June 28, 2021

Impressive Action

Current Market Outlook

Just over a week ago, it looked like the market’s intermediate-term trend was going up in smoke as cyclicals cracked and growth stocks remained hit or miss. But, frankly, last week’s action was one of the more impressive few days we’ve seen in a while—most indexes roared back, we saw more stocks (growth and otherwise) pop on excellent volume and even some hard-hit areas rebounded nicely. To be clear, we don’t think the market is out of the woods; many cyclical names still look iffy, and it’s not like there are dozens of great-looking breakouts to sink your teeth into (yet). Thus, we still think picking your spots is important, but it’s also true that we’re seeing more good-looking patterns than we have in a while. We’re nudging up our Market Monitor to a level 7.

This week’s list features many of the names that have seen some persistency and power of late. Our Top Pick is Dynatrace (DT), which appears to be emerging from a big-picture, year-long consolidation.

Alnylam Pharmaceuticals (ALNY)

alnylam.com

Why the Strength

Alnylam Pharmaceuticals is one of the leaders in the RNA interference (RNAi) industry, where drugs are based on the silencing of specific genes that cause diseases, and as opposed to development stage operators, Alnylam has notched the only RNAi-based therapeutics to win FDA approval. Onpattro is the biggest producer right now, and it treats a rare disease that causes the simultaneous malfunction of many peripheral nerves due to excess protein deposits; more than 1,500 people were on Onpattro at the end of March, with Q1 revenues totaling $102 million (up from $67 million a year ago). Then there’s Givlaari, which treats acute hepatic porphyria, a family of genetic diseases that lead to serious attacks and symptoms (from belly pains and muscle aches to weakness or paralysis); about 225 patients are using Givlaari, with Q1 revenue of nearly $25 million. (Management thinks there’s a $500 million market opportunity for the drug.) And just recently Alnylam won approval for Oxlumo, which treats a disease that results in the overproduction of a substance that needs to be discarded by the kidneys (thus stressing out that organ); it was just launched a few months ago and had 50 patients at the end of March, with Q1 revenues of $9 million. The big idea here is that the company is just scratching the surface of its potential—management has a goal of serving 500,000 patients by 2025 and is targeting 40%-plus annual revenue growth for the next few years, too. The trick is that a competitor’s solid drug results today dented the stock, but until proven otherwise, there’s little reason to think Alnylam’s underlying growth story will be damaged.

Technical Analysis

ALNY has seen many ups and downs over the past year, when the stock bobbed and weaved between 120 and 180. But we like the setup of the past few months, with a modest-volume dip and lots of tightness in the 140 area, before a string of six straight up-weeks in a row as ALNY returned to its highs. Today’s dip isn’t the prettiest thing, but after the recent run, it’s not abnormal. If you’re game, you can start small here and add if the stock shows this is an overreaction.

ALNY Weekly Chart

ALNY Daily Chart

American Eagle (AEO)

aeo-inc.com

Why the Strength

The pandemic was particularly hard on teens and tweens–they had few options for socializing and many of them spent the past school year remote or in isolated cohorts. Now that malls are opening back up, they’re going shopping and hanging out again. American Eagle has long excelled at appealing to the brand-conscious young demographic, selling jeans and other casual apparel at 940 American Eagle stores. The company also has 178 Aerie stores, which sell women’s intimates in a body-positive approach, and Todd Snyder, a designer brand with three locations in Manhattan and the Hamptons. The teen appeal drives Outfitters as a business, which it does through an ethos of promoting inclusion that connects with younger consumers. The mix works, as prior to the pandemic the company had 20 straight quarters of growth. American Eagle weathered the pandemic well thank to its strong balance sheet compared to other retailers and disciplined inventory control. Now the firm’s proven model looks like it will launch another wave of growth. In the first quarter, ending May 1, the business generated $1.03 billion in sales, more than double the COVID-19 impacted spring quarter last year. Its 48-cents-per-share net profit was a big swing from a loss of $0.84 last year, and compares well to 23 cents in spring 2019. Since 88% of company sales are in the U.S., American Eagle isn’t affected too much by the pandemic lingering abroad and management sees domestic sales accelerating in the coming months. The dividend has just been hiked 31% to 18 cents a quarter (1.9% annual yield), too, as analysts see earnings surging to north of $2 per share this year with more gains in store going ahead.

Technical Analysis

AEO recovered strongly from the pandemic panic through the back half of 2020, roughly quadrupling to 38 by the start of May. Shares had to take a rest given the steep path upward, but the sellers weren’t able to do much damage—the sideways eight-week consolidation featured a lack of heavy-volume selling, and last week, the buyers really showed up, with AEO popping back toward its highs on heavy volume. We like the action and think the dip of the last couple of days is buyable.

AEO Weekly Chart

AEO Daily Chart

CommScope (COMM)

commscope.com

Why the Strength

CommScope looks like an interesting turnaround situation. The company provides telecom companies network infrastructure hardware – antennas, cables, networking panels and the like. The company is rebounding from a run of down years as a new CEO refocuses the company on its core businesses. It’s also benefitting from tailwinds behind major infrastructure trends like rural broadband, 5G and system upgrades at many cable companies. Investors felt the business stumbled in late 2018 when it paid $7.6 billion for Arris, a maker of home networking hardware like routers sold to consumers and set top cable boxes. Shares churned from 38 when that deal was announced down to 9 in last October, leading to a leadership change along the way. Current chief Chuck Treadway is spinning off Arris and the rest of CommScope’s home networking businesses into a separate company. Shareholders will receive shares in the new entity when the deal is done by early 2022. Wall Street likes the move to simplify the business, especially since home networking was the weakest division in 2020. Treadway’s reset should help CommScope recognize better gains from business related to 5G expansion and the FCC’s rural digital opportunity fund (RDOF), an effort targeting rural areas lacking broadband. RDOF will fund $20 billion in upgrades to networking companies building out the least connected areas. The FCC just handed out its first awards entering 2021, and CommScope says orders from winners are strong. The company also just won a cease-and-desist order against Rosenberger, a competitor, which it’s suing for patent infringement. Analysts see earnings lifting 20%-plus both this year and next.

Technical Analysis

COMM broke a 42-month downtrend in November, shortly after long-time board member Treadway took the reins. The positive move at the end of 2020 came on mediocre volume, suggesting investors were waiting for concrete action. Now that the spin-off has been set in motion and springtime results were strong–1Q EPS of 36 cents beat consensus by 7 cents– shares are posting gains on better volume, a good sign. To be fair, COMM has had a good run, but it continues to find support where it “should” on all pullbacks. You can enter around here or (preferably) on a bit more weakness.

COMM Weekly Chart

COMM Daily Chart

Deckers Outdoor Corp. (DECK)

deckers.com

Why the Strength

Despite most retailers being hard hit by the pandemic, Deckers was one of the few that managed to thrive during lockdowns, as consumers spent more time with outdoor activities last year (and, despite the easing of virus restrictions, continue to do so this year). The company is known for the premium footwear brands it designs and sells, including UGG and the Hoka One One brand of running shoes, as well as offering athletic apparel and accessories through shoe retailers, department stores and direct e-commerce sales. A major tailwind for Deckers—and the overall industry—is the expectation that demand for athletic footwear and apparel will continue well beyond the economic reopening (as was made clear last week when several Wall Street analysts raised forecasts for some high-profile footwear companies, including Deckers). Further supporting the positive Wall Street sentiment on Deckers was a record-breaking report for its fiscal Q4 (reported late May), which obliterated expectations. In the quarter, Deckers’ top line skyrocketed 50% to $561 million, led by a 74% sales surge for its Hoka brand and a 53% increase for the UGG line. Meanwhile, the bottom line of $1.18 doubled from a year ago and beat estimates by 45 cents. Management was confident enough to issue full-year guidance for fiscal year 2022, forecasting revenue between $2.95 and $3 billion—which was 10% above consensus expectations —and guiding for per-share earnings that were in line with expectations. The company also approved a $750 million increase to its stock buyback authorization. Further out, Deckers is focused on increasing its digital sales reach, driving more business to direct-to-consumer channels and building the Hoka brand beyond $1 billion in sales.

Technical Analysis

DECK has a history of building multi-month lateral bases from which powerful rallies are launched—and that’s what looks to be starting here. Shares ran up to 336 in mid-January, but after that, it mostly moved sideways, with a few pokes above that level and some sagging below there in the spring. But there was big-volume support in late May, and last week saw the stock catapult higher on extremely heavy volume. We’re OK taking a swing at DECK here or on dips.

DECK Weekly Chart

DECK Daily Chart

Dynatrace (DT)

dynatrace.com

Why the Strength

Many cloud and technology stories can give you the proverbial ice cream headache, but Dynatrace has always had a big idea that was easy to understand: As organizations adopt the cloud and countless new apps, and as dependence on them grows, the need to make sure everything is working as it should is skyrocketing. Enter Dynatrace’s all-in-one “software intelligence” platform, which uses artificial intelligence to give IT teams precise knowledge about the performance and security of their apps and infrastructure, as well as whether the experience of end users is up to snuff. Of course, Dynatrace isn’t the only player in the market, but its platform is regarded as best-in-class, providing the broadest visibility into what’s happening with a client’s IT assets and it works in all major cloud environments, which in turn leads to better results for clients. As for the numbers, Dynatrace sports rapid and reliable top-line growth: In Q1, annualized recurring revenue lifted 35%, driven by both new additions (173 new clients, up 19% from a year ago) and same-customer revenue growth (north of 20% for 12 straight quarters), while cash flow from operations is giant (north of 30% of revenue last year). It’s not going to grow at triple-digit rates, but Dynatrace simply needs to execute on its land-and-expand sales strategy—if it does, there’s no reason business can’t expand at 25% to 30% rates for as far as the eye can see. We like it.

Technical Analysis

We’ve been watching DT on and off for over a year now, and it appears to finally be kicking into gear. The stock staged a huge earnings gap out of a seven-month consolidation in February, but the market was just topping out—which led to another choppy consolidation for the past four months. Now, though, DT has put on a persistent advance, stretching to new price highs on good (not amazing) volume. Officially, we’ll set our buy range down a bit, thinking any pullback will set up a good risk-reward return.

DT Weekly Chart

DT Daily Chart

Natera (NTRA)

natera.com

Why the Strength

Natera is a pioneer in the DNA analysis field, providing non-invasive prenatal tests (NIPT) for prospective parents and early-stage pregnancies and screening for genetic abnormalities—it already has a big market share for high-risk pregnancies, but just a fraction of the 3.4 million “average risk” pregnancies, so there’s plenty of room for growth. But Natera isn’t just settling for the prenatal market; it also has big (probably bigger) potential in the oncology testing arena. Natera’s oncology segment offers Signatera, which is a custom-built circulating tumor DNA test for treatment monitoring and disease assessment for multiple cancer types (including colon, esophageal and GI cancer). Signatera has also been used in numerous clinical studies across non-small-cell lung, bladder, breast and other cancers to identify molecular residual disease up to two years earlier than standard imaging. The firm received two breakthrough device designations for Signatera in Q1, and earlier this month, the Centers for Medicare & Medicaid Services granted advanced diagnostic laboratory test status for the test (a reason for the stock’s strength). Moreover, Natera and partner BGI Genomics just announced the launch of BGI/Natera Signatera Assay in China. All in, there is the potential for millions more tests as its wares get approved, which is the big reason Wall Street is so excited. Revenue growth has been solid (product revenue up 36% in Q1; the rest was from a one-time royalty) thanks to a steady increase in the number of tests (up 48%), which has led to a meaningful bump in guidance (analysts see the top line up 45% this year). It’s a good story.

Technical Analysis

From last August until mid-January, NTRA had a smooth-and-steady climb from 50 to a record high of around 125. Then came the correction, with shares sinking to the 40-week line in March, followed by a bounce and then another trend line test in May. But since then, NTRA has found its second wind and staged a great-volume push back toward its highs last week. It still likely needs a little seasoning, so aim for dips if you want in.

NTRA Weekly Chart

NTRA Daily Chart

Nutanix (NTNX)

nutanix.com

Why the Strength

Post-pandemic, three trends have emerged that experts believe will continue for years to come, namely digital transformation, cloud migration and a shift to a remote work force. Nutanix is a cloud infrastructure company that deals in hyper-converged systems, which effectively combines servers and storage into a single platform (making deployment easier and providing fewer systems to manage), offering a flexible technology solution for all three trends. Since 2019, the company has moved away from selling licensed software and moved to a subscription model, and a recent Investor Day event highlighted that the best is yet to come. Today, 90% of Nutanix’s business is subscription-based and management expects a “big growing stream” of automated renewal and upsell business to kick in over the next couple of years. Consequently, Nutanix expects to be profitable by the second half of 2022, expects free cash flow of between $50 and $150 million in fiscal 2023 (after likely losing $175 million in the current fiscal year, ending in July) and, most important, anticipates 25% annual contract-value (ACV) billings growth through 2025. What’s more, the firm sees cash flow as high as $350 million by 2025, which caused several institutions to hike their price targets for the stock (a reason for the latest strength). In fiscal Q2, Nutanix posted revenue of $346 million that was up 8% from a year ago, though it also delivered ACV billings growth of 14%, bolstered by the strength of new products (including hybrid cloud capabilities for its unstructured data storage offerings). Looking ahead, Nutanix sees its total market expanding from $39 billion now to $60 billion by 2025, and Wall Street sees growth gradually accelerating from here.

Technical Analysis

NTNX didn’t make much net progress since last summer, spending most of the past 12 months chopping around in a range between 20 and 35. But the stock looks like a different animal now—it tightened up for many weeks right around its 40-week line in March and April and has taken off since May, rising nine weeks in a row, six of which sported above-average weekly volume. If you really want in, we wouldn’t argue with nibbling here, but officially we’ll set our buy range down a bit, thinking some wiggles are likely.

NTNX Weekly Chart

NTNX Daily Chart

Shopify (SHOP)

shopify.com

Why the Strength

Shopify has been one of the market’s bigger winners over the past few years, yet it still has great growth potential as consumers increasingly shop online and digitization expands. Shopify’s popular platform is poised to command an even bigger share of the online retail sales pie since it makes it easy for merchants to quickly create a scalable online store without hiring a web designer, allowing them to manage their businesses across multiple digital channels (and even physical storefronts). The company’s software further allows sellers to integrate with social platforms while providing a range of merchant services, including payment processing and financing. Shopify had a tremendous 2020, thanks to the pandemic-fueled online shopping surge. Gross merchandise volume (GMV) sold on its platform last year doubled, from $61 billion in 2019 to $120 billion, and while the growth rate is expected to decline this year as brick-and-mortar stores reopen, analysts predict the firm’s GMV will continue expanding thanks to the e-commerce boom. In this year’s Q1, revenue of $988 million was 110% higher from a year ago, while per-share earnings of $2.01 beat estimates by a whopping 74 cents. Meanwhile in Shopify’s latest move, its Shop Pay (the Internet’s highest-converting checkout) is now available to all merchants selling on Facebook and Google, even if they don’t use Shopify, a move that could be big. Plus, the company just inked a deal with BuzzFeed designed to give publishers an alternative to Amazon and Walmart in generating affiliate revenue. With global online sales projected to hit nearly $5 trillion this year and grow 30% by 2024, Shopify still has just a small slice of its target market. Analysts see sales increasing 45% and 40% in Q2 and Q3, respectively.

Technical Analysis

SHOP blasted to record highs just a month after last year’s March low and continued soaring into July, but then it lost its mojo—shares moved sideways for many months, and then after perking up in February, fell and consolidated with the market. All in all, SHOP went nowhere for 11 months! But it began perking up in May, and after a brief rest, shares have seen a very nice volume cluster, driving the stock back to its price highs. Some near-term wiggles are likely, but the buyers are in control.

SHOP Weekly Chart

SHOP Daily Chart

Upwork (UPWK)

upwork.com

Why the Strength

According to a recent survey, nearly half of all U.S. businesses have increased their spending on freelance hires since the start of last year’s pandemic, making the so-called “gig” economy one of the world’s fastest growing industries. A leader in this space is Upwork, whose online talent pool facilitates gigs by making it easier for firms to hire skilled freelancers—with a longer-term employment focus—through its online marketplace. Continuing the trend from last year’s stellar pandemic showing, Upwork’s revenue grew 37% in the first quarter, with gross sales volume (the amount of work billed by freelancers via the firm’s marketplace) up 41%. Significantly, Upwork reported a 55% new client growth rate in the quarter, its fourth consecutive quarter of accelerating growth, which is a good sign for future business. (It also boasted stellar 113% growth in new clients acquired through search engine marketing (SEM), while lowering its cost per acquisition.) Upwork has been sacrificing profit for growth, however, as research and marketing costs represented around 55% of its revenues (!), but even then the bottom line has been in the black and topped estimates (Q1 of 3 cents beat by the same amount) each of the past three quarters. Meanwhile, large enterprises are increasingly drawn to the company’s platform, as the number of clients spending over $1 million annually increased 15%, while the number of customers spending over $100,000 was up 27%. Going forward, analysts expect the top line to rise 30% this year and 24% next, but the big draw here is the potential growth in the gig economy itself: Management estimates its addressable market is $1 trillion and plans to integrate its project catalog (which contains tens of thousands of predefined projects in more than 300 categories) into even more work marketplaces. Upwork smells like a new-age, growth-oriented Robert Half or Manpower to us.

Technical Analysis

UPWK blasted off on humongous volume near 20 last November and rocketed to 60 by February before finally correcting as growth stocks went over the falls. The correction was steep (45% from high to low), though given the prior upmove, it wasn’t longer-term abnormal. After tagging the 40-week line, UPWK’s initial bounce was just OK, but it showed some nice accumulation last week as it approached its old high. We favor entering on dips as the 60 level could bring in some selling.

UPWK Weekly Chart

UPWK Daily Chart

Vista Outdoor Inc. (VSTO)

vistaoutdoor.com

Why the Strength

Many outdoors-y companies thrived during the pandemic and continue to see good results even as virus restrictions have eased. Vista Outdoor is at least partially a play on that, though the company has its own unique focus and a solid long-term forecast, too. About two-thirds of revenue comes from shooting sports (it has the #1 ammunition brands for commercial and U.S. law enforcement, plus it’s #1 in hunting and shooting accessories), while the rest comes from a wide variety of outdoor products (#1 in GPS and rangefinders for serious golfers; #1 in biking and hiking hydration packs; #1 in biking helmets and accessories; and #2 in camping stoves and snow goggles). The combination of the firm’s leading positions in a variety of areas, the overall bullish environment and some cost controls and maneuverings (more e-commerce, etc.) has resulted in a step-function hike in the bottom line—earnings rose to $3.66 per share last year, up from an average of 30 cents the prior three years! And that strength is sticking around: In Q1, total revenues boomed 40% (shooting sports up 37%, the rest up 47%), earnings of $1.02 per share topped expectations by 35 cents, and free cash flow for the prior 12 months totaled a whopping $5.50 per share. The firm has sliced debt in a big way, and given the fragmented nature of the businesses it operates in, it’s looking to use its cash flow to fund some M&A-based expansion. (It also has a modest share buyback program, mainly to offset share-based compensation dilution.) Yes, growth will slow going forward, but the major retrenchment that Wall Street expected seems off the table—in fact, the top brass thinks it can grow sales 10% annually and crank out at least $600 million of free cash flow (north of $10 per share) during the next three years.

Technical Analysis

VSTO soared into August of last year before building a solid base, with the breakout from that leading to another good-sized run into February. There was a sharp (but low-volume) dip from there, with shares eventually tightening up and bounding ahead once again starting in May. VSTO’s most recent shakeout nearly tagged the 10-week line, but buyers stepped in again. We do think choppiness is likely, so if you’re game, try to enter on dips.

VSTO Weekly Chart

VSTO 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 6, 2021.