March 7, 2022

The story remains mostly the same: When it comes to rubber-meets-the-road evidence, nothing has changed—the intermediate-term trend of the major indexes remains down, and growth funds and individual stocks are in the same boat. Until some of that changes, it’s telling you the bulls are swimming upstream, so it’s best to be defensive. However, we also don’t want to ignore many secondary measures that are showing some encouraging action, including the indexes holding above their recent lows and increasingly negative sentiment. The pieces are in place for some sort of turnaround, but we’ll have to see it happen before taking action.

This week’s list is again heavy in commodity-type names, though a few other areas popped up as well. For our Top Pick, we’re going with a growth-y name that’s holding well—it’s probably the best-looking non-commodity stock in the market today.

Market Overview

Still Cloudy … with Some Rays of Light

We could pretty much copy and paste the last couple of intro’s here and it would still reflect our thoughts on the market. When it comes to rubber-meets-the-road evidence, nothing has changed—the intermediate-term trend of the major indexes remains down, and growth funds (which actually came within a couple of good days of a green light last week) and individual stocks (81% and 63% of Nasdaq and NYSE stocks, respectively, are below their 200-day lines) are in the same boat. Very simply, until some of that changes, it’s telling you the bulls are swimming upstream, so it’s best to be defensive. However, we also don’t want to ignore many secondary measures that are showing some encouraging action: Despite the fact that we’re seeing daily new highs in commodity prices, not to mention death, destruction and sanctions, stocks have hung in there since the invasion begun; fewer stocks (so far) are participating in the downside; and sentiment is getting increasingly negative. Thus, we’d simply say the pieces are in place for some sort of turnaround (short-term or otherwise), but we’ll have to see it happen before taking action. We’ll leave our Market Monitor at a level 5 today.

This week’s list is again heavy in commodity-type names, though a few other areas popped up as well. For our Top Pick, we’re going with a growth-y name that’s holding well—Palo Alto Networks (PANW) is one of the best-looking non-commodity stocks out there, with a reasonable pullback in recent days.

Stock Picks & Previously Recommended Stocks

Stock 1

Civitas Resources (CIVI)

Why the Strength

While most of the leading energy producers these days have acquired their acreage over time and focus most of their efforts on regulation-light Texas, Civitas has taken a different route—the firm (formerly known as Bonanza Creek) made a few big moves last year, acquiring and combining with four different outfits that focus on the Denver Julesberg (DJ) Basin in Colorado that’s created a powerhouse in that area. The end result is a firm with very low breakevens, nearly no net debt (just 0.2 times annual cash flow) and what’s likely to be massive cash flow going forward—as last year’s acquisitions were finalized, the company changed its name to Civitas and hiked its base dividend to $1.85 per share (3.2% annualized yield), with a plan to return half of its post-dividend free cash flow to shareholders beyond that. And the firm continues to play offense, as it just completed an accretive $300 million all-cash buyout of Bison Oil & Gas, bringing with it 38 already-permitted, very oily (75% oil and 90% liquids) locations. Of course, Colorado is more environmentally-sensitive than a Texas, but Civitas says it’s the first carbon neutral oil and gas producer in the state, which should help it stay on regulator’s good side. Right now, the firm doesn’t have an official forecast or price deck for 2022 and beyond, but some analysts see free cash flow more than double the already-solid base dividend even at very modest ($65) oil prices. More will be revealed Tuesday evening (March 8, though the conference call will come the next morning), when the firm will release Q4 results and its 2022 (and possibly beyond) forecast. Given that some secondary energy names are getting going, with think Civitas could do the same.

Technical Analysis

CIVI did well last year, though it was up and down not just because of the sector’s gyrations but also the moving parts concerning all the acquisitions—and even this year, the stock has effectively lagged the group move, with shares bobbing back and forth in a wide 25% range between 45 and 60. But now it looks like the stock could be getting moving: CIVI found support and then rallied nicely on two straight weeks of big-volume buying. Today’s sector pullback was sharp but not unacceptable; you could nibble ahead of the report, or just wait for a decisive push above 60.

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Stock 2

Globalfoundries (GFS)

Why the Strength

One of the world’s largest foundries for making semiconductors, Globalfoundries is benefitting from a series of tailwinds that should double semiconductor demand in eight to 10 years. One is the need for chips to power 5G mobile phone capabilities, like video, which is a niche growing some 25% compared to single-digits for the overall handset sector. The Internet of Things and increased demand for chips in automotive applications, like EVs and autonomous driving features, are powering growth, too. Autos are just 5% of business today, but expected to grow rapidly, with management recently inking deals with BMW and Ford centered on building out the supply chain. In Q4 2021, results reported last month, total sales were up 74%. It’s not quite apples-to-apples because of 2020 accounting change making the prior-year quarter appear weaker, but nevertheless business is booming; Q1 sales should come in around $1.9 billion, a 36% leap over 2021. The California-based company has operations worldwide, with Singapore and Dresden, Germany, providing 65% of capacity. Its main U.S. foundry, in Malta, New York, will probably have expansion plans beefed up under the pending CHIPS Act – a $52 billion federal program being debated in Congress to stimulate expansion of semiconductor manufacturing in the U.S., which is now just 17% of global capacity, down from 37% in 1990. In any case, the company plans to have a whopping 50% more capacity globally by the end of next year compared to 2020. Globalfoundries should have no problem ramping up – the business already has a gross profit margin of 21.5% and should convert some of that into net income this year, with $1.87 EPS expected, compared to a loss of a nickel last year, with 2022 likely to see another big leap in the bottom line.

Technical Analysis

GFS IPO’d in October at 47 and had a nice first few weeks, rallying as high as 73 in November before pulling in—and when the market fell apart in January, the stock sunk all the way to 44. However, it made this week’s cut because, while shares aren’t “strong” they are showing relative strength—while the market briefly sunk to new lows two weeks ago on the invasion, GFS did not, and even as stocks have struggled since then, this name is well above its prior low. We’re not opposed to starting small here, or just keep it on your watch list.

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Stock 3

Lockheed Martin (LMT)

Why the Strength

The Russia/Ukraine conflict has resulted in at least 22 NATO members pledging to send billions of dollars in military assistance to Ukraine. Moreover, Germany has just raised its defense spending by an estimated $76 billion annually, and nations across Europe (even Australia is getting into the act) are expected to up their military budgets by tens of billions every year—actions which have dramatically increased growth prospects for global security and aerospace company Lockheed. While the defense contractor is mostly known for its military aircrafts and missiles, Lockheed has been focusing more of its research and development efforts of late on hypersonic weapons, directed energy and artificial intelligence (AI), all pillars of its long-term growth strategy. The successful execution of that strategy was seen in Q4, in which Lockheed reported revenue of $17.7 billion that was 4% higher from a year ago and per-share earnings of $7.47 that were 27 cents above estimates. By business, both aeronautics and rotary mission segment sales rose 6%, missiles and fire control increased 12%, while space decreased 10%. The company also reported “outstanding” full-year free cash flow of $7.7 billion (up 20% and north of $28 per share) that was driven by a tightly coordinated collections process across all its business segments—91% of which was returned to shareholders through buybacks and dividends. Looking ahead, management guided for full-year 2022 EPS of $26.70 and plans to deploy the entire amount of its remaining $4 billion share repurchase authorization in 2022. Lockheed is a well managed company, though the real opportunity lies in selling goods to allies overseas during the next few years.

Technical Analysis

After hitting a long-term peak around 440 in early 2020, LMT collapsed to 265 when the pandemic arrived in March, then recovered to within 25 points of its old high by June. But unlike most stocks, LMT entered a long period of consolidation for the next 19 months in which the stock made no net progress. The malaise ended last December when shares turned up from a low of 330 and, after some tightness south of 400 in recent weeks, the roof has blown clean off, with a massive-volume move to all-time highs. It won’t be your fastest horse but we think LMT is headed higher.

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Stock 4

Inari Medical (NARI)

Why the Strength

Inari is a small medical outfit whose stock has gone through the wringer for nearly a year, but the story remains terrific and the stock is starting to act better. Inari’s big draw revolves around procedures to remove blood clots, most of which occur in or near an artery—and thus, arterial devices used to remove them are fairly effective. But when using those same devices for blood clots within veins, they don’t work very well, with poorer results and safety due to those clots having different characteristics (they tend to be harder, lead to more bleeding complications; thrombolytic drugs are often still required, too). That, though, is the big opportunity for Inari: The company’s ClotTriever and FlowTriever collection of products are specifically designed for certain veinous blood clots conditions, including deep vein thrombosis (usually a clot in a vein in the lower leg, thigh or pelvis) or pulmonary embolisms (clot travels to the lungs). Management believes its current products address a market north of 700,000 patients per year, and the proven results (near-bloodless procedures, patients avoid ICU stays, large clots removed in a single session, etc.) have made them a hit—in Q4, Inari’s offerings treated around 7,700 patients in the quarter, up from 6,700, 5,900, 5,500 and 4,600 the prior four quarters, helping revenues pick up at a rapid rate even among increasingly tough year-over-year comparisons (up 71% in Q4). Impressively, gross margins are at 90% and profits have been just above breakeven in all but one recent quarter. To be fair, the outlook for 2022 is a bit disappointing (revenues up 28% or so, partly due to a falloff in COVID-related procedures, which made up around 10% of the total), but we see that as conservative--and long-term, Inari believes just 4% of patients who would benefit from their devices are actually treated. Big picture, it’s a great story.

Technical Analysis

NARI peaked at 127 in March 2021, broke down in May and hacked up and down before bottoming with the market at 63 in January, about half way off its peak. To be clear, the stock still has lots of resistance to chew through, but it’s showing noticeable strength—as the market struggles, NARI has spiked nearly to 10-month highs on two weeks of huge volume. If you’re game, we’re OK starting small here or (preferably) on dips.

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Stock 5

ONSemi (ON)

Why the Strength

Onsemi is doing well as it continues to shift out of the commodity-like, low-end of the market with a focus on larger, more sophisticated wafers geared for the renewable energy and automotive industries. The company, long known as On Semiconductor, just announced a deal to sell its South Portland, Maine fabrication plant, right after closing on the sale of another in Belgium. The goal is to lower its costs by trimming out plants focused on producing the cheaper, lower margin, more price-volatile wafers that have made its a boom-bust type stock in the past. The freed-up capital is being used to build capacity for premium millimeter wafers, with an expansion underway at its East Fishkill, New York, facility (Onsemi will close on an agreement at year’s end to purchase the plant from another Top Ten name, Globalfoundries). Part of the strategy to being less of a commodity producer is to emphasize silicon carbide-based chips (SiC), which are more heat-tolerant and efficient than traditional silicon. That makes SiC better for higher-growth renewable and electrification responsibilities, where electricity throughput is higher. In a move to help that along, Onsemi closed a $415 million purchase of GT Advanced Technologies late last y ear, which produces high quality silicon carbide crystals for the industry. That secures Onsemi the SiC needed for expansion, and gives it greater ability to sell excess to other fabricators. That should support a 50% spike in the firm’s renewable energy business, which will contribute to an overall 28% sales gain management sees for 2022, with current Q1 revenue see hitting $1.9 billion and with analysts see the bottom line catapulting north of 40% this year.

Technical Analysis

ON has enjoyed three straight quarters of earnings beats, gapping shares higher each time. The latest, in February, was the least dramatic, but it’s at least helped the stock remain resilient—shares fell sharply from 71 at the start of the year to 51 at the market’s low in January, but bounced back to 67 after earnings and are still hanging around the mid 50s even as the market sniffs new correction lows. We’ll set our buy range up a bit from here, thinking a strong snapback could lead to a meaningful rally.

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Stock 6

Palo Alto Networks (PANW) ★ Top Pick

Why the Strength

Geopolitical instability and growing use of cryptocurrencies are two key reasons why cybersecurity demand is on the rise in both the public and private sectors. Add to this increased cloud adoption, and Palo Alto (covered in the January 24 report) has some potentially strong underpinnings for 2022. For these reasons, a major Wall Street firm made Palo its top cybersecurity pick for the year, citing the cybersecurity space’s “rock solid” fundamentals and Palo’s “accelerating” top line. Indeed, sales momentum is the main reason for the company’s latest strength, as Palo reports seeing “significant” customer demand for automation and security as threat data and volume security events grow at exponential rates. Consequently, revenue in fiscal Q2 of $1.3 billion rose 30% from a year ago, driven by a 21% increase in product revenue, while per-share earnings of $1.74 beat estimates by nine cents. Better yet, billings (more of a forward-looking measure) of $1.6 billion grew 32% in the quarter while remaining performance obligations (all the money due to it under signed contracts) increased 36% to $6.3 billion, driven by its next-generation offerings (annualized recurring revenue of these products of $1.43 billion, approaching half of total revenue, with billings up 79%.) The company also reported 47% of its Global 2000 customers used products from all three of its platforms (up 38%). Total customer count rose 62% to more than 19,000 as the firm reported a “strong uptake” from existing clients. Additionally, 221 customers spent at least $1 million in Q2 (including three transactions of over $20 million), and the 1,000-plus military-related customers (up 26%) could be a demand driver going ahead. For the current Q3, management expects sales to jump 26% and EPS to increase 20%. Wall Street is equally sanguine on Palo’s prospects, seeing full-year top- and bottom-line growth of 28% and 19%, respectively, with one big institution predicting a “parabolic growth cycle” for 2022.

Technical Analysis

After gapping 19% on nearly 10 times average volume back in August, PANW rode its 50-day line to a record high of 570 just prior to the New Year. The stock turned tail in January with the market, dropping to an intraday low around 450 before find solid support above the 200-day line in late February. The latest earnings report pushed PANW to a new high of 600 on a string of strong volume, and we’re OK using the latest pullback to start a position.

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Stock 7

Patterson-UTI (PTEN)

Why the Strength

Energy explorers have foregone much in the way of added drilling and production, instead focusing on cost controls and free cash flow. However, with oil in the triple digits, even some of the most disciplined operators are starting to whisper about bumping output. Translation: It’s nearly a sure bet that demand and pricing for oil equipment and rigs is going to head up in 2022 and beyond, which should mean great things for Patterson-UTI. The company is a major provider of drilling and pressure pumping services via its fleet of high-quality, land-based Tier 1 rigs in the U.S., which are known for being near the forefront of the industry, technology-wise. (The firm thinks it has 107 of the 400-ish so-called Tier 1 super-spec rigs that are seeing the greatest demand in the industry.) That hasn’t helped the firm at all in the past few years, but Wall Street is thinking a long-term business upturn is getting underway. Indeed, in Q4, not only did Patterson’s revenues more than double, but in its contract drilling segment, the number of rigs in use grew 26 in the quarter to 106 (13 were from an acquisition), with at least 10 more likely to be added in Q1, all while revenue per rig day lifted nearly 3%. And more is on the way—in the words of the CEO, “We expect increasing margins throughout the year due to strong pricing momentum as the availability of premium equipment has become tight. I believe it is fair to say that it’s been a long time since the outlook for oilfield service pricing was this strong … For those of us in the contract drilling and oilfield services sectors where premium equipment is tight, this potential commodity price stability has been making of a multiyear up cycle with higher activity for a longer period than we have seen over the last decade.” Indeed, the top brass sees EBITDA of $450 million this year, up from $171 million last year.

Technical Analysis

Like most oil service firms, PTEN peaked years ago (it was up near 40 in 2014), crashed into the 2020 low (below 2!) and then rallied after the vaccine announcements in November 2020. But that kicked off a long rest period, with no net progress from mid March of last year through early February of 2022. Now, though, there’s no question the buyers are in control, with PTEN ratcheting higher six weeks in a row, including four on big volume, as investors anticipate a boom this year. We’ll set our buy range down some, thinking a near-term shakeout could provide an opportunity.

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Stock 8

Royal Gold (RGLD)

Why the Strength

Metal prices are soaring right now, thanks to a combination of inflation pressure and geopolitically-driven supply disruptions. Gold, which until recently has been a laggard, is finding its legs, which is benefiting companies that have access to gold streams or royalties without the capital expense involved in mining it. Enter Royal Gold, whose main business is streaming, which involves providing up-front payments to miners in exchange for the right to buy gold, silver, copper and other resources at a set (usually low) price, or else receive a percentage of the metal output. In total, the company has streaming or royalty deals with 35 producing properties, including well over 100 exploration properties and around 20 development projects. In Q4, Royal Gold’s revenue of $169 million was up 6% from a year ago and topped estimates by 2%, while per-share earnings of $1.05 beat the consensus by 12% (after-tax margins here are a very impressive 41%), allowing the firm to end the year with no debt and $1.2 billion of liquidity for future deals—all while it has ver little committed in the way of payments to partners going forward. (By metal, 73% of Q4 sales was from gold, 12% from copper and 11% from silver.) Production volume came in at just over 191,000 gold equivalent ounces, 3% above the company’s previous midpoint estimate. During the quarter, the company closed two previously announced transactions, including a stream on the Brazil-based NX Gold mine and a royalty on the Red Chris mine in Canada. Analysts see earnings up 12% this year, but that’s likely based on prior gold prices—every uptick in the yellow metal is going to fall right to Royal’s bottom line.

Technical Analysis

Like most gold stocks, RGLD outperformed in pandemic-impacted 2020, thanks to strong safety-driven demand. Gold topped out in August of that year, however, with RGLD hitting a peak that same month just under 150. A grueling 14-month slide followed with shares finally hitting a nadir at 92 in October. A 16-week period of tightening then ensued before the stock finally broke free in February and rallied to around 130, which is near 10-month highs. We like the power, though if you want in, we suggest aiming to start a position in the mid 120s.

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Stock 9

Steel Dynamics (STLD)

Why the Strength

With Russia and Ukraine accounting for around 14% of the global steel trade, disruptions to steel exports due to their ongoing conflict are prompting buyers to seek alternative suppliers. This is one reason behind the strength of Steel Dynamics, one of America’s largest producers of carbon steel that’s used in buildings, bridges, rails and pipelines. The company set records in several key metrics for both Q4 and 2021, including full-year sales of $18.4 billion—a nearly 100% improvement from the previous year as prices skyrocketed. Operating income for 2021 was also at an all-time high, along with cash flow and EBITDA, driven by record steel and steel fabrication shipments of 11.2 million tons and 789,000 tons, respectively, as well as record metals recycling segment earnings. The company touted a “tremendous” operational and financial performance in reporting Q4 revenue of $5.3 billion that was an eye-popping 104% higher from a year ago, along with per-share earnings of $5.78 that beat estimates by 7 cents. Remember, this isn’t just because of the current war—Steel Dynamics said steel demand was strong throughout the year and supported by the construction, automotive and industrial sectors, and further helped by the fact that steel inventories are at historical lows, which drove prices higher and should provide a solid underpinning for many quarters to come. What’s more, the strength allowed the company to repurchase $1.1 billion of its own stock (around 8% of shares outstanding!), boosted its dividend by 31% (now a 1.8% yield) and reupped another $1.25 billion on the share buyback authorization. Management guided for steady growth in North American steel consumption in 2022, supported by construction and automotive, with the “more severe” supply chain challenges in the latter industry expected to abate this year, supporting stronger production. Analysts see earnings remaining elevated in 2022.

Technical Analysis

STLD’s post-pandemic rally effectively topped out at 66 in May of last year; there was a rally to the mid 70s in August but that quickly went up in smoke. The low came in January, when shares dove below their 40-week line, but that now looks like a massive shakeout—since then, STLD has skyrocketed six weeks in a row to new highs. Today’s drop was sharp and could easily go a bit further, but given the recent upside volume we’re not expecting a huge retreat.

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Stock 10

Trade Desk (TTD)

Why the Strength

Programmatic advertising, which uses artificial intelligence software to allow ad buyers to more efficiently reach their target audience and track engagement, is fast eclipsing traditional advertising. At the leading edge of this trend is Trade Desk, the largest aggregator of connected TV (CTV) ad impressions across every major content provider and whose software platform allows advertisers (including ad agencies) to purchase optimal impressions across various ad formats and devices. After a pandemic-related sales slowdown in 2020, Trade Desk went on a major growth spurt last year, reaching nearly $1.2 billion in revenue for 2021 (up 43% from the prior year), with total ad spending on its platform hitting $6.2 billion, leading the industry. The company said the CTV market was the largest driver of spending on its platform in 2021, a trend expected to continue this year. (More than 15,000 advertisers bought CTV ads last year and customers spending more than $1 million on CTV ad campaigns almost doubled from 2020!) Revenue for Q4 was $395 million, up 24% and above consensus, and EPS of 42 cents beat estimates by 15 cents. Product innovation is a key growth driver for Trade Desk, and in Q4 the company released a new platform, OpenPath, which gives advertisers a direct connection to large-scale publishers (companies who sell ad space) in order to maximize their ad dollars. Trade Desk also scaled its Unified ID 2.0 platform earlier this year, allowing clients to place targeted ads without using privacy-invading cookies (which some see as the future of advertising). Management also guided for Q1 sales to increase 38% to “at least” $303 million and adjusted EBITDA to hit $91 million, up 29% from a year ago. Long-term, there’s little doubt the industry will continue to come Trade Desk’s way.

Technical Analysis

TTD saw the wind came out of its sails in early 2021. From a late 2020 high of 97, shares sagged to 47 by May. From there, shares etched a good-looking basing period and a breakout move to 115 in November, but of course the market got in the way and TTD fell all the way back to 55 in January. But the action since then has been solid, with five weeks up in a row and lots of higher highs even as the major indexes test their lows. Of course, today it fell with everything else, but again, remains well above its prior lows; we’ll set our buy range up a bit from here, trying to catch the start of a new rally.

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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 14, 2022.