March 14, 2022

The situation remains the same as it has for the past week or so. When it comes to selling pressures, we’re seeing some signs that they’re starting to ease, but, on the buying side, there isn’t much evidence to suggest the bulls are flexing their muscles, as most indexes, sectors and growth funds are still in downtrends while rallies into resistance (whether for an index or stock) almost always attracts quick selling. Yes, there are still many old world stocks that are acting well (though we’ll see how today’s commodity-related selloff goes), so we’re not opposed to nibbling on these sorts of pullbacks. But overall, we think watchful waiting is the right course.

This week’s list is intriguing as there are a good number of fresh breakouts here, some from very long ranges. Our Top Pick is one of those, with the company’s massive step-up in earnings last year expected to persist for at least the next couple of years.

Market Overview

Selling Easing—but Buyers Needed

The situation remains the same as it has for the past week or so. When it comes to selling pressures, we’re seeing a few signs that they’re starting to ease, not the least of which is that the major indexes continue to hold support from six weeks ago despite a barrage of bad news (today’s headline was that interest rates hit new recovery highs), while fewer stocks are hitting new lows and more seem to be drawing lines in the sand. That said, on the buying side, there isn’t much evidence to suggest the bulls are flexing their muscles, as every major index and growth fund is still in a downtrend while rallies into resistance (whether for an index or stock) almost always attracts quick selling. Yes, there are still many old world stocks that are acting well (though we’ll see how today’s commodity-related selloff goes), so we’re not opposed to nibbling on these sorts of pullbacks. But overall, watchful waiting is the right course: With so many people leaning bearish these days, a turn is certainly possible, but we have to see it first before putting much money to work.

This week’s list is intriguing as there are a good number of fresh breakouts here, some from very long ranges. Our Top Pick is Westlake Corp. (WLK), which should crank out elevated earnings for many quarters to come and whose stock is just emerging to new highs.

Stock Picks & Previously Recommended Stocks

Stock 1

Agnico Eagle Mines (AEM)

Why the Strength

Precious metals have outshined equities so far this year (up 11% for gold and 15% for silver through Friday), and when gold soars, the shares of companies that mine the metal tend to significantly outperform the bullion in percentage terms. Among those that have lately commanded attention is Agnico Eagle, a senior Canadian gold miner with a pipeline of high-quality exploration and development projects in the U.S., Canada (including the just-closed acquisition of Kirkland Lake), Columbia and Mexico, and whose policy of no-forward gold sales gives it full exposure to current gold prices, which today is a great place to be. Agnico recently reported several record results for full-year 2021: The company posted solid annual gold production of around 2.09 million ounces with all-in sustaining costs of $1,038 per ounce (well under the current gold price of around $2,000), boosted by record production years from its Meliadine (Canada) and Kittila (Finland) mines, which produced 392,000 and 239,000 ounces of gold, respectively. On the financial front, Agnico also posted consensus-beating revenue of $949 million in Q4, up 2% from a year ago, as well as per-share earnings of 46 cents. Impressively, Q4 was also Agnico’s fifth consecutive quarter of over half a million ounces in gold production, and the firm achieved records in gold production, operating cashflow and mineral reserves (45 million ounces). The strong results prompted Agnico to hike its dividend 14% (2.6% annual yield) and announce a $500 million share buyback program. Looking ahead, analysts see the top line growing 41% in Q1, followed by three more quarters of 60-ish percent growth (mostly due to the Kirkland acquisition), but of course the wild card here is gold prices, as upside will fall right to Agnico’s bottom line.

Technical Analysis

Like most gold mining stocks, AEM hit a peak last May (at 74) and then spent the next eight months in a downward slide. Most of the decline was through with by October (at 49), but shares did probe lower into January (at 45) when the stock’s fortunes began to improve along with that of the yellow metal itself. AEM established a two-steps-forward, one-step-back pattern in the last six weeks, with a huge-volume push higher last week. We’re OK taking a swing here or on further pullbacks.

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Stock 2

Antero Resources (AR)

Why the Strength

Energy stocks aren’t new stories at this point—between the transition to cash cows during the past couple of years, and of course the latest spike in oil and gas prices, most investors are aware of the upside. That said, it’s also hard to say some stocks (especially those focused on natural gas, like Antero) are discounting sunny skies for years into the future, either. Antero operates in the Marcellus and Utica shales (has 20 years of drilling inventory) and is the fifth largest U.S. gas producer, the 2^nd largest natural gas liquids producer and the top liquified natural gas supplier (LNG), too. After years in the doghouse, the company has turned things around, with a very low cost structure that’s led to big debt reduction (down 43% in the past two years; now has no debt maturities until 2026) and, with tame CapEx, huge cash flow: Last year, Antero cranked out $2.70 per share of free cash flow, which was already a ton, but at recent strip pricing, it sees that figure ballooning to $5 per share this year (about 20% of the market cap!) and totaling a ridiculous $19 per share during the next five years. (True, long-term forecasts in the energy sector are usually worth a cup of coffee, but it goes to show you the potential here.) And shareholders should start getting a chunk of that money—Antero aims to return 25% to 50% of free cash flow through share buybacks (it recently approved a $1 billion repurchase program that commenced in Q1) while continuing to slash debt (which will total less than one times cash flow by year-end). Plus, given its position in LNG, there certainly could be upside ahead given Europe’s likely shift away from Russian supplies in the years ahead. There’s a lot to like here.

Technical Analysis

AR has had a huge run in the past couple of years, as it came back from near-bankruptcy after Covid first hit. But the latest action suggests the buyers are still active—after topping in November and correcting 30%, shares found support at their 40-week line in late January with two big-volume support weeks. And then, after just one week of rest, AR has taken off, lifting to new highs on four straight weeks of above average volume. Today’s dip could go further, so we’ll set our buy range down a bit, as the odds favor this being a shakeout.

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Stock 3

Cameco (CCJ)

Why the Strength

Russia’s war with Ukraine has left Europe’s energy sector in limbo as the continent heavily relies on Russian-supplied natural gas for heating and electricity generation. This makes nuclear power generation an attractive prospect, a point noted in an International Energy Agency report on how Europe can reduce its Russian energy imports by increasing production at existing nuclear facilities. In response to war-related spikes in oil and gas prices, moreover, uranium costs have already exploded 36%, benefiting Cameco—one of the world’s largest miners of the energy metal. Even before the invasion of Ukraine, Cameco turned heads on Wall Street with an good-sized Q4 earnings beat, a 50% dividend hike (though the yield is a token 0.3%) and plans to re-start operations at its McArthur River mine in Canada (the world’s largest high-grade uranium deposit). While sales of $367 million were 16% lower from a year ago, per-share earnings of six cents beat estimates of a penny. More important is the future, and there the future looks brighter—the company added 70 million pounds of additional long-term contracts to its portfolio in 2021, and management said improving uranium market sentiment is providing the firm with leverage to higher uranium prices under its contracts. While Cameco operated at 75% below productive capacity in 2021, the company plans to operate just 40% under capacity by 2024 as it ramps up production at McArthur River to an estimated 15 million pounds per year. Cameco also plans to focus on long-term supply contracts going forward, adding some stability to business with an aim to increase profitability while maintaining production discipline. Analysts predict revenue growth of around 18% percent this year and 23% next, which could prove conservative given the rising demand outlook.

Technical Analysis

After underperforming for more than a decade, CCJ turned a corner in early 2021, riding the 50-day line higher into mid-year and peaking at 22 in June. A quick trip lower to 16 followed, with shares rebounding in August and hitting a higher peak at 28 in November. From there, CCJ nosedived into late January, finding support at 18, but has jaggedly made its way back up to the old high over the last six weeks before today’s drop. Maybe the stock falls apart, but given the massive buying of late, we’re OK taking a small position around here.

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Stock 4

Century Aluminum (CENX)

Why the Strength

Like many commodity areas, the aluminum industry is faced with supply disruptions, low global inventories and robust demand, which are putting significant upside pressure on prices. This partly explains the strength behind Century, the largest producer of primary aluminum in the U.S., with smelters in Kentucky, South Carolina and Iceland. Century is a big player in the global aluminum trade; its facilities make standard grade and high-grade aluminum, as well as value-added primary aluminum products, and its operations collectively produce around a million tons of aluminum per year. With supply deficits becoming particularly acute in Century’s two core markets, the U.S. and Europe, the company is fast becoming the supplier of choice for its value-added product lines due to the firm’s secure and short supply lines to its domestic customer base. Century hailed 2021 as a “transformative year” which saw expanding production at its South Carolina facilities and it just announced an expansion of its low-carbon smelting operations in Iceland. Management believes this leaves the company in an “excellent position” to take advantage of uniformly strong market conditions, which are expected to persist though this year. Higher realized fourth-quarter aluminum prices (up 10% from Q3) contributed to Q4 revenue of $659 million, a 69% improvement from a year ago, while per-share earnings of 17 cents were 13 cents above consensus. Looking ahead, a major Wall Street bank just upped its aluminum price target 15% on rising oil prices that have idled some smelters, as well as fears that sanctions on Russia could curb aluminum exports. Analysts see earnings leaping to around $3.50 per share this year.

Technical Analysis

CENX came back from the dead after the 2020 crash, rallying from just 3 to 20 as the firm turned the corner. But then came a long, deep basing phase—shares retreated as much as 47% and remained range bound between 11 and 20 for many months. However, CENX finally calmed down a bit in January, setting the stage for a moonshot to 30 ... before a sharp dip back into the lower 20s. The drop is normal, but we’ll set our buy range above the current price, thinking a solid rebound will mark an end to the dip.

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Stock 5

CrowdStrike (CRWD)

Why the Strength

Newer, fresher names are the most likely stocks to lead the next sustained uptrend, but a choice few old big winners could reemerge if their fundamental numbers and stories remain unchanged. CrowdStrike looks like it could be one of those exceptions to the rule, with a popular platform (dubbed Falcon) that started in endpoint security (basically any device that connects to a network) but has broadened out into protecting cloud workloads, identity, logs and extended detection and response; the secret sauce here is the system itself, which, as the company’s name implies, grows “smarter” by analyzing trillions of events per week across its customer base, resulting in stronger protections. What’s impressive, too, is that many other cybersecurity players actually use Falcon (Cloudflare signed up in Q4!). The fear here was that the firm’s traditional endpoint offerings would see slowing growth, while the newer offerings wouldn’t catch on, but the Q4 report seemed to blow those ideas out of the water: Not only did revenues (up 63%) and earnings (up 131%) easily top expectations, but so did annualized recurring revenue (ARR; up 65%), including ARR for non-endpoint offerings, which came in north of $150 million, more than double from the year before. And when it comes to competition, management didn’t split hairs in the conference call: “We’ve never seen a better competitive environment for us. We’re entering the quarter with the largest pipeline. We’ve got lots of replacements in the legacy world, lots of replacements in the next-gen world … So full steam ahead from us on the competitive side, and we continue to out-innovate and build what we believe is the best platform in the industry.” Analysts see earnings up 64% this year and 45% next, both of which are likely conservative. Fundamentally, CrowdStrike continues to look like an emerging blue chip.

Technical Analysis

CRWD ran from a pre-pandemic high of 100 to a peak near 300 late last year before getting cut in half by January along with many high-flying growth titles. It’s not “strong” right here, but it has been showing outsized support—specifically, the 150 area has found buying on every market dip, punctuated by last Thursday’s good-looking gap up toward 200. You could nibble here with a loose stop near the lows, or wait for a push north of 200.

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Stock 6

Fluor (FLR)

Why the Strength

A year ago, management at engineering firm Fluor wanted to focus the business mainly on non-traditional oil and gas production. Non-traditional production is a lot of what happens in North America these days, like fracking and liquefying natural gas. That requires a lot of infrastructure, but Fluor can handle it: It’s building LNG Canada, an export facility in British Columbia that represents the largest investment in a single energy project in the country’s history. The company is still in transition, with energy about 40% of the business now, well short of the long-term goal of 70%. Still, the fossil fuel emphasis has investors excited about the potential projects given the turmoil surrounding global oil and gas from the Ukraine invasion. It also helps that Fluor, which lost money last year in a pandemic-impacted year, is profitable in its energy division while spinning off money-losing NuScale, an advanced nuclear reactor developer, through a SPAC merger. Helping sentiment around Fluor as well is its strong position in gold and copper mining services. That segment was hobbled by client delays last year and while the outlook is that delays could still crimp results in 2022, the more metals prices boom, the greater the likelihood projects get pushed ahead. After seeing sales shrink 20% in 2021, Fluor should rebound strongly this year, posting $15.3 billion revenue, above pre-pandemic levels, with earnings per share of $1.30. Longer term, investors like that management has been lowering debt ratios and positioning itself for the potential emergence of hydrogen as a fuel source, which would tap its chemical plant expertise.

Technical Analysis

FLR rallied to 25 in May of last year, but that was it for a while—shares corrected twice afterwards, first 43% and then, after getting back to its old high, retreating 23%. But now the roof has blown clean off, with FLR decisively breaking out last week along with many peers; the three straight weeks of above-average, accelerating buying volume bodes well. We think a small position here or on weakness is a solid risk-reward.

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Stock 7

Intra-Cellular Therapies (ITCI)

Why the Strength

Intra-Cellular produces the only FDA-approved treatment for Bipolar I (manic episodes that are so intense they require hospitalization) and Bipolar II (less-intense episodes that last longer) disorders. Some 4% of the U.S. population suffers from one version of Bipolar, which in its most extreme form can result in suicide, and for most hinders quality of life. Intra-Cellular’s treatment, lumateperone – sold under the name Caplyta – is a once-a-day pill first launched commercially in 2020 when originally approved for adult schizophrenia, and it has shown to perform consistent with clinical trials, where it cut depressive episodes by a good amount. Last year, as pandemic restrictions eased at treatment centers, doctors began prescribing Caplyta at greater rates. In the fourth quarter, reported at the start of March, Caplyta scripts were more than double the year prior, to $25.5 million. That just hinted at its potential, though, since it was just in December that FDA approval was issued for bipolar disorders as a monotherapy and as an adjunctive therapy with other treatments. In the first seven weeks of the current quarter, management says total prescriptions were up 35%. Caplyta is also being tested for major depressive disorder, a Bipolar II-like condition that affects 19 million people in the U.S., and for treatment for people with mixed indications of MDD and Bipolar II. Other drugs in its pipeline treat agitation among Alzheimer’s patients and an inhibitor with potential for Parkinson’s. This year sales should more than double to $213 million, though we think that’ll prove conservative as Caplyta gains traction.

Technical Analysis

ITCI continues to ignore the market’s weakness, which, given the environment and the firm’s red ink, is impressive. January brought a huge drop (partially market-related, partially due to a share offering), but since the late-January market low ITCI has rallied nicely, hitting new highs in February and chopping sideways of late—even closing at a new high on Friday. If you want in, start small on dips.

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Stock 8

Sweetgreen (SG)

Why the Strength

Sweetgreen is a recent new issue with a great, straightforward, cookie-cutter story. The firm operates fast casual restaurants that focuses only on fresh, healthy fare (whole grains, lean proteins, etc.) and feature a seasonal menu (salads are the most popular but warm bowls and plates also sell well) that changes thanks to its 200-plus partnerships with local farmers around the country, not to mention small bakeries and the like, too. For environmentally- and health-conscious folks that have some extra income (it’s popular in cities), Sweetgreen is a hit—it has some similar characteristics to Chipotle back in the day, which served good, tasty mainstream food (not tofu, etc.) with a healthy kick. And the firm is expanding quickly to take advantage of its opportunity: In 2021, the company opened 31 new locations to boost its overall presense to 150 restaurants, but the firm sees a “clear runway” to have 1,000 restaurants open by the end of the decade; for 2022, Sweetgreen expects to open around 35 new locations (20%-plus store growth), including seven in the first quarter. Then there’s the digital angle—with an upper-class client base, a full 43% of revenues come through its app or website, building loyalty and opening up marketing opportunities. The store economics are solid (recoup well over half of store opening costs by year two), which backs up the rapid expansion. Covid has slightly hindered business on and off during the past two years, but the market is looking ahead and likes what it sees: Analysts see sales up 55% this year and another 43% in 2023, and while the bottom line is in the red, much of that is due to the expansion and, even with some inflation pressures, it’s likely the losses will shrink. It’s a solid story.

Technical Analysis

SG came public right at the market top in mid November and proceeded to slide more than 50% within a month! But since early December it’s found solid support in the low- to mid-20s; note the big weekly buying volume at the lows in January, and again the past two weeks, when SG approached the 22 area. The trick here is volatility, with the stock regularly moving 10% in just a few days, but if you want to nibble in what looks like a bottoming area, we’re OK doing so on dips.

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Stock 9

Westlake Corp. (WLK) ★ Top Pick

Why the Strength

Westlake is possibly the most important company you’ve never heard of. The international manufacturer and supplier of petrochemicals, polymers and fabricated building products produces an astonishing 40 billion pounds of product every year, making it one of the world’s largest basic material suppliers. The company’s main focus is plastics (it’s the number two producer of specialty polyvinyl chloride on earth!), with operations in 11 nations, and its products are widely used in food packaging, shipping boxes, automotive parts and construction materials. Residential construction and remodeling spending drove strong fourth-quarter demand for Westlake’s PVC products, as well as the housing and infrastructure products it makes. Additionally, consumer demand for packaging products spurred demand for the firm’s polyethylene and caustic soda. Last month, the company reported annual records for several key metrics in 2021, including net sales, net income and EBITDA. In Q4, revenue of $3.5 billion was 78% higher than a year ago (and 15% above estimates), while per-share earnings of $4.98 beat the consensus by 45 cents. Westlake said that record earnings in 2021 were driven by “robust” demand across its entire product portfolio and, of course, higher prices. Going forward, management sees consumer demand and manufacturing growth remaining strong and expects the company’s recent acquisitions in housing, building and epoxy products to provide a “larger platform for growth” which should drive value through Westlake’s integrated supply chain and “meaningfully” contribute to earnings in 2022, along with higher chemical prices and margins. After last year’s moonshot, analysts see earnings remaining elevated in the $14 to $16 per share range both this year and next.

Technical Analysis

WLK kited as high as 106 by June of last year before turning tail and giving back most of its gains from the first half of the year in just seven weeks. The stock hit bottom in July at 78, spent nine more weeks consolidating and then began a measured move higher, halting every few weeks to digest the gains before leaping forward. Net-net, WLK really didn’t do much for nine months, but now it looks like a new uptrend has started, with shares up six weeks in a row to new highs. We’re OK starting a position here.

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Stock 10

ZIM Shipping (ZIM)

Why the Strength

The global container shipping industry is booming, as reflected by recent record-high shipping rates (with some analysts seeing Russia’s war in Ukraine tripling shipping rates in coming months!). ZIM Shipping (covered in the January 3 report) is one of the world’s largest cargo shipping liners and, unlike other carriers, leases out its entire fleet on shorter-term contracts (which lowers costs and increases flexibility), using “eco-friendly” charter vessels and technology to optimize its cargo mix, making it an established niche shipper. Last week, ZIM report blow-out revenues of $3.47 billion that were 155% higher than a year ago and 3% above estimates (a reason for the strength), with EPS of $14.17 surprising by 98 cents. Adjusted EBITDA for Q4, meanwhile, jumped 345% while free cash flow totaled north of $14 per share! Management touted the company’s “outstanding” cash generation in 2021, made possible by “sizable” investments in equipment and fleet capacity, allowing for “substantial” capital returns to shareholders—it aims to return 30% to 50% of net income for the full year (quarterly amounts are usually less with a larger, catch-up payment for Q4), which led to a whopping $17 per share dividend declared following Q4 (payable April 4 to shareholders of record March 23). ZIM is also growing quickly: In the 14 months since its IPO, ZIM has increased its operated capacity by around 20% and currently operates 125 vessels, with plans to unveil an additional 28 eco-friendly dual-fuel container between 2023 and 2024 (as part of its strategy to be at the forefront of carbon intensity reduction among global liners). For 2022, the company guided to another huge set of massive results similar to last year, which would lead to monstrous payouts going ahead. As a heads up, there can be some tax implications with the dividends given that ZIM is Israeli; we’ll leave that to others to figure out, but the stock itself looks great.

Technical Analysis

After its IPO last January, ZIM immediately began sailing higher along with earnings, reaching a peak near 45 at the end of June. A drop to 31 came next, followed by another eight weeks up in a row that took shares near 60. The stock bobbed and weaved between September and January, consolidating its prior rally and paving the way for a series of higher peaks that kicked off last month. The recent buying volume looks great, but we’ll set our buy range lower, thinking ZIM can let off some steam in the days ahead.

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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 bold.

The next Cabot Top Ten Trader issue will be published on March 21, 2022.