March 12, 2021

Solid Rebound, but Still a Split Tape

Current Market Outlook

Up is good, so last week’s rebound in growth and continued push higher in the broad market was encouraging. That said, nothing much has changed with the overall evidence—many areas of the market look just fine, with a few indexes actually hitting all-time highs, but growth stocks are still (mostly) in a corrective mode, with a bunch of names having rallied only into resistance. Really, we think the action of the next week or two will tell the tale—resilience and upside from here would suggest the huge pullback earlier this month was more of a shakeout, but renewed selling pressure would hint toward another leg down. Right now, we’re playing things halfway—we’re OK with some buying, especially in stronger names that pull back some, but we’re not pushing the envelope and need to see more from growth before concluding the storm has passed. We’re leaving our Market Monitor at a level 5 today.

This week’s list is very much a mixed bag, with cyclicals, retail, growth and turnarounds all making the cut. Our Top Pick is Thor Industries (THO), which looks like the leader of a fresh move for that group. You could nibble here or (preferably) on dips.

Big Lots (BIG)

biglotscorporate.com

Why the Strength

Almost every retailer was hit hard by the pandemic, with widespread store closures and huge declines in retail sales. But a select few thrived, including those offering low prices and who boosted their online business, and Big Lots was able to do both. And now many are coming around to the view that last year’s gains won’t be given back even as the virus exits stage right. The company’s stated mission is simple: To help people live BIG and save LOTS. And the retailer has been delivering with an appealing merchandising mix at discount prices and an inviting store format. But online sales have given the company an even bigger boost: Last week, the Columbus, Ohio-based discount retailer reported fiscal fourth-quarter profit that beat expectations and provided an upbeat outlook. Sales grew 8% to $1.74 billion, almost all of which came from same-store sales growth (up 7.9%), while e-commerce revenue leapt a huge 130%. On the bottom line, earnings also rose 8% and topped estimates by a few pennies. Most important was the outlook, with management seeing Q1 earnings actually up from a year ago (when the firm first saw the benefits of the pandemic), with same-store sales up in the low single digits—that had analysts nudging up their estimates and thinking that the company will earn nearly $6 per share this year (likely conservative). Throw in a decent dividend (1.7% annual yield) and Big Lots should be able to benefit from continued upside in investor perception.

Technical Analysis

Big Lots shares took a hit along with the entire market with the pandemic outbreak this time last year, but the shares were tagging new 52-week highs by May. The stock motored into the mid-50s by the end of summer, but then began a multi-month correction as investors feared earnings would fall off a cliff once the pandemic eased. But with that outlook changing, the buyers have returned, with BIG hitting new highs in January, finding support at its 10-week line and moving up again after earnings two weeks ago. We’re OK taking a stab at it on a pullback.

BIG Weekly Chart

BIG Daily Chart

Devon Energy (DVN)

devonenergy.com

Why the Strength

Cyclical sectors obviously go up and down over time, but what creates mega-moves are huge downtrends that wipe out many weak players and that change how the remaining, stronger operators do business. Devon is set to thrive in the new energy bull market thanks to its acreage (the main attraction is its 400,000 net acres in the Delaware basin, thanks in part to its acquisition of WPX Energy late last year; 13 of its 18 rigs are drilling in that basin) and its belt tightening (it’s cut $345 million of costs, mainly through drilling efficiencies and G&A reductions, with another $230 million on the way), all of which has resulted in a rock-bottom breakeven price (profitable at $32 oil or higher) and burgeoning free cash flow—despite a fair amount of investment and up to 5% growth in output, Devon sees well over $1 billion of free cash flow at $50 oil (and something like $1.7 billion at $60). As with most of its peers, a lot of that is going to debt reduction, but Devon has a history of paying dividends, sporting a solid fixed payout (1.8% annual yield) and also a quarterly variable payout based on cash flow (totaled 19 cents per share in Q1, in addition to the 11 cent fixed dividend). Some share repurchases are also possible if things really go well. As for operational risks, it’s worth noting that about 35% of Devon’s acreage is on federal lands, which could face headwinds with the new administration, but management says they’d previously secured a few hundred drilling permits that should keep Devon busy for four years. All in all, Devon looks like another solid turnaround story in the oil patch.

Technical Analysis

DVN has followed the same pattern as its peers, with a total implosion last March (26 to 5 in just a few weeks!), and it was still stuck in the mud through October (near 8). But it’s had a monster run since then, with two modest pullbacks each finding support near the 10-week line. DVN accelerated higher earlier this month but has begun to pull in, though the selling pressure has been very reasonable so far. Dips of another point or two would be tempting.

DVN Weekly Chart

DVN Daily Chart

Dropbox (DBX)

dropbox.com

Why the Strength

Dropbox helps individuals and teams adjust to the new work-from-home paradigm through its client software, file hosting and cloud storage services. Dropbox now has more than 540,000 team plan clients and finished 2020 with more than 15 million paying customers, up 8% from a year ago. In fact, business has been good (not amazing) for a while, with Q4 revenue up 13% to $504 million, while annual recurring revenue (a key metric) rose 11% to over $2 billion; all told, sales and earnings have been on a steady mid-teens ascent for many years. And that growth should continue as well: Its latest offerings include Dropbox Spaces (currently in beta)—a virtual workspace where remote workers can find anything they need for a project, such as files, tasks, meetings and updates—as well as an encrypted storage service called Vault. Management also plans to expand its 2019 acquisition of HelloSign by becoming a player in the e-signature market. Despite all that, the stock has been stuck in the mud, but it’s turned strong now because some sharp investors may be looking to buy or take control of it—one of Dropbox’s directors just bought 100,000 shares (after he had no prior transactions for the past 15 months) at the same time there are rumors swirling of behind-the-scenes interest from some activist investors. The combination of solid growth, a strong market position and a potential catalyst make Dropbox intriguing.

Technical Analysis

DBX came public in 2018 at 30 and quickly rose to 44 before entering a bear market that ended with last year’s pandemic panic. The rebound was sharp but didn’t last, and as of a couple of weeks ago, the stock was still mired in a two-year range. But now shares are acting much better, handling the market’s two dips this year and exploding to new highs on big volume last week. If you’re game, you can grab some shares here or (preferably) on dips.

DBX Weekly Chart

DBX Daily Chart

Dycom Industries (DY)

dycomind.com

Why the Strength

With 5G rolling out and high-capacity telecommunications increasingly crucial, the demand for telecom contractors has mushroomed. Dycom is the largest national provider of telecom contracting services, including engineering, construction, maintenance and installation services. The company reports that several major industries are constructing or upgrading wireline networks across broad sections of the country, using 1 gigabit network speeds and wireless 5G technologies. Dycom said industry participants are turning to such high-capacity fiber networks as the most effective way to deliver services to their customers. This translates to a bigger opportunity for Dycom, both now and especially in the years ahead. In its fiscal Q4, the company saw increased revenue from Comcast (up 29%), which is one of its top five customers. Management also indicated increasing demand for fiber network deployment in rural America as work-from-home expands. Construction revenue from electrical utilities, meanwhile, increased 125% from a year ago. While overall sales and earnings were nothing to get excited about (partially due to higher costs from one project), big investors are looking ahead—backlog at the end of Q4 was up 26% from the prior quarter, increasing $1.4 billion, thanks to renewals and new awards across a “significant number” of customers. Dycom expects a softer Q1 due to adverse weather, but analysts see top- and bottom-line growth picking up in the following quarters (20% projected growth this year, 39% next). The company also just authorized a $150 million share repurchase program through next year (a trigger for the latest strength). This is a solid down-the-food-chain 5G story.

Technical Analysis

After peaking at 120 three years ago, DY was in decline until it hit rock bottom at 15 last March. Shares have trended higher since then, albeit with lots of sharp pullbacks along the way, the latest of which occurred into early March, with shares falling from 94 to 73 over a couple of weeks. But the Q4 report brought in the buyers, and DY has since pushed to new price and RP peaks. Dips of a couple of points from the century mark would be buyable.

DY Weekly Chart

DY Daily Chart

Groupon Inc. (GRPN)

groupon.com

Why the Strength

After falling out of favor with Wall Street years ago, Groupon is back in the spotlight as the economy reopens. The well-known online discount platform connects subscribers with local merchants by offering deals (of up to 70%) and coupons for dining, travel and other goods and services in 15 countries. It benefited from the last major economic downturn and achieved “unicorn” status just 18 months after its 2008 launch by raising over $1 billion. Financial underperformance soured investors on the company, however, and shares have been in the doghouse for a while. But things are finally looking up for the firm as consumers hungrily search for deals in the recession’s wake. Groupon was recently upgraded by some big-name institutions, which are sanguine about the firm’s prospects following its shift to a third-party marketplace model (expected to be completed in Q3). Groupon’s new focus is on the “local experiences market”—a trillion-dollar opportunity based on millennial consumers’ preference for spending money on experiences instead of on things. The firm is also focused on increasing customer purchase frequency, as reflected in its improved free cash flow (up 128% from its Q1 low). While the revenue numbers remain horrid, the firm posted a surprise profit in Q4 and investors are optimistic about Groupon’s prospects to return to growth in the wake of aggressive cost-cutting efforts and improving economic conditions. Further out, analysts see the bottom line surging next year, and with Groupon having trashed estimates of late (51 cents in Q4 topped by 25 cents) even that should prove conservative.

Technical Analysis

After a seemingly endless decline from an all-time high of around 600 in 2011, GRPN hit a lifetime low of 10 at the nadir of last March’s crash. It was slow to recover and volatile as can be, but nonetheless established a series of higher highs and lows in the months that followed. Then came a more proper, tighter launching pad, and the latest earnings produced an explosive rally on volume that was nearly 10 times above the daily average (an encouraging sign). You could nibble here or on (ideally) on pullbacks.

GRPN Weekly Chart

GRPN Daily Chart

Inari Medical (NARI)

inarimedical.com

Why the Strength

Inari Medical is a small outfit ($140 million in annual revenue) but it’s set to get a lot bigger as it’s come up with a better mousetrap in an underserved medical area. The story revolves around thrombectomies (procedures that remove blood clots), and because most blood clots occur in and around arteries, doctors use arterial devices to remove them. That makes sense—but those arterial devices don’t work very well for those suffering veinous clots (in blood veins), which have their own set of unique conditions (differing blood flows, harder clots, different vessel sizes, etc.), leading to big costs (partly because of a reliance on clot-busting drugs), sour results and elevated risks. Enter Inari, whose minimally invasive FlowTriever and ClotTriever products allow doctors to remove large clots from veins without the need for thrombolytic drugs, including for pulmonary embolisms (when a clot breaks loose and travels into the lungs), and the improvement is big: For patients, procedures take just 34 minutes and 90% of clots are removed in a single session, with big drops in mortality, pain and re-admission rates compared to current treatments. Plus, there’s a 40% to 60% drop in costs since thrombolytic drugs aren’t needed and stays are shorter (ICU stays are basically non-existent). Not surprisingly, Inari’s offerings are seeing rapid uptake—in Q4, revenues again grew at a triple-digit rate (up 144%) while earnings were in the black for the fifth time in the past six quarters and total procedures continue to skyrocket (4,600 last quarter, up 24% sequentially!). Inari sees this as a $3.6 billion market in the U.S. alone, and recent European approval (and continued new product releases in the U.S.) mean the total opportunity is much larger. It’s a good story.

Technical Analysis

NARI came public in May, had a good initial run and then consolidated for three months before enjoying another solid advance—shares took off near 70 around Christmas, broke out in mid January and tapped 120 in February before pulling back sharply with all growth stocks. But Q4 results put an end to the selling, with NARI soaring to new highs before pulling back sharply on Friday. We’d prefer to see the stock settle down a bit, but if you’re OK using a loose stop, you can start a position here.

NARI Weekly Chart

NARI Daily Chart

Macy’s, Inc. (M)

macysinc.com

Why the Strength

Traditional department retailers like Macy’s were already suffering for the prior couple of years and were also among the hardest hit of all retailers during the pandemic. But while the company suffered significant losses last year from lower store foot traffic, its expanding digital presence is starting to pay off and is a big reason for the latest strength; e-commerce sales now represent a whopping 44% of the company’s total sales and increased 21% in the fourth quarter. Macy’s has also found success using its physical stores to fulfill online orders. Moreover, Macy’s is getting a sentiment boost from the collapse in Covid cases (and last week’s CDC statement that those who are fully vaccinated can spend time together indoors and unmasked also contributed to the strength). The retailer has also embraced data analytics and enhanced collaboration with its vendor partners to improve its customer outreach. This, along with a rapid adjustment to its merchandise mix, resulted in a respectable increase of nearly seven million customers in Q4 (many of them under 40). While Q4 earnings of 80 cents per share were shy of the year-ago $2.12, they were still miles ahead of the 11-cent Wall Street expectation. And though revenue of $6.8 billion was 18% lower from a year ago, it also beat expectations (by $280 million). Management is targeting long-term sales growth in the low-single-digits, with sales and profitability improving from pandemic lows. Wall Street, meanwhile, is bullish on the near-term sales outlook, forecasting 19% top line growth for this year, with earnings taking off as well. Macy’s will never be confused with a great growth stock, but it looks like a solid turnaround situation.

Technical Analysis

M hit a long-term peak at 74 in 2015, then slid all the way to a low of 5 last March. Unlike most stocks, however, it barely moved higher in the months that followed and spent most of 2020 establishing a base. Lift-off occurred in November when enthusiasm over an economic reopening became widespread, with shares skyrocketing from 6 to 22 over a three-month period. While the action was wild in late January (it was one of the shorted stocks that briefly went nuts), the very tight base at 15 after that was bullish and has given way to higher prices. Aim for pullbacks.

M Weekly Chart

M Daily Chart

Owens & Minor (OMI)

owens-minor.com

Why the Strength

Owens & Minor is a leading distributor of medical and surgical supplies ranging from basic disposable gloves and medical gowns to complex intravenous products and sterile surgical procedure kits. The company connects manufacturers of medical products with health care providers ranging from hospitals and outpatient facilities to large integrated health care networks. This is a steady, recession-resistant business that was growing due to an aging U.S. population and solid execution. But the virus outbreak triggered a dramatic increase in demand for personal protective equipment and Owens & Minor was perfectly positioned to meet that demand with its own production facilities ramping up business considerably—and, like Big Lots earlier in this issue, it’s looking more and more like that bump in business will stick around even as the virus dissipates. The numbers of late have been spectacular, with Q4 revenue rising 8% while earnings rose nearly 400% (!) and beat estimates by a wide margin ($1.14 vs. 85 cents expected). Owens & Minor also expects full-year 2021 earnings to grow in a 45% range, which was miles above Wall Street estimates. This is another firm that’s not changing the world, but has enjoyed a step-function increase in business that should persist for a while.

Technical Analysis

OMI went from zero to hero beginning last July, when shares exploded from 8 to 16 in just a couple of weeks, eventually motoring up to 28 in October. But that started a long sideways period as investors wondered how long the good times would last, including a shakeout in late February with the market. But Q4 results changed perception, with OMI gapping to new highs and, after a few wiggles, hitting 38 last week. Aim for dips of a point or two to get started.

OMI Weekly Chart

OMI Daily Chart

Summit Materials (SUM)

summit-materials.com

Why the Strength

If the economy as a whole and construction in particular is going to pick up, then it’s pretty much a sure thing that Summit will do well—the company is one of the biggest providers of construction aggregates (sand, gravel, crushed stone, slag, etc.), cement, ready-mix concrete and asphalt mixes, basically all the stuff that’s needed to build anything. Interestingly, the firm has a bigger focus in some rural and exurban areas (Texas, Utah, Kansas and Missouri make up more than 60% of revenue), which is helping as people move out of big cities and those types of communities are built up. And acquisitions are also a help, with Summit usually absorbing a couple of firms a year to boost its reach. It’s a simple story, but simple is good as the U.S. economy is set for boom times: EBITDA was actually up last year despite the pandemic, and while management has guided cautiously this year (EBITDA up in mid single digits), big investors are sniffing out a prolonged period of big demand (and price hikes) as the firm’s end markets (especially residential housing and any potential infrastructure bill goosing public spending) look healthy. (Any pickup in non-residential building, especially low-rise commercial projects, could be very bullish for Summit.) Analysts see earnings up 30% this year and another 20% in 2022. The firm will be having an Investor Day tomorrow, so we’ll see if the top brass has any updated outlook since the Q4 report was released nearly a month ago.

Technical Analysis

SUM is a cyclical-type name that just changed character a few weeks ago, meaning it could have plenty more gas left in the tank. The stock went through the wringer in 2018, 2019 and early 2020, and was still languishing nearly 50% off its all-time highs around year-end. But a a sharp late-January pullback appears to have finally shook out the last of the weak hands—SUM has ripped ahead six weeks in a row since then, including some big-volume buying both before and after earnings last month. We’re OK doing some buying here or (preferably) on weakness.

SUM Weekly Chart

SUM Daily Chart

Thor Industries (THO)

thorindustries.com

Why the Strength

In the wake of last year’s lockdowns, millions of Americans felt an urge to escape from the confinements of urban areas. Unsurprisingly, recreational vehicle sales have soared as travel restrictions have loosened, fueled by unfettered demand for road trip adventures. Thor manufactures and sells towable and motorized RVs through several subsidiaries, including Airstream and Heartland RV, and is one of the leading players in the industry, so it’s no surprise that business has picked up markedly of late—Q4 (quarter ending in January) sales surged 36% and earnings more than tripled, crushing estimates in the process ($2.38 per share vs. $1.57 expected). Thor continues to grow through acquisition, too, with the most recent purchase being Tiffin Motorhomes. Beyond North American, Thor also has an overseas presence after its 2019 purchase of Germany-based Erwin Hymer Group, one of Europe’s largest RV makers; western Europe is a big market for summertime RV use, so this should provide some additional tailwinds for Thor going forward. Best of all, the good times should continue for a while longer—the forward-looking backlog metric came in at nearly $11 billion at the end of January, up a ridiculous 280% from a year ago! The RV Industrial Associated predicts total North American wholesale RV shipments will grow nearly 24% in this year to approximately 533,400 units. Management concurs and thinks this forecast may even be too conservative based on current conditions.

Technical Analysis

After a big decline in 2018 and much of 2019, THO was actually on the upswing before the pandemic hit, so after the crash, the stock got right back to its winning ways, soaring to multi-year highs near 120 last summer. Then came a long basing process, with THO correcting as much as 35% before finding buyers. And the last pullback into early March has given way to a powerful pre- and post-earnings move. It’s a bit extended, but we’re OK starting here or on minor weakness.

THO Weekly Chart

THO 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 22, 2021.