March 1, 2021

A Tale of Two Markets

Current Market Outlook

The market staged a nice-looking rebound today, especially given that both the S&P 500 and Nasdaq were hanging around their 50-day lines coming into today. Up is definitely good, but when examining the evidence, we see a tale of two markets. Growth stocks still look ragged, as many cracked key support last week and have been extraordinarily choppy during the past month (a sign bulls and bears are fighting it out after big runs). However, the broad market is largely fine, with small- and mid-cap indexes perched near their highs and many sectors acting fine. All in all, the evidence has worsened, so we’re knocking our Market Monitor down a notch, but we’re mostly taking things on a stock-by-stock basis, ditching those that break down while targeting new buying at resilient names.

This week’s list is heavy on cyclical and re-opening plays, though chip stocks remain a bastion of resilience. Our Top Pick is Kulicke & Soffa (KLIC), which staged a long-term breakout in November, has huge growth and has been unaffected by the market’s wobbles.

Ameriprise Financial, Inc. (AMP)

amerprise.com

Why the Strength

Despite the market’s hiccups, we continue to see strength and resilience in many Bull Market stocks (those whose business is tied directly to the interest and activity in the market). Ameriprise Financial is one of them that, after years in the doghouse, is cheap and under strong accumulation. The company (and the more than 10,000 financial advisors under its brand) has its hands in many investment-related cookie jars—more than half of revenues come from advice and wealth management services ($732 billion in total client assets at year-end, up 14% from a year ago), while a quarter comes from asset management ($547 million of assets, up 11%) and so-called retirement and protection solutions (which includes insurance and annuities) make up another quarter or so. Similar to Affiliated Managers Group (written about a month ago), Ameriprise is highly profitable (17.5% after-tax profit margin), but growth has been hard to come by in recent years, which led investors to chase brighter rainbows. But Wall Street now sees a big rebound coming next year: Analysts see the company’s sales rising 12% and earnings booming 40%, with more upside beyond that, resulting in a forward P/E ratio of 11 (and that doesn’t even mention a 1.9% yielding dividend, either). Of course, if the latest market hiccup turns into a multi-month maelstrom, all bets are off, but near-term wobbles aside, the major trend of the market is up and more individuals are becoming interested in stocks—all of which should be bullish for Ameriprise.

Technical Analysis

AMP is another financial-related stock that has recently broken free from a mega-consolidation, which bodes well in the months ahead. The stock went nowhere from January 2018 (near 180) to Halloween of last year (near 170), but it broke out in November and has been advancing steadily since then, with two tests of the 10-week line (December and January) bringing in the buyers. AMP got a bit out of trend on the upside early last week, so the current rest could last longer, but if the market holds up, so should the stock.

AMP Weekly Chart

AMP Daily Chart

Amkor Technology (AMKR)

amkor.com

Why the Strength

Semiconductors are critical for today’s electronics-driven world, but so are the ceramic, metal or plastic cases which house these delicate devices. One of the largest providers of outsourced semiconductor packaging is Amkor, a strategic manufacturing partner for the world’s leading semiconductor companies, foundries and electronics OEMs. It delivers solutions in four end markets—communications, automotive, computing and consumer products—and its chips are everywhere in the smartphone ecosystem, supporting all major functions (chances are there are several Amkor-packaged chips in your phone). With overall chip demand strong, Amkor’s offerings are selling well—the company produced record quarterly revenue in Q4, with the communications segment leading the way. The fourth quarter top line rose 16% and was above the high end of guidance, while 2020 revenue increased a mouth-watering 25% and was above $5 billion for the first time in Amkor’s history. High factory utilization and cost control initiatives pushed profitability above expectations as well, with per-share earnings up 27% from a year ago while full-year earnings shot up 180%. In the wake of the stellar report, Amkor received an upgrade from a major Wall Street firm (another reason for the strength) while the stock was added to the S&P MidCap 400 index, which doesn’t hurt. More importantly, though, is that business should remain solid: Management expects that higher semiconductor content in 5G phones will drive the firm’s growth during the next few years (the 5G penetration rate is forecast to increase from 20% in 2020 to around 35% this year and higher beyond that). Wall Street sees 12% sales growth in 2021 and 29% higher earnings, both of which could prove conservative given the momentum in the business.

Technical Analysis

AMKR rose from a low of 5 during last year’s crash to 15 by last July, as chip demand soared on the back of the stay-at-home trend. A seven-month digestion phase followed, but then the stock’s character changed for the better as shares broke above resistance at 15 in January. The late-January shakeout was fierce, but AMKR went bananas after its Q4 report and has consolidated normally since. We’re OK starting a position around here.

AMKR Weekly Chart

AMKR Daily Chart

Avis Budget Group (CAR)

avisbudgetgroup.com

Why the Strength

Not surprisingly, Avis Budget has struggled mightily during the pandemic, which cut deeply into both its business and leisure car/truck rental business. In fact, during the worst of the shutdowns in Q2, revenues imploded by two-thirds! However, things have picked up some since then, and now that nationwide vaccinations are on the rise (at least 24.8 million people have completed the two-dose regimen), the company is viewed as a prime “reopening” candidate with its business sure to receive a substantial boost as the economy returns to normal and travel picks up. In total, Avis Budget is one of the biggest vehicle rental companies in the business today with a fleet of about 20,000 cars and trucks, which are rented through a network of 515 dealer-operated and 410 company-operated rental locations throughout the U.S. The firm has also made a foray into the car-sharing business with the launch of Zipcar, which is obviously a younger and faster-growing business. Encouragingly, the company has delivered a string of better-than-expected results over the past few quarters, despite continued disruptions: For its most recent (Q4) results, Avis Budget posted sales of $1.35 billion, down from $2.16 billion in the year ago period, but 5% above analyst estimates. The company lost $0.36 per share, but again, that easily beat consensus estimates of a $0.60 loss. As a result, several Wall Street analysts recently raised their price targets for the stock, and most expect the firm to return to profitability in the second half of this year as revenues advance at 20%-plus rates. It’s a solid turnaround story.

Technical Analysis

CAR shares plunged about 80% during the pandemic crash a year ago, and the recovery from there was powerful but wild and short-lived—after rallying to 36 in June, the stock made no net progress for six months. However, the change in character occurred near year-end, when CAR tightened up and began its current string of 10 weeks up in a row. Short-term, it’s extended, but big picture, this move appears more like a kick-off of a sustained rally.

CAR Weekly Chart

CAR Daily Chart

Bausch Health Companies (BHC)

bauschhealth.com

Why the Strength

As Covid restrictions are increasingly lifted, a massive pent-up demand for elective procedures is expected to result in millions seeking eye and skin care treatments. This is great news for Bausch, which develops a broad range of branded and generic pharmaceuticals, OTC products and contact lenses with a traditional focus on eye health (through its well-known Bausch & Lomb offerings). Its other business segments focus on treatments for gastrointestinal diseases (via its buyout of Salix Pharmaceuticals a few years back) and dermatology (Ortho Dermatologics). Last year, Bausch Health said it plans to spin off the eye business into a separately traded public company, and its updated guidance that this will likely happen by Q3 of this year is a reason for the stock’s latest strength; the move is expected to produce a higher earnings multiple for Bausch. Last week, the company also surprised the market by announcing plans to reduce debt by $200 million as part of an aggressive restructuring effort to enhance shareholder value (it also repaid $900 million in debt last year, thanks to strong cash flow). Full-year and Q4 results showed evidence of a recovery from Covid-related setbacks. While the top line was flat-ish in the quarter, it easily beat Wall Street’s expectations thanks in part to a 47% sales bump for the company’s Thermage skin tightening treatment (driven by strong demand in China) as well as record revenue for its IBS treatment, Xifaxan. Looking ahead, Bausch guided for 2021 revenue to be 9% higher, in line with estimates. Management sees a significant tailwind this year and beyond for eye treatments, and expects strength in its leading brands such as Xifaxan and PreserVision. A dirt cheap valuation (8 times trailing earnings) helps the cause.

Technical Analysis

BHC took it on the chin last winter, cascading from a high of 30 to a low of 11. Its post-crash recovery was subdued, however, and shares spent quite a few months meandering in a fairly narrow trading range. By November, BHC turned a corner due to a vastly improved outlook for elective health treatments, with the buying really picking up steam after the calendar flipped. The calm action of the past few sessions is a good sign, though we still prefer aiming to enter on weakness.

BHC Weekly Chart

BHC Daily Chart

The Cheesecake Factory (CAKE)

thecheesecakefactory.com

Why the Strength

The restaurant sector has certainly been one of the hardest hit due to the virus and its related shutdowns. However, some of the strongest brand-name eateries, such as the Cheesecake Factory, have adapted by quickly pivoting to a greater reliance on takeout sales featuring a ramp up in online ordering and (usually third-party) home delivery services. The company is well positioned with a chain of nearly 300 upscale, full-service casual dining restaurants in the U.S. under its namesake brand, plus the Grand Lux Cafe and RockSugar Pan Asian Kitchen names. The pandemic brought a 20% decline in fiscal 2020 overall sales and a 28% decline in same-store sales at its restaurant locations, but management has partially compensated by transitioning to a digital model with greater takeout business, which now accounts for 40% to 50% of total sales. Last week, the company reported Q4 sales of $555 million, down from $694 million a year ago, with an adjusted loss of $0.32 per share, which was actually worse than estimates. But those numbers mean next to nothing for the stock at this point—it’s all about the future, and the good news is that management said 80% of locations have currently reopened indoor dining with limited capacity, and availability is on the way as the virus lessens. Analysts see revenues rising 31% this year and more in 2022 while earnings leap into the black this year and mushroom after that. With plenty of pent-up dining demand from Americans eager to dine out, plus less competition in the wake of many independent restaurant closings, established chains like Cheesecake Factory should recover to an even stronger position than before the pandemic.

Technical Analysis

CAKE was around the 40 level before the virus, and after crashing and posting a jagged recovery, the stock was just south of that area last November. Shares tightened up beautifully at that point, and following a kiss of the 10-week line, have gone on a rampage—CAKE has powered ahead eight straight weeks to new highs with excellent action since earnings. If you want in, aim for dips of a couple of points.

CAKE Weekly Chart

CAKE Daily Chart

HubSpot (HUBS)

hubspot.com

Why the Strength

Last year’s lockdowns created a new series of challenges (and opportunities) for companies (especially smaller ones) in terms of attracting new customers and converting leads online, and HubSpot’s solutions were a perfect fit. HubSpot’s marketing software simplifies the advertising process for small and mid-sized clients, featuring “inbound” methods such as blogs, videos, landing pages and personalized messages to attract visitors to a company’s website and grow its customer base. (This contrasts with outbound methods like cold calls and bulk emails that are far less effective.) The company’s fourth quarter results underlined the popularity of its platform, as the top line rose 35% compared to a year ago, fueled by 36% growth in subscription revenue and a 9% bump in services revenue. Earnings per share of 40 cents were up from 38 cents a year ago and 17 cents above consensus expectations. HubSpot achieved two major milestones in Q4, surpassing 100,000 customers and crossing $1 billion in annual recurring revenue. Additionally, it added 8,400 subscribers in Q4 (up 42%), with average subscription revenue per customer of $9,800. Calculated billings (a leading indicator) rose 43% in the quarter, driven by a shift toward professional and enterprise (bigger customer) subscriptions. HubSpot reiterated its commitment to new product innovation going forward and put some of its $1.3 billion in cash to work by purchasing a business newsletter called The Hustle, which will provide it with 1.5 million subscribers from which to generate new leads. Management also guided for full-year 2021 revenue to be around 32% higher from a year ago (and analysts see a 26% gain in 2022 as well). This growth story has a long way to play out.

Technical Analysis

HUBS continues to be a fantastic performer since last March’s bottom, and the stock has tended to stay consistently above the 10-week line, despite a brief shakeout below it in January. Since then, however, HUBS has regained its stride and gapped up strongly on last month’s earnings. While shares have held up pretty well during the market’s recent turbulence, we prefer waiting for a pullback to enter.

HUBS Weekly Chart

HUBS Daily Chart

Kulicke and Soffa Industries (KLIC)

kns.com

Why the Strength

As the digital economy expands, there’s an ever-growing demand for increasingly powerful semiconductors to power emerging technologies like 5G and AI, as well as conventional technologies like PCs and smartphones. Kulicke and Soffa (commonly known as K&S) is a leading provider of advanced semiconductor packaging equipment for the automotive, consumer, communications, computing and industrial segments. In the latest quarter, K&S reported strength in the general semiconductor, LED and automotive markets, as well as higher demand for more complex, high-volume semiconductor assembly processes. All of this was reflected in the firm’s fiscal first quarter revenue mushrooming 86% from a year ago as per-share earnings nearly tripled to 86 cents. The firm also completed the acquisition of Uniqarta, giving it that company’s next-generation LED display and die transfer technology. K&S anticipates strong demand for these solutions as the LCD market begins to adopt new forms of backlighting in automotive and other sectors. The company also foresees higher sales for its advanced display business and expects multiple design wins with its APAMA and Katalyst chip bonding systems. Management further sees the chip boom will result in a fiscal Q2 revenue rise of 97%, along with a whopping per-share earnings increase of 300%—with both projections in line with analyst estimates. Fundamentally, K&S boasts a sound balance sheet with no debt and $577 million in cash, which the company plans to use for its long-term capital allocation target of returning at least 50% of free cash flow to shareholders in the form of share repurchases and dividends (1.1% annual yield). All told, it’s a solid chip equipment story.

Technical Analysis

KLIC spent almost four years ping-ponging between 18 and 28 before finally slicing through the upper band of its trading range in November, which bodes well longer-term. It’s tagged its 10-week line twice since then, finding support both times, with the buying recently accelerating and pushing the stock as high as 52. Weakness is possible in the near-term, but barring a market implosion, we’re not expecting a huge dip.

KLIC Weekly Chart

KLIC Daily Chart

Pioneer Natural Resources (PXD)

pxd.com

Why the Strength

Pioneer Natural Resources was always one of the higher-quality energy operators, and it looks poised to be a leader in the new energy bull move. Thanks in part to its buyout of Parsley Energy, the firm has an excellent acreage position, with 920,000 net acres (none on Federal land) in the Midland and Delaware basins; in 2021, 80% of its drilling activity will be in the Wolfcamp areas in the Midland basin. Like many of its peers, the company has gone from emphasizing production growth to cutting costs and producing a torrent of free cash flow—Pioneer claims it has a best-in-class cost structure (it’s even changed executive compensation to better align it with shareholder interest), with an overall breakeven rate well under $30 per barrel of oil. The firm should expand production in a good way this year (though most of that is due to the closing of the Parsley acquisition), but the story here is that, at $55 oil, Pioneer believes it will produce a whopping $2 billion of free cash flow this year (after CapEx and the base dividend; yield 1.5%), or about 8% of the current market cap! Moreover, leverage is low, and starting next year, management aims to introduce a variable dividend that pays out a good chunk of whatever free cash flow is earned. Meanwhile, things are already coming in better than expected (earnings of $1.07 in Q4 were 38 cents above expectations), and if the economic recovery proves durable, there’s no reason energy prices can’t rise further, which would goose Pioneer’s results.

Technical Analysis

PXD hit 234 back in 2014, fell to 50 at last year’s nadir and was still hanging around 80 when the vaccine news kicked the energy group into gear. Shares have obviously had a huge run since then (albeit with some sharp pullbacks here and there), but it certainly isn’t acting like it’s running out of gas—the 50-day line test in late January brought in a bunch of buyers, and PXD spiked to 52-week highs on good volume early last week ahead of earnings. A bit more weakness should provide a tempting entry point.

PXD Weekly Chart

PXD Daily Chart

Shake Shack (SHAK)

shakeshack.com

Why the Strength

Shake Shack (which is effectively a roadside burger joint with fries, shakes and the like) has two big tailwinds that are keeping investor perception on the rise despite the challenging market environment. The first is helping many restaurant stocks: Optimism surrounding the return to normalcy for the overall economy (bolstered by rapidly falling virus hospitalizations and steady vaccination growth). The second is more company-specific, as Shake Shack is embarking on a massive store expansion plan during the next two years that, as things return to normal, could catapult the top and bottom lines. Interestingly, the big question with Shake Shack all along has never been expansion but its own operations—same-store sales growth has never really impressed over the years, leaving the entire growth story dependent on new store openings. But investors are thinking the “natural” growth from the booming economy will help that along, and like many retailers, Shake Shack has dramatically upgraded its e-commerce capabilities (nearly two-thirds of orders now come digitally!), which should pay off handsomely even after the virus’ impact lessens. Last week’s Q4 report was a mixed bag, but overall sales growth did return to the black and management stuck to its aggressive store growth plan; during the next two years, the firm sees its total restaurant count lifting 40% (including a 45% hike in domestic company-operated outlets), and while that will obviously lead to higher pre-opening costs, investors are looking over that horizon to the potential of a much larger sales and earnings base. The firm needs to execute, but if it does, there’s a lot of potential here.

Technical Analysis

SHAK appeared to be getting going from a long-term rest back in September 2019, but it fell apart soon after and then came unglued during the pandemic. The recovery was great, and the stock made it all the way back to all-time highs in January after a bullish company update (and its huge store growth target). There’s definitely been some chop since then (today’s news of a dilutive convertible bond offering didn’t help), but SHAK hasn’t budged much, with its latest dip looking controlled as the 50-day line catches up. We’re OK starting a position here or on further dips.

SHAK Weekly Chart

SHAK Daily Chart

Valmont Industries (VMI)

valmont.com

Why the Strength

Construction spending is on the rise as the economy rapidly rebounds from the pandemic recession, while hopes are high that Congress will approve a major infrastructure bill this year to upgrade many of the country’s roads and bridges. Poised to benefit from all of this is Valmont, which provides products that support infrastructure essential for economic and agricultural growth, including engineered support structures, irrigation equipment and lighting and traffic poles. It counts among its customers utilities, telecoms, commercial farms and huge building outfits, and its two biggest segments are utilities and irrigation. The latter was a big winner for Valmont during Q4, thanks to significantly higher sales resulting from last year’s global agriculture boom; it even secured the largest irrigation order in the industry’s history to supply $240 million of products and services to Egypt. Despite a slow start to the year due to lockdowns, the company grew the Q4 top and bottom lines 17% and 46%, respectively, while sales rose 5% for the full year. Management expects 2021 irrigation-related sales to continue surging, rising 29% or so this year. Demand for its engineered support structures, meanwhile, is expected to grow 15% this year as investment in 5G accelerates (Valmont reported a noteworthy backlog of $247 million in this segment). Additionally, the drive toward higher renewable energy generation equipment (windmills and the like) is expected to be a big growth driver down the road. Sure, Valmont is an old world company, but it’s leveraged to some strong growth trends.

Technical Analysis

VMI has flown under Wall Street’s radar for most of the last few years, and the stock did little to command attention after peaking at 175 in 2017 and drifting downward to last year’s rock-bottom low of 83. But after that crash, VMI turned a corner as the global agriculture and infrastructure outlook improved. Like so many stocks, November was the kick-off, and VMI has enjoyed an excellent run since then, with buying volume actually picking up of late. Big picture, we like it, though it looks stretched to the upside at the moment.

VMI Weekly Chart

VMI 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 March 8, 2021.