May 24, 2021

A Good First Step, but Need to See More

Current Market Outlook

After a couple of horrid weeks for growth stocks, we’ve seen a ray of light lately, as many found solid support with some volume beginning to show up in some stocks as they rally, an early sign that big investors are engaged. Thus, we’ll chalk it up as a nice first step, and definitely a change from the recent carnage, but we still need to see more—many indexes are now doing more chopping than rising (the overall intermediate-term trend is basically neutral at this point), and most of the action in recent days has been among stocks that took the biggest hits (and thus still have a ton of overhead to chew through). Don’t get us wrong, we’re intrigued by what we see—it could prove to be the early stages of a change in character for growth stocks after three months in the outhouse—but the bulls still have more to prove before we meaningfully increase our exposure.

This week’s list remains mixed, with lots of turnaround and cyclical situations, but with a few growth-y issues too. Our Top Pick is Analog Devices (ADI), which has come back to life after a three-month rest thanks to great earnings, huge cash flow and a pending acquisition.

Acuity Brands (AYI)

acuitybrands.com

Why the Strength

As Covid restriction are lifted, more Americans are returning to the office, which means office lighting sales are increasing. Acuity (covered in the April 12 report) is North America’s leading provider of lighting and building management solutions for industrial, commercial and residential applications. Led by higher sales for LED home and office lighting, Acuity is seeing steady demand growth for its various offerings. It has several new products in its pipeline, including cutting edge, air-circulating 254-nanometer luminaires. Its cloud-based Atrius IoT solution, which uses occupancy data and analytics to control a connected lighting platform, is expected to be a meaningful recurring revenue driver down the road. And to expand its cloud footprint, Acuity just announced the acquisition of Rockpile Ventures, an early-stage accelerator of artificial intelligence companies (along with naming a Rockpile co-founder as president of Acuity’s Intelligent Spaces group). Rockpile is known for driving startups to partnerships with major cloud ecosystems, enabling faster adoption from proof-of-concept trials to market scale, and the deal is expected to position Acuity for stronger growth in lighting solutions, software and cloud application development. The stock’s change in character was driven by Acuity’s sterling fiscal Q2 report (released March 31), in which the firm reported per-share earnings which blew the consensus view out of the water (22% above expectations). The improved outlook—along with the accelerating return to work trend—has prompted several Wall Street institutions to upgrade the company in recent weeks. Analysts see single-digit growth.

Technical Analysis

Last November’s rally drove AYI from 90 to 120 in under a month, but from there shares spent several months in a fairly tight trading range just above 120. An earnings-related breakout occurred on the last day of March, with AYI recently hitting a multi-year high of 195. The dip of the past two weeks has brought shares down to their 10-week line, its first test of that key support area—it should be a solid risk-reward buying opportunity.

AYI Weekly Chart

AYI Daily Chart

Analog Devices (ADI)

analog.com

Why the Strength

Analog Devices is one of the big boys on the chip industry, with a market cap approaching $60 billion, 45,000 different products, 125,000 customers and a long history of solid, highly profitable (though not often exciting) fundamental performance. Today, there are a few main reasons the stock has come to life. First, of course, is the overall chip shortage that should carry on through at least the rest of this year; Analog was smart enough to expand production ahead of this latest demand wave, so while it’s still capacity restrained, it’s less so than many peers. Second, the firm is playing in some growth-y areas, including connected factories, electric vehicles, advancements in the electrical grid, energy storage solutions, communications and more. Third is the upcoming merger with Maxim Integrated, which has been lingering since initially announced last June but should provide more scale and even greater free cash flow, which is the fourth piece of the story—Analog Devices has been spinning off tons of cash recently (about $6 per share over the past year), and that should grow further, with one analyst seeing free cash flow nearly doubling to $4 billion by 2023, nearly all of which could be returned to shareholders. Back to the here and now, Analog pays a decent dividend (1.7% annual yield) and, after a great quarterly report last week (sales up 26%, earnings up 43%), analysts see earnings surging 28% this year and chugging even higher down the road—and those should prove conservative once the Maxim deal officially goes through. It’s not changing the world, but Analog is a solid company with some upside catalysts ahead.

Technical Analysis

As a big outfit, ADI isn’t a dynamic stock, but it can make some big moves when it wants to. The stock broke out of a long base in November, which carried the stock from 120 to 160 within a couple of months. But the growth stock correction took hold after that, leading to a tedious, mostly-sideways four-month rest that nearly saw ADI tag the 40-week line. But last week’s earnings report likely changed perception, with shares popping back near their highs on excellent volume. We’re OK starting a position here.

ADI Weekly Chart

ADI Daily Chart

Avery Dennison Corp. (AVY)

averydennison.com

Why the Strength

Packaging companies tend to get lost in the mix due to their lack of sex appeal. But this year’s economic reopening has given renewed importance to package makers as global industry ramps up. Avery Dennison designs and manufactures a wide variety of materials, including pressure-sensitive adhesives, apparel branding labels and tags, radio-frequency identification (RFID) inlays and specialty medical products. But its self-adhesive labels are what the company is best known for, as it’s a world leader in this category. In Q1, label and graphic materials was by far the firm’s leading segment by revenue, accounting for nearly $1.4 billion in sales, up 17% from a year ago and above consensus expectations. Retail branding and information solutions sales of $438 million were 20% higher, while industrial and healthcare materials revenue of $192 million rose 30%. As a result, the first-quarter top line was 19% higher, and the bottom line of $2.40 beat the consensus by 38 cents. So-called “smart labels” involving RFID tracking technology are a big part of the company’s growth initiative, and as the world’s largest UHF RFID partner, Avery is focused on building a broader smart labels platform to bridge the physical and digital worlds. To this end, Avery recently acquired ZippyYum, an inventory management software startup for food retailers. It also launched a connected product cloud platform dubbed atma.io, capable of creating and managing digital identities for everyday items across all industries (and currently used by sportswear brand adidas). Looking ahead, Wall Street sees full-year 2021 earnings rising 22%, which will likely prove conservative.

Technical Analysis

AVY wasn’t in favor for most of last year’s impressive market rebound, spending a good part of 2020 stuck in a narrow range between roughly 100 and 125. But the stock experienced a change in character in September as economic reopening hopes gained traction. The only real difficulty since then was a shakeout in early February, but AVY has acting pristinely since then. After ramping to new highs at the end of April, the two-week pullback marks a solid entry point.

AVY Weekly Chart

AVY Daily Chart

Blackstone Group (BX)

blackstone.com

Why the Strength

Bull market stocks remain in good shape despite some more wobbles in the broad market, and we think that makes a lot of sense—while growth stocks have had their issues, the odds strongly favor higher prices (for most everything, stocks, real estate, commodities and more) down the road. Blackstone is one of the kings of the bull market sector, which is obviously the main draw, with huge stakes in real estate and private equity (each about one-third of total assets under management), credit and insurance (24%) and hedge fund solutions—as asset prices lift, so do Blackstone’s value and cash flow. But there are two more pieces to the pie that are attractive here. First, as of a couple of years ago, the company became a C-corp.; gone are messy K-1s, replaced by 1099s and qualified dividends, which makes the stock more attractive to a greater number of funds. Second, Blackstone itself has shifted to a fee-based model, which leads to far greater earnings (and dividend) stability and growth, as opposed to being dependent on windfalls from asset sales. All of this is bearing fruit today—in Q1, the firm’s fee-related earnings per share rose to $2.20 for the past year, up from $1.57 a year ago, while total distributable earnings more than doubled (thanks in part to easy comparisons). And that dependability is leading to some solid shareholder returns (82 cent per share quarterly dividend was paid on May 10; $2.69 per share payout over the past year), though the payouts are variable. There are a lot of moving parts here, but the big picture idea is easy to understand as the bull market continues.

Technical Analysis

Like many stocks, BX topped early last year, crashed, recovered and then meandered through October before kicking into gear on the vaccine news. And the action since then has been smooth and superb, with just one shakeout (in early March, with the market) along the way. More recently, BX bounced off its 25-day line and moved to new highs on decent volume. If you want in, we prefer to play pullbacks.

BX Weekly Chart

BX Daily Chart

Children’s Place (PLCE)

childrensplace.com

Why the Strength

The Great Reopening trend, along with stimulus in U.S. consumers’ pockets, has given a much-needed boost to turnaround apparel retailers. The Children’s Place is a specialty retailer of children’s apparel and accessories, also marketing apparel under the Place, Baby Place and Gymboree brand names, and its latest earnings report provided a glimpse of how much consumer spending trends have improved in the last quarter. First-quarter revenue rose an eye-popping (and estimate-beating) 71% from a year ago, and that wasn’t just because of easy comparisons—the firm managed to beat first-quarter 2019 results despite having 27% fewer stores this year! Gross margin also expanded, driven by higher merchandise margins in both the company’s digital channel and storefronts, lower occupancy expenses, favorable lease negotiations and storefront reductions. Per share earnings, meanwhile, were expected to be near break-even, but came in at a whopping $3.25 per share. Most importantly, management was confident that the momentum will continue as the company continues to increase its digital sales channels. (On that front, the firm indicated its “steady state” digital penetration rate has risen to a respectable 50%.) Looking ahead, The Children’s Place said Q2 is off to an excellent start thanks to “unprecedented stimulus” and strong product acceptance. It further anticipates the return of in-person school learning across the country this fall will provide additional support, along with new child tax credits that will provide 88% of American families with $250 to $300 per month per child. Analysts agree with the sanguine outlook, seeing earnings exploding back to north of $7 per share this year.

Technical Analysis

PLCE peaked at 160 in 2018 and spent the next two years in decline, finally bottoming at 10 last March. The turnaround from there has happened in stages, with a quick move to 58 last June, then a sharp drop to a secondary (higher) low of 19 in August. That low was followed by a tell-tale volume spike—around 10 times the daily average—which paved the way for the steady advance since then. A constructive three-month consolidation range preceded last week’s rally to the century mark. We’re fine nibbling on dips.

PLCE Weekly Chart

PLCE Daily Chart

EOG Resources, Inc. (EOG)

eogresources.com

Why the Strength

EOG Resources is yet another developing cash cow in the energy field, with heavy investments in acreage and drilling in years past leading to dramatic CapEx cutbacks, drilling cost reductions and massive profits even at modest energy prices. The firm is a big boy in the industry ($47 billion market cap) with operations a ton of different basins (Powder River, Williston, DJ, Anadarko, Delaware and Eagle Ford), and it’s put in a ton of work to cut costs and emphasize wells that will produce high rates of return (60%) even at $40 oil, with slower decline rates; it has a whopping 5,700 yet-to-be-drilled locations that fit this description and that’s where the firm is doing its work these days. Like its peers, all of this is leading to some eye-opening results: The company thinks it will crank out $3.4 billion of free cash flow (about $5.80 per share) at $60 oil, and even if prices tumble, it should be able to afford its solid regular dividend (2.1% annual yield) even if oil prices average just $39. (Like many of its peers, EOG is actually losing money this year on its hedges at $60 oil, so cash flow could presumably grow next year if prices remain flat.) Up at these prices, EOG is busy cutting debt (it paid off a $750 million bond tranche in February; it already has a strikingly low debt-to-market cap ratio), hiking the regular dividend and paying special dividends ($1 per share, to be paid alongside the regular dividend in mid July). The longer oil prices can hold up around these levels, the more cash EOG is likely to spin off.

Technical Analysis

EOG has a similar pattern to most of its peers, with lackluster performance through November of last year, a big rally through February and then a couple of months of rest. But it’s separating itself from the pack of late—EOG flashed a solid volume clue after earnings in early May, easily moving to new price and relative performance highs. And the chop since then (mostly on tame volume) looks normal. We think you can enter here.

EOG Weekly Chart

EOG Daily Chart

EPAM Systems (EPAM)

epam.com

Why the Strength

As the global economy becomes increasingly digitized, companies specializing in IT engineering will be among its biggest winners. A leader in this $1 trillion space is EPAM, which offers scalable software, business consulting and advanced technology design solutions to help customers digitally transform their businesses. It boasts a growing global customer base including an estimated 83% of the Fortune 500 and has lately been in acquisition mode. In March, the firm acquired digital consultancy PolSource (a boutique Salesforce partner), which gives EPAM access to over 350 specialists with experience developing multi-cloud, end-to-end solutions on the Salesforce AppExchange across many key industries. The move is also intended to give EPAM exposure across the Salesforce domain from engineering to advisory on specific clouds and industry verticals and is a big reason for the stock’s recent strength. (Management believes it will position EPAM as a top player in the Salesforce services area.) Earlier this month, EPAM bought Israeli-based White-Hat to expand its comprehensive cybersecurity expertise portfolio and expand its Mid-East exposure. Plus, it just bought Netherlands-based data analytics firm Just-BI, which is expected to boost the company’s advisory capabilities in the E.U. In Q1, EPAM saw its top line increase 20% to $780 million, while the bottom line rose 27% to $1.81 per share (a 12-cent beat), prompting management to raise full-year guidance. Analysts see the long-term growth story remaining on track, with 22% to 24% growth both this year and next.

Technical Analysis

EPAM has been a steady-and-strong performer for many years, typically showing relative strength during broad market setbacks. The latest period of broad-based volatility was no exception as EPAM (after a five-month rest) made new highs in march and April while the market struggled. And last week, the stock popped on good volume after the 10-week caught up. We favor entering on a pullback.

EPAM Weekly Chart

EPAM Daily Chart

Owens Corning (OC)

owenscorning.com

Why the Strength

Owens Corning needs little introduction, as the first is in its 66^th year as a Fortune 500 firm, thanks mainly to its dominant, market-leading position in a variety of construction-related markets, including insulation (#1 in North American residential fiberglass), roofing (#2 market share) and composites (#1 in glass non-wovens, #2 in global glass fiber). Obviously, the booming housing market and prospects for increased infrastructure spending are helping perception, while the firm’s history of cost controls mean much of the increased business is falling right to the bottom line—indeed, we think a big story with Owens Corning is just how much earnings power the firm actually has. After years of earnings in the $4.40 to $5.20 per share range, analysts see the bottom line catapulting to nearly $8 per share this year with more growth beyond that … and free cash flow is actually even higher than that! The Q1 report played along with those expectations, with earnings lifting 179% on “only” a 20% revenue increase, well ahead of expectations. That’s good enough, but management is helping with a modest share buyback program (share count down 2.6% over the past year) and dividend (1.0% annual yield). We have seen some wobbles from housing-related stocks of late on fears the Fed be in play, but big picture, we think demand for Owens’ wares should continue to kite higher for a long time to come.

Technical Analysis

OC has been in a jagged advance since last July, making excellent progress while suffering a few shakeouts every couple of months, sometimes dipping below the 10-week line (seen last October, this January and March). Maybe OC follows that same script, but so far, the stock has been resilient, finding support at its 25-day line and holding near its highs. We favor entering on minor weakness with a stop in the mid 90s.

OC Weekly Chart

OC Daily Chart

Progyny (PGNY)

progyny.com

Why the Strength

The average age of a first-time mother in the U.S. is 26, up from 21 in 1970, and of course many working professionals don’t start families until much later in life than that. Delayed motherhood is closely associated with education as college graduates put off becoming parents to establish their careers and establish financial stability. Younger, talented people are also the same folks employers want to attract and retain, but fertility issues are expensive: treatments are a $7 billion market and associated problems, like pre-term births, cost employers another $40 billion annually. That’s where Progeny comes in, for both couples trying to conceive and for firms wanting a productive workforce: It’s the solutions provider for employers seeking to provide fertility benefits. Founded five years ago, Progeny now has a network of 600 fertility clinics across the U.S., including 46 of the top 50 by volume. The company is growing fast because it provides a demonstrably superior set of patient outcomes – a 25% higher live birth rate from each treatment round and a 72% decrease in multiple births, an event that often comes with additional medical costs and time off. The company produces this through a comprehensive set of treatment services and using data from all its patients to drive treatment improvements. That Progeny has near 100% client retention demonstrates the approach works for its 180 corporate customers, and that’s just the tip of the iceberg—in a year or so 75% of large U.S. employers are expected to offer fertility benefits, up from about 50% today. Progeny sales should rise 54% this year to about $525 million with earnings reaching 46 cents, a 171% increase over 2020, and we think there’ll be years of growth beyond that. It’s a great story.

Technical Analysis

PGNY broke out of a post-IPO base last November and enjoyed a great run into late February, when Q4 earnings and a weak market brought it down. The action since then has been choppy, but importantly, the stock has etched a series of higher lows (39 in March, 42 later in March, 47 two weeks ago) and is now racing back toward its high. PGNY is still a bit thin and wild, but we think a dip (and, ideally, some tightness) would be tempting.

PGNY Weekly Chart

PGNY Daily Chart

Roblox Corporation (RBLX)

corp.roblox.com

Why the Strength

New issues are always tricky, especially in this environment (go look at SNOW, PLTR and ABNB for some examples of the potholes out there). But Roblox has all the makings of a new leading glamour stock, with a one-of-a-kind offering and growth numbers that are hard to beat. The company is commonly known as a gaming app that kids play, but that’s underselling it by a long shot—Roblox’s countless 3D worlds enable what the firm calls “human co-experiences,” allowing people to play or goof around with their own personalized 3D character in a new form of social interaction. For content, most of it is produced by more than eight million developers who make these worlds (along with avatar items that people can buy) and get paid based on how popular the world is and how many items are sold. Thus, this is really a new gaming idea and platform, and while there are many goofy things out there now, the potential for branded worlds (from, say, Disney) and non-gaming applications (building a world of ancient Rome for education; virtual concerts, etc.). Q1 results came out a couple of weeks ago, and the numbers were fantastic (revenues up 140%, free cash flow came in at 34 cents per share), but the user base metrics were even more encouraging—Roblox’s total user count lifted 79%, but importantly, those 13 and older grew 111% and now make up nearly half of the total. Plus, even as the world got back to normal in April, trends remained strong (bookings up 8% from March and user growth remained strong). There’s no doubt the pandemic helped and growth will slow, but this isn’t looking like a pandemic stock that’s already seen its best days—instead, Roblox’s unique platform and offerings could be the next big thing in gaming.

Technical Analysis

RBLX just came public in March, so there’s not a lot to analyze, but a few things stand out to us. First, the stock is extremely liquid, a sign many big investors are playing. Second, the price-volume action has generally been solid; even the failed pop in mid April showed good-volume buying. Then there was the bullish reaction to the Q1 report two weeks ago, and of course the big-volume breakout on Friday. To be clear, breakouts have been low-odds bets in this environment, but everything else is in place—we’re OK starting a position here, but keep it small and use a loose leash.

RBLX Weekly Chart

RBLX 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 June 1, 2021.