June 14, 2021

Continued Progress

Current Market Outlook

Our thoughts on the overall environment remain the same—growth stocks continue to slowly repair the damage, though most stocks aren’t out of the woods yet (many have moved right into some tough resistance), and there remains lots of selling on strength and rotation on a daily basis (cyclical stocks look iffy), so it’s tough to make much progress. All in all, we’re going to keep our Market Monitor at a level 6—we’re close to raising it, but the lack of upside breakouts and the continued chop keep us in a “trust but verify” mode. There are things to like, but we need to see more.

Interestingly, this week’s list is heavy on growth stocks, though finding buy points is tricky. Our Top Pick is DocuSign (DOCU), which has shown excellent accumulation since earnings, though we favor keeping it small and/or trying to get in on dips.

Align Technology (ALGN)

aligntech.com

Why the Strength

With masks coming off and faces showing again, millions of people will again be seeking treatment to enhance their smile. The biggest beneficiary of this should be Align Technology, which had a big 2020 despite last year’s hold in elective procedures. Align’s Invisalign braces continue to be in high demand globally, and the company just celebrated its 10 millionth orthodontic patient in 10 years (while anticipating 2.5 million patients this year alone!). The end of Covid restrictions will also mean more in-person consults with dentists, which should boost aligner sales. Revenue in Q1 was an estimate-beating 62% higher on the back of an 8% sequential increase in Invisalign clear aligner sales (with notable strength in international markets). Per-share earnings of $2.49, meanwhile, beat estimates by 24%. The company has also been on a buyback spree lately, embarking on an accelerated $100 million repurchase (to be completed in August) as part of a much bigger $1 billion repurchase program, reflecting a solid balance sheet and strong cash flow generation. Management expressed “growing confidence” in Align’s digital platform, noting that it’s driving growth across all regions and market segments. It further expects 2021 revenues of around $3.8 billion, a 54% increase from a year ago, with plans to expand manufacturing capacity to support international expansion. While most of Align’s patients have historically been teenagers, the firm sees a huge potential market in adult cosmetic dentistry with 500 million potential patients. Analysts see earnings taking a step function higher this year with more growth after that.

Technical Analysis

ALGN staged a two-year breakout last October and ran up to 624 in February. After a three-month rest, the late-April breakout failed, but the action since then has been encouraging—ALGN’s six-week consolidation has been shallower and tighter, and last week saw the stock begin to perk up. Shares may need more time, but odds favor the net major move is up. We’re not opposed to starting a position here with a tight stop.

ALGN Weekly Chart

ALGN Daily Chart

Arista Networks (ANET)

arista.com

Why the Strength

Data center demand is expected to surge in 2021, driven by big capital expenditures from American companies. Hardware buying is seen as increasing too, as companies enter a cycle of upgrading the backbones of their corporate networks. Both of those mean Arista will be taking a lot of sales orders, as the company is a leader in the networking field. Formed in 2008 by three well-known Silicon Valley scientists, Arista is riding the explosion of the Internet-of-Things, in which small, networked devices are growing exponentially. To satisfy that evolution, the Internet requires tremendous flexibility to enable multi-directional communications, in contrast to the simpler server-to-computer workflow of years ago. The IoT, along with the cloud that enables it, has forced networking companies to rethink systems design to deliver the better speed and flexibility needed in the new age. Arista tackles this through two business arms: A hardware business providing Ethernet switches and routing platforms for very large network capabilities, such as huge data centers that need 10 Gigabit Ethernet or faster to push vast levels of information around the world. The other arm is in cloud networking, including software applications that together make up what it calls its Extensible Operating System, a way for its customers to program, monitor and automate networks. Arista has 7,000 customers, some of them very big, like Microsoft, which accounts for nearly 10% of sales. More important, after a sluggish few quarters, growth is picking up steam, with Q1 results posting their fastest growth since late 2019; analysts see more upside ahead.

Technical Analysis

ANET had a huge run for a few years but topped out in March 2018 and began a very long consolidation—from that point through last October, shares actually fell about 30%. But the change in character started after a great reaction to earnings, and while the stock fell in March with most growth stocks, the action since has been solid, with ANET slowly but steadily accelerating to new highs on a pickup in volume. We favor entering on weakness.

ANET Weekly Chart

ANET Daily Chart

CareDx (CDNA)

caredx.com

Why the Strength

The market for organ transplant diagnostics has been underserved for years, but CareDx, a diagnostics provider focused on developing noninvasive diagnostic surveillance and testing solutions for heart transplant patients, is filling the void and establishing a dominant position in this space. CareDx helps doctors find a better match between organ donors and their recipients, as well as monitor transplant patients for signs of organ rejection. The company’s primary products include a pre-transplant organ matching diagnostic tool and another one for post-transplant monitoring, with more than 70% of U.S. kidney transplant centers and over 90% of heart transplant centers (!) using its AlloSure and AlloMap testing diagnostics and patient management software. The company is in expansion mode and recently acquired TX Services, a company with a cloud-based offering that allows kidney dialysis centers to electronically submit referrals to transplant programs. Last week, it bought health app provider Transplant HeroPrior, and prior to that purchased TransChart, an electronic health records software provider for transplant centers. CareDx is also busy at in-house innovation, as its pipeline includes a lung testing candidate that could be on the market later this year, while its AlloCell surveillance solution for engineered-cell patients should allow it to enter the $5.5 billion stem cell transplant diagnostics market. The company’s record Q1 included revenue of $67 million, which mushroomed 76% from a year ago, and per-share earnings of 14 cents—a huge beat and up from just a penny a year ago. Looking ahead, losses are expected to continue to shrink while revenues surge 45% this year and 20% next. It’s a good story.

Technical Analysis

CDNA is a bit thinly traded (under $50 million in volume per day), but we like the overall look of the chart. Shares broke out from a huge base last October near 36 and motored to 100 in January before correcting. The downturn was sharp (40%, give or take), but the 40-week line held and, as growth stocks have perked up, so has CDNA—in fact, the stock is up 9 of the past 11 weeks and last week saw some great-volume buying. Like many growth names, we’re OK starting a position on here or (preferably) on dips.

CDNA Weekly Chart

CDNA Daily Chart

Cloudflare (NET)

cloudflare.com

Why the Strength

Cloudflare is one of a group of publicly traded companies that operate the Internet, to the extent any entity does. It’s a content delivery service, or CDN, providing the architecture, network ability and back-end tech to keep websites humming for all but the very largest web players (which run their own CDNs). Some of what CDNs do is workmanlike–Cloudflare maintains operations in more than 200 cities worldwide because physical closeness to users speeds up loading pages and streaming media. Other work is much more sophisticated, like developing cloud infrastructure and blocking some 70 billion cyber threats each day to its 4.1 million customers, which includes 17% of the Fortune 1,000. Among the CDNs, Cloudflare has a specialty in smaller file sizes and network security, the latter growing more important as network problems become more common for CDNs–recently, competitor Fastly’s service went down from a programming glitch, making some major websites inaccessible for almost an hour. Providing the Internet backbone is a business that offers rapid and reliable growth, which, over time, is like catnip for institutional investors: Cloudflare has generated compounded annual growth of 50% since 2016, and that growth rate is continuing, with analysts seeing the top line lifting to almost $600 million this year and close to $800 million next thanks to both new customers and strong same-customer growth, too (up 23% in Q1). The red ink isn’t ideal as the firm is investing a ton, but big investors see huge profits down the road as Cloudflare captures more and more customers.

Technical Analysis

NET was one of the newer winners last year, breaking out of an IPO base and enjoying a huge run into the growth stock top in February. The action since then has been sloppy, but not abnormal in the big scheme of things (36% top-to-bottom correction), and it’s in Top Ten this week because it’s showing great relative strength compared to its peers. It’s tough to buy it into resistance after a big run, but any shakeout should provide an opportunity to start a position.

NET Weekly Chart

NET Daily Chart

Continental Resources (CLR)

clr.com

Why the Strength

Continental Resources used to be one of the emerging blue chips in the oil patch a few years ago, with growth-oriented management driving production much higher. But after falling on hard times, the top brass is set to harvest cash like the rest of the sector. The majority of the firm’s output comes from the Bakken (it’s the largest leaseholder in that basin), but it also does big business in the Scoop and Stack plays in Oklahoma. Production has faded from a year ago while Continental cuts costs (targeting 7% to 17% lower well costs depending on the area), aims for high-producing wells (believes its wells will crank out an average of 50% to 70% returns at $60 oil) and builds free cash flow. Indeed, as opposed to its peers, 2021 should be the company’s sixth straight year of positive free cash flow (after CapEx), with returns accelerating going forward—at $60 oil and $2.75 natural gas (both below current market prices), Continental thinks it will earn $1.7 billion of free cash flow this year (about 13% of the current market cap), and while it’s focused mostly on reducing debt (to less than $4 billion by year end, down from $5.5 billion in December 2020), it’s stepping up returns to shareholders, restarting a dividend (1.2% annual yield) just a couple of months ago. As with its peers, one of the stories here is that the longer oil prices remain north of the company’s targets (currently hovering near $70 oil), the greater the chance that even these bullish free cash flow estimates will prove conservative both this year and going ahead (as the firm potentially puts on hedges at advantageous prices). While oil stocks will always be cyclical, it continues to look like the current upcycle has room to run as investor perception improves.

Technical Analysis

CLR’s post-vaccine uptrend really accelerated at the end of February and into early March, which led to a pullback that the entire group experienced. Interestingly, the stock found support at its 50-day (and at the 25 level) multiple times and began pushing higher again in mid-April. The pop higher after the OPEC meeting last week was great, and CLR has so far refused to budge despite some retrenchment in the group. We advise aiming for dips if you want in.

CLR Weekly Chart

CLR Daily Chart

DocuSign (DOCU)

docusign.com

Why the Strength

DocuSign was one of the market’s biggest pandemic winners, as the already-great growth story got a major boost as work went mobile—but what’s impressive is that, unlike so many of its pandemic peers, the stock really never got hit too badly and is now looking like it’s starting its next advance. The story here is huge, but also easy to understand: DocuSign is the hands-down leader in the eSignature business, an idea that simply makes sense, saving consumers (when signing for things like mortgages) and businesses tons of time and money compared to the manual way of doing things. But beyond that is what the company is billing as the Agreement Cloud, offering added services before and after an agreement is inked (document preparation, risk-scoring of agreements, remote notary services and contract management), automating another batch of processes and dramatically boosting efficiencies for clients. All in, DocuSign sees itself playing in markets totaling $50 billion, and leading firms from all industries have signed up thanks to the firm’s best-in-class number of applications, integrations, partners and leading brand name, with the average contract length around 18 months. And the numbers here are borderline ridiculous—sales growth has been steadily accelerating, earnings have gone vertical in recent quarters, with free cash flow larger than earnings (60 cents per share vs 44 cents earnings in Q1). Plus, the overall customer count (now 988,000, up more than 10% from the prior quarter) and same-customer revenue growth (up 25% in Q1) are both very impressive, with the latter figure itself accelerating in recent quarters. Analysts see the bottom line booming this year and growing 30% in 2022, but even those figures are likely conservative.

Technical Analysis

DOCU originally broke out in September 2019 and went bananas after the pandemic hit, eventually topping out with an “iceberg” last September; eight months later, the stock was languishing under its 40-week line and well below its old highs. But the Q1 report may have marked a turning point—DOCU not only reacted excellently (up 20% on six times average volume), but it’s also followed through nicely on the upside. There’s still overhead to chew through, but if you’re game, you can start a position here or on dips and look to add on further strength.

DOCU Weekly Chart

DOCU Daily Chart

GoPro, Inc. (GPRO)

gopro.com

Why the Strength

GoPro was a very hot IPO a few years ago, but its high-end action cameras ended up serving more of a niche market than many thought (more sizzle than steak fundamentally), producing a multi-year slide as business languished. But now GoPro is doing well for a couple of reasons, the first of which is that, brand-wise, the firm is as strong as ever, owning 80% of the action camera category and boasting a massive social media presence. Beyond that, though, has been a change in the business model, with a major shift away from one-off camera sales and toward subscription revenue. That’s right: GoPro currently has north of one million subscribers (up 165% from the prior year and 24% from the prior quarter) that pay $50 per year to get up to $100 off a camera purchase, reimbursement if the camera suffers major damage, automatic cloud backup of content, access to special app features and deals on accessories, too. There’s also its Quik subscription service, giving people advanced editing tools for photos and videos no matter what camera or cell phone they’re taken with. Along with some revamped cameras, it’s all led to solid (albeit seasonal) results—sales and earnings boomed in Q1 as e-commerce revenue more than tripled and subscription revenue (though just 5% of the total) picked up in a big way. More important, the subscription business is set to raise margins and goose the bottom line, which Wall Street sees surging to 66 cents per share this year and growing more in 2022. It’s not changing the world and isn’t a real glamour stock anymore, but GoPro’s moves have put the wind at its back.

Technical Analysis

GPRO was in the garbage bin a year ago, but as its business model transition has taken hold, the stock has continued to make progress—albeit with a ton of big corrections along the way. The latest of those started in March and lasted eight weeks, dragging shares from 14 back to 9 as growth stocks were weak. But since early May, GPRO is acting better—the stock rallied back to its 50-day line two weeks ago, and after some tightness, showed great-volume buying last week. Volatility will be extreme, but nibbling here or on dips of a few dimes is fine by us.

GPRO Weekly Chart

GPRO Daily Chart

Lightspeed POS Inc. (LSPD)

lightspeedhq.com

Why the Strength

Lightspeed, which provides cloud-based point-of-sales (POS) and e-commerce software solutions for retail, hospitality and gold merchants, clearly benefited from last year’s shutdowns as businesses pivoted to a digital sales model. Now that the economy is reopening and new businesses are being formed, the company is doubling down on plans to expand both digital and physical location sales. As part of Lightspeed’s growth strategy, it announced last week an acquisition of two companies, Ecwid and NuORDER, in a bid to unify commerce ecosystems and provide customers with new entry points to the digital economy. The Ecwid acquisition will allow customers to create a standalone business in minutes and help merchants increase selling flexibility by reaching shoppers on multiple social media or digital marketplaces. With NuORDER, Lightspeed aims to bridge the merchant and supplier experience and simplify product ordering for retailers. Prior to that, Lightspeed announced a partnership with jewelry insurer BriteCo to offer free appraisal systems for retail jewelers and allow their customers to quickly purchase insurance online. In fiscal Q4, Lightspeed reported revenue of $82 million (up 127% from last year’s depressed quarter), including recurring subscription and transaction-based revenue of $75 million that was 137% higher. The company isn’t yet profitable, but its net loss narrowed to 29 cents per share (from 16 cents a year ago). Customer locations, meanwhile, grew to nearly 119,000 (up 56%). Management sees a potential market of seven million merchants for its omnichannel systems, so it’s just scratching the surface of its opportunity, and for 2021, the top brass sees revenue of around $440 million, nearly double last year’s tally. Lightspeed has the look of yet another payment-oriented market winner.

Technical Analysis

LSPD had a nice uptrend from last year’s crash to the February growth stock peak, when it corrected sharply (82 to 52!) in just two weeks. That type of swift damage requires time to heal, and sure enough, the stock spent another couple of months hacking around before retesting its low last month. But LSPD’s character may be changing, with a massive-volume rally around earnings in May, three tight weekly closes, followed by today’s pop. There’s still resistance to chew through, but it looks like a decent entry around here.

LSPD Weekly Chart

LSPD Daily Chart

Signet Jewelers (SIG)

signetjewelers.com

Why the Strength

Signet is the world’s largest diamond jewelry retailer, operating several iconic brands including Kay Jewelers, Zales and Jared. Prior to the pandemic, just 5% of total revenue for Signet came from e-commerce—well under the industry average of 15%. But the astounding success of Signet’s “Path to Brilliance” digital growth strategy has resulted in its e-commerce operations now accounting for more than 20% of total revenue. Testifying to the transformation, Signet reported fiscal Q1 2022 sales of $1.7 billion that were 98% higher from last year’s Covid-impacted quarter (importantly, they were 27% higher from two years ago). Although international sales were 12% lower, same-store sales in North America were up an eye-catching 117%. Most impressive, storefront sales were 106% higher in a sign that foot traffic is returning, while digital sales grew an even stronger 110%. Looking ahead, Signet is aggressively moving forward with plans to increase online sales, based on management’s belief that the pandemic has permanently altered the traditional retail sales landscape and increased people’s openness to buying jewelry online. The company is also expanding its footprint in new areas like jewelry subscriptions through its recent acquisition of Rocksbox (allowing members to rent and swap designer jewelry through an online platform). Management guided for fiscal 2022 revenue of $6.57 billion—up 26% at the midpoint and 6% above the consensus. And while diamond and precious metal prices are moving higher and shortages are expected, the firm’s long purchase cycle should insulate it from inflation in the near term. An added plus was the recent reinstatement of the dividend; 18 cents per share will be paid in August (a 1.0% yield), tying a bow on an otherwise attractive package.

Technical Analysis

SIG has been in a solid uptrend since the pandemic low, with periodic pullbacks usually finding support near the 10-week line. The stock finally met with resistance near 66 in March, which effectively kicked off a three-month rest. Encouragingly, volume really dried up near the end of that pause, and last week’s earnings-induced move inspires confidence. We think it heads higher, though would prefer to grab shares on minor weakness.

SIG Weekly Chart

SIG Daily Chart

United States Steel Corporation (X)

ussteel.com

Why the Strength

Soaring steel prices, along with the potential passage of a massive U.S. infrastructure spending bill (the “small” bill now looks like it’s worth $1.2 trillion over 10 years), is good news for steel producers, including one of the nation’s biggest steel producers, U.S. Steel. The company has lately been the target of several Wall Street analyst upgrades (a reason for the recent strength), but an even bigger reason for the enthusiasm is the aforementioned bipartisan infrastructure bill which appears to be gaining steam in Congress and which would be a major catalyst for earnings growth for the firm. Even without the extra spending, steel demand is booming and having wild impacts on pricing—widely used hot-rolled coil, which accounted for 60% of U.S. Steel’s total shipments in Q1, has seen its price rise by 275%! Low levels of steel in the supply chain are another reason for the strength, and management reports that end user demand has been so strong that most customers haven’t had a chance to restock depleted inventories—a trend the company sees continuing. Further, with iron ore prices near record highs, U.S. Steel’s input costs are the lowest in North America, giving the firm a cost advantage in its flat-rolled segment. First-quarter financial results reflect the bullish steel market fundamentals as revenue rose 33% and per-share earnings were $1.08 (versus a loss of 73 cents in the year-ago quarter). By far the biggest news in Q1 was the closing of the company’s acquisition of Big River Steel. Regarded as North America’s most technologically advanced flat-rolled mill, the purchase will enable U.S. Steel to produce 14 advanced steel grades while doubling its hot-rolled production capacity. Finally, even assuming a huge drop in earnings in 2022, the stock trades at less than 10 times that 2022 guesstimate.

Technical Analysis

X bounced after last year’s low, but was still sitting near multi-decade lows in September before getting going in a big way. The issue since then hasn’t been progress, it’s been volatility, with three sharp corrections since mid-January, including the latest quick two-week dip (30 to 23) last month. But that pullback found support near its 50-day line, shares tightened up a bit and, last week, X saw some big-volume buying. We’re OK buying a little on today’s dip.

X Weekly Chart

X 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 21, 2021.