% of the total last year due to store closures) and management has been high on its omni-channel strategy. Best of all, the top brass raised its 2021 outlook by a mile—analysts now see earnings north of $8 per share this year, which is up from $5.30 before last week’s report! All in all, Dick’s looks like another story where Wall Street expected last year’s earnings bump to fade as the pandemic ends, but instead the business’ strength is actually picking up.

Technical Analysis

DKS was hitting multi-year highs last October before finally taking a breather, etching a three-month consolidation. But as earnings continued to ramp, the buyers returned, with a breakout near the start of the year. The run since then has been more steady than explosive, but last week’s Q1 report caused a huge (up 17% on seven times average volume) earnings reaction. The century mark could provide a little resistance, but minor weakness should be buyable.

DKS Weekly Chart

DKS Daily Chart

Ford Motor Co. (F)

ford.com

Why the Strength

Ford’s long-standing reputation as a maker of stodgy domestic cars has been shaken off in recent years thanks to the success of its ultra-popular F-Series pickup trucks (last year’s best-selling vehicles). But it’s Ford’s pivot toward the electric vehicle (EV) market with the introduction of the F-150 Lightning that’s earned the company even more street cred with younger, hipper consumers (and investors). With experts predicting that every tenth car sold in the U.S. will be electric by 2025, Ford’s embracement of EV is timely. The company is focused on making EVs account for 40% of its global sales by 2030, starting with a $1 billion factory investment to produce electric passenger vehicles in Germany beginning in 2023, with further plans of making all its European passenger vehicles electric by 2030. Ford’s foray into the EV market began late last year with the rollout of the Mustang Mach-E all-electric SUV (it received thousands of pre-orders). The company’s transformation from legacy auto maker to cutting-edge EV producer is expected to revitalize revenues for Ford after years of stagnant sales growth, and some big-name Wall Street firms have lately responded with ratings upgrades (with more likely to follow). Even the here and now looks bright, with the booming economy creating huge demand after last year’s slump—in Q1, sales rose 6% from a year ago while earnings of 89 cents came in miles ahead of the 30-cent estimate. Going forward, analysts see the bottom line rebounding strongly for the next few quarters and approaching the levels of a few years ago. With current trends solid and the EV growth kicker down the road, we think this stodgy outfit can do well.

Technical Analysis

F has been an underperformer for years (its all-time high was at 37 back in 1999!), but things appear to be changing during the past few months. The recovery from last year’s crash was solid, but the real action has occurred this year—the stock saw huge-volume buying starting in January (moving it to multi-year highs), and after a modest consolidation from mid-March to early May, the bulls have taken over, with F plowing to higher highs on extremely heavy weekly volume. F isn’t going to go straight up, but with these volume clues, we think weakness is buyable.

F Weekly Chart

F Daily Chart

NVIDIA Corporation (NVDA)

nvidia.com

Why the Strength

Nvidia (covered in the April 19 report) has had a busier year so far than most of its semiconductor peers, setting several records in the first quarter and with several irons in the fire. The red-hot video game market is the main source of the company’s recent successes, with record-breaking Q1 gaming sales of $2.76 billion increasing 106% from a year ago (up 11% sequentially), driven by the firm’s RTX 30 series GPUs released in late 2020. Nvidia also just announced with fanfare that new laptops with RTX GPUs, which offer “huge boosts in performance,” will be released this summer. The data center segment also posted a record quarter, with sales rising 79% (up 8% sequentially) to just over $2 billion. Management indicated the data center business is expanding as industries worldwide adopt Nvidia’s AI Enterprise software suite to facilitate computer vision, natural language understanding and so-called recommender systems. Total revenue in Q1 was $5.7 billion—also a record—and up 84%, while per-share earnings of $3.66 came in 38 cents above estimates. The company said it’s making progress with a planned acquisition of Arm, which Nvidia sees expanding its GPU and AI technologies to a wider range of end markets, including mobile and the Internet of Things (IoT). Although auto segment revenue was flat in Q1, Nvidia sees a massive growth opportunity in self-driving vehicles through the advancement of its Drive autonomous vehicle platform, as well as Software as a Service (SaaS) cloud-based recurring revenue. Management guided for Q2 revenue to be around $6.3 billion—15% above consensus and 63% higher from a year ago at the midpoint—which will likely prove conservative.

Technical Analysis

NVDA got off to a roaring start following its 2020 rebound from the March crash low of 180, hitting 600 by September. But that was it for a while, with a long sideways phase and, this year, the stock’s had two failed breakout attempts, one in mid-February and the other in mid-April—both times the market pulled it back down. However, the 3rd time could be the charm, as NVDA has galloped off its 200-day line on huge volume both before and after the report. We’re OK buying here but with a liberal loss limit.

NVDA Weekly Chart

NVDA Daily Chart

Range Resources (RRC)

www.rangeresources.com

Why the Strength

Range Resources is another turnaround energy play, but as opposed to most of the others we’ve written about, Range has a different focus—it’s one of the top 10 producers of natural gas and liquids (70% of production is natural gas), and it’s the top liquid exporter among independent explorers. Still, the same factors driving its oily peers are why this stock is strong today: Range has very low maintenance costs, has a ton of inventory (nearly half a million acres in Appalachia with an estimated 16 years of drilling inventory), is keeping production relatively level while focusing on debt reduction (three straight years of slashing debt with more on the way) and free cash flow. While Range doesn’t give a free cash flow outlook that we can find, it has a very low breakeven price (something like $2.28 natural gas, compared to a realization of $3.20 in Q1) and states in its presentations it expects “significant” and “sustainable” free cash flow, with shareholder returns likely to pick up once it hits its debt targets—and given the prices it’s fetching, it thinks it can hit those debt targets sooner rather than later. Moreover, given that the industry as a whole is so focused on free cash flow/debt reduction, the likelihood of oversupply is greatly reduced. Trading at less than 1.5 times this year’s expected revenue, Range looks like an undervalued, profitable energy outfit that could be a cash cow if current energy prices stick or advance.

Technical Analysis

RRC was at 95 in 2014 and spent six years declining to less than 2 at last year’s crash. The immediate recovery from that low was sharp (back to 8 by June), but then it began a very long, tedious period of chop—the stock was still hovering at 8 a few weeks ago. But now RRC looks like it’s changed character, with four straight above-average volume weeks driving the stock up to 14, followed by today’s sector upmove. Dips should be buyable.

RRC Weekly Chart

RRC Daily Chart

Sea Limited (SE)

seagroup.com

Why the Strength

Sea is a mobile app company built around the ubiquity of the smartphone in southeast Asia, India and Latin America. In some cases it’s the only network-connected device people own, which makes phones the gateway for consumer shopping, banking and entertainment, areas Sea targets with its three divisions. The mobile games division, dubbed Garena, makes multi-player shoot ‘em up games including Free Fire, the most-downloaded mobile game world-wide (!) and in-game purchases made it the highest grossing game in Sea’s three primary regions last year. Individual sales are small, about $1.70 per user in Q1, but it adds up with a large user base—Sea’s digital entertainment sales more than doubled to $781 million in the period. Last year, Free Fire-related content tallied 72 billion views on YouTube, the most of any game, signifying a robust franchise and underpinning a move into esports, where fans watch and attend video game matches like other sporting events. Then there’s Sea’s Shopee division, which is effectively a $452-million (Q1 sales) Amazon competitor, a mobile based storefront that commands top market share in Indonesia, southeast Asia and Taiwan. Tying Sea’s access to users together is SeaMoney, a financial services hub. It’s the smallest of Sea’s businesses ($152 million Q1 revenue) but potentially the most lucrative as mobile banking’s scale can offer users cheap transactions and sell larger loans and mortgages. None of that means Sea makes money–it lost $2.78 a share last year on $2 billion sales–but the story is typical tech: Command market share first before converting dominance into profits. Indeed, sales are expected to rise 86% this year and another 50% next, and both of those should prove conservative.

Technical Analysis

SE has had a huge, huge run during the past couple of years, and to be fair, that does raise risk here as shares could need more time to digest. That said, it’s been showing a lot of positive signs of late. First, the overall correction (33% high to low) was sharp but reasonable given the recent run. Second, SE held its 40-week line, which is better than most glamour names. And third, the stock found two big-volume support weeks near the lows, including a nice pop on earnings. It’s still in the middle of its consolidation, so just watching it is fine, but we’re not opposed to nibbling here and adding if all goes well.

SE Weekly Chart

SE Daily Chart

Toll Brothers Inc. (TOL)

tollbrothers.com

Why the Strength

There’s some emerging worry that sky-high home prices and an inching up in mortgage rates (with the possibility of even higher rates if the Fed changes its tune) could slow the housing market, but there’s no sign of that yet, especially at the higher end of the market. Toll Brothers bills itself as America’s Luxury Home Builder, and indeed, it’s one of the few nationwide high-end builders, with a large presence all along the east coast, in Texas, and in the west and southwest. Obviously, operating near the top of the market has advantages, especially these days—prices are less of an issue, and most of its clients are now able to work remotely, meaning they can move and live where they want. And due to years of under-building (really from 2007 right through last year), demand for new homes should remain buoyant for a while. Most important, the stock is strong today because Toll’s Q1 results were outstanding—sales (up 25%) and earnings (up 71%) were impressive, but other sub-metrics were jaw-dropping, with its net signed contract value in the quarter rising 97% (up 85% in units), while Toll’s backlog at the end of April was $8.69 billion, up 58% from the year before! (Just to show its higher-end focus, in the quarter, 18% of buyers paid in all cash, the average loan-to-value ratio was just 70% and the average price of its delivered homes was $809,000.) And the company hasn’t been shy about adding land to its portfolio, so it has tens of thousands of potential lots to build on should the wind remain at the industry’s back. Analysts have bumped up their estimates as a result and now see the bottom line up 68% this year and another 39% in 2022. The company will host an Investor Day tomorrow (June 2), where it could give an outlook on the next few quarters.

Technical Analysis

TOL rebounded quickly from its crash and made it back to 50 in October. That was followed by a three-month base, which gave way to further upside in January. The action since then has been solid, but choppy, with TOL mostly riding its 50-day line higher; the latest test of that support area brought in buyers following the quarterly report. If you want in, you can take a swing at it here with a stop in the upper 50s.

TOL Weekly Chart

TOL 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 June 7, 2021.