May 7, 2021

Growth Horrid, Broad Market OK

Current Market Outlook

While there are still a handful of growth stocks in decent shape, the spate of setups we saw during the past few weeks has been replaced by a ton of breakdowns, including many big winners from last year slicing below longer-term support. Meanwhile, the broad market is OK, while some areas (commodity stocks, financials and many turnaround situations) are accelerating higher. For the here and now, sticking with what’s working (and avoiding what’s cracked) is key, but also keep in mind that such divergences can lead to wild action and reversals. Thus, some buying here or there is fine, but pick your spots (and stocks) carefully, take partial profits on the way up and don’t get too aggressive.

This week’s list is chock-full of names that are thriving in this environment, including a few that are getting going after multi-month rests. Our Top Pick is Wesco (WCC), a dominant electronic products distributor, which just gapped out of a base on earnings last week.

Celanese (CE)

celanese.com

Why the Strength

Like many cyclical industries, chemical producers are seeing demand for commonly used inputs rising while supplies are tightening. This trend means greater pricing power—and bigger profits—for producers like Celanese, a global chemical and specialty materials manufacturer of a wide variety of products essential to everyday living, including intermediate chemicals used in paint, adhesives, packaging, pharmaceuticals, autos and electronics. The company is a major producer of acetic acid, a key intermediate, and its Clear Lake, Texas plant is the lowest-cost acetic production plant in the world (and is in the process of doubling capacity). Winter storm Uri forced three of four large U.S. acetic acid producers offline, contributing to the chemical’s tight supply and boosting prices. Moreover, the company reported “really robust demand” for acetic acid beginning in last year’s fourth quarter, thanks in part to China’s manufacturing rebound. This led to stronger than expected earnings in Q1, as Celanese reported a 50% top line beat of $1.8 billion (up 23% from a year ago), and a 15% bottom line beat of $3.46 per share (up 51%). Acetyl chain segment sales increased 32% in the quarter, while the company’s engineered materials sales rose 15%. With supply chains still tight, management doesn’t believe its customers will return to “near-normal” inventory levels until Q3. Consequently, Celanese expects its momentum will persist, allowing it to deliver strong earnings through the remainder of 2021 (analysts predict a 74% bottom line bump this year). Based on this outlook, the company also plans $500 million in buybacks in the first half (about 2.5% of the company), along with potentially “significant M&A” in 2021 and 2022.

Technical Analysis

Despite its cyclical nature, CE is behaving very much like a growth stock. A sharp pullback in January penetrated the 50-day line but served to shake out out the weak hands while breathing new life into the stock. The latest move to new highs was catalyzed by earnings. It’s a touch extended to the upside, so we favor entering on a pullback toward its moving averages.

CE Weekly Chart

CE Daily Chart

Cleveland-Cliffs (CLF)

clevelandcliffs.com

Why the Strength

Whenever surging economic growth meets short supplies of key commodities, the winner is almost always commodity stocks. And that’s exactly what’s happening in the iron and steel industry right now, which is boosting the fortunes of Cleveland-Cliffs, one of America’s largest iron ore and steel producers. Steel prices have more than tripled over the past year alone, with prices of flat rolled steel (widely used in automotive, machinery, construction, and appliances) hitting record highs across all major regions of the world. And Cleveland-Cliffs is benefiting in a big way now that its two big acquisitions (AK Steel and ArcelorMittal USA) have closed. In Q1, revenues soared due to the acquisitions, while earnings lifted to 35 cents per share. But that’s just the tip of the iceberg—using conservative pricing assumptions, management believes Cliffs’ EBITDA will lift to a whopping $4 billion this year, which is well over one-third of the current market cap! Now, to be fair, analysts see this pricing environment as transitory (2022 earnings are projected to fall by half), but (a) they’re still expected to be at $1.74 per share, so it’s not like the stock is crazy valued, and (b) given the fact that the industry has been in the doldrums for years (along with accompanying production cuts and industry consolidation), it’s a good bet those estimates will prove too low. If commodity stocks remain strong, there’s little doubt Cleveland-Cliffs will participate.

Technical Analysis

CLF got going with most cyclical names last fall and had an awesome run into early January, but it finally met with sellers near 19. There was some big-volume selling in February and a giant-volume pop in late March, but net-net, CLF spent about three months going nowhere fast before buyers showed up again. Shares accelerated higher and lifted to new highs of late but reversed hard today. Even so, the stock is still in good shape--we’re OK grabbing some here or on further weakness.

CLF Weekly Chart

CLF Daily Chart

Devon Energy (DVN)

devonenergy.com

Why the Strength

After a two-month rest, many energy stocks are perking up. Energy prices (oil in the $60s, natural gas in the $3 range) are certainly one reason for the strength, but it’s not like these prices are sky-high. Instead, a big factor is the sea change in the industry—with heavy investments made and industry consolidation having taken place, leading players like Devon Energy are spinning off ridiculous amounts of cash even at the current (or lower) energy prices. The company (partially thanks to its recent merger of equals with WPX Energy) is active all over the country; the Delaware basin is the largest chunk but it’s also is active in the Williston, Anadarko and Powder River basins, as well as the Eagle Ford in Texas. Management is aiming for slow, steady production growth (up to 5% annually), but even with money-losing hedges this year, it’s become a cash cow: In Q1, it produced 59 cents per share of cash flow after CapEx, and because of an innovative cash return policy, that led to a 34 cent per share quarterly dividend (to be paid in late June). But the story is much larger than that—at $60 oil, the top brass sees after-CapEx cash flow around $2.70 per share! Beyond the dividends is the decrease in boom-bust fundamentals with Devon and the sector as a whole; the odds of an implosion are a fraction of what they used to be as debt is paid down (north of $700 million in Q1 alone; no debt maturities until 2023) and cash flow should be strong even if oil slips (north of $2 per share at $50 oil). And that means big investors will probably be more apt to build larger positions, thinking they won’t be left at the altar. All in all, we think there’s good potential here as investor perception improves.

Technical Analysis

The huge rebound from the vaccine announcement in early November through early March saw DVN (and most of its peers) double or triple, albeit from hugely oversold levels. The action since then has been solid, with nine weeks of consolidation, very little distribution and a shakeout a couple of weeks ago that brought it back to levels seen in mid-January. Now DVN is pushing higher on solid volume—it’s always possible the stock might have another wobble or two, but we’re OK starting a position here.

DVN Weekly Chart

DVN Daily Chart

Fortune Brands Home & Security (FBHS)

fbhs.com

Why the Strength

The red-hot real estate market is benefiting more than just homebuilders; companies that provide home products and services are also enjoying sunny days. Fortune Brands is the parent of several subsidiaries that offer products in the cabinetry, doors and decking, plumbing and security product spaces (including brands such as Master Lock, SentrySafe and KitchenCraft). Demand for its decking, plumbing and cabinets has grown vigorously in the wake of lockdowns as millions in the U.S., Canada and Europe have turned to home improvements in the past year, and home improvement spending has remained resilient even as the world turns right side up. This was illustrated by a strong Q1 in which Fortune reported exceptional double-digit sales growth across all its brands, channels and regions. The top line was 26% higher from a year ago, while a bottom line of $1.36 per share came in 68% higher (thanks partly to easy comparisons), driven by global housing market strength. Fortune delivered double-digit growth in both its make-to-order and value-priced categories, while each of its segments outperformed: Cabinet sales were 31% higher, plumbing was up 33% and outdoor and security sales rose 47% from a year ago, as international markets continue to reopen. With lumber becoming scarce during the housing boom, the company reported selling every board it makes and expects to grow the decking business by around 25% in 2021, with plans to increase capacity in the coming year. Going forward, Fortune believes “attractive demographics,” plus strong demand and a low new home supply, will provide a multiyear tailwind for the sector, which is obviously a good thing. Full-year revenue is forecast to grow 21%, with earnings expected to rise 34%. A 0.9% dividend doesn’t hurt the cause.

Technical Analysis

FBHS rebounded strongly from last year’s sell-off, making a new high by July—well before most stocks fully recovered. But after running into resistance at around 90 last summer, the stock spent several months consolidating in a lateral range. Following a brief kiss of the 40-week line in February, it was off to the races again for FBHS, which has now marched up 10 weeks in a row, a sign of momentum that doesn’t usually up and die. Pullbacks would be tempting.

FBHS Weekly Chart

FBHS Daily Chart

Franklin Resources, Inc. (BEN)

franklinresources.com

Why the Strength

Franklin Resources is one of the largest active asset managers in the U.S. with nearly $1.5 trillion in total assets under management (AUM). With the proliferation of index-tracking funds and ETFs these days, active stock-pickers like Franklin Resources had fallen out of favor with investors. But this company has a strong franchise and has moved into specialized investment products including alternative assets that are attracting clients. Franklin also works in close partnership with an established network of financial professionals to design customizable investment solutions. Roughly one-third of its AUM is in stocks, while fixed-income accounts for 45% and multi-asset and alternatives making up nearly 20% of the mix. Possibly the biggest drivers of the stock’s strength is the overall bull market and the return of many investors to the market for the first time in years, as well as its buyout of Legg Mason, giving it increased scale and leverage to buoyant financial markets. Just last week the company reported quarterly sales of $2.08 billion, up 58% from a year ago (thanks to the Legg Mason acquisition), while earnings of 79 cents per share were up 20%. Franklin noted that alternative asset inflows of $6.2 billion nearly doubled from the prior quarter, driven mainly by the firm’s unique real estate, alternative credit, hedge fund and infrastructure strategies. (Franklin now has $131 billion in total alternative assets under management.) Fixed income inflows likewise increased by a big 27% from the prior quarter to $ 53.5 billion. After years of flat-ish earnings, analysts see Franklin’s bottom line headed up (22% this year), and the bargain valuation (12 times earnings, 3.3% dividend yield) should keep big investors interested.

Technical Analysis

BEN will never be confused with a super-fast mover, but we think the character of the stock has changed after years in the doghouse; it was 44 in 2017 but was sitting near 20 last Halloween. BEN has been mostly up since then, with a couple of brief rest periods, and last week’s earnings-induced pop bodes well. We favor aiming to enter after a little downside.

BEN Weekly Chart

BEN Daily Chart

Funko, Inc. (FNKO)

funko.com

Why the Strength

Funko excels at feeding fandom. It’s best known for its POP! series of figurines, four-inch tall plastic models with large heads and big eyes that are usually caricatures of fictional (like Harry Potter and Ronald McDonald) and real celebrities. With 900 licensed lines including Disney’s big brands, the major sports leagues, video game publishers and global movie studios, Funko has something to appeal to seemingly anyone, young to old or serious collectors to impulse buyers. It’s also not terribly reliant on any one licensee, with none accounting for over 6% of sales. The pandemic has been a boon for the entire collectibles industry and Funko has participated—in Q1 (usually weak following the holidays), the company saw sales growth accelerate in a big way to 38%, while margins expanded as well, driving the bottom line to 24 cents per share, up from a loss a year ago and a huge 13 cents above expectations. Figures are 80% of Funko sales and they continue to be popular, with revenues up 35% in the quarter. Even better in the eyes of investors is the possibility of Funko expanding further outside figurines to things like games and soft goods like backpacks and T-shirts. The latter piece of the business performed even better, led by its Loungefly apparel business, which saw an 82% surge in sales. And then there’s the new NFT craze (non-fungible tokens, digital, blockchain-based limited rights to unique images and video clips), which Funko bought into during April by acquiring TokenWave, a leading platform for organizing and tracking NFTs. (Funko will start selling unique NFTs through that platform next month.) Analysts see earnings more than doubling this year.

Technical Analysis

FNKO had been a low-priced, speculative name for most of its life (IPO in late 2017), but it changed character with many stocks last November. The buying was solid, with shares reaching 14 in January before a little rest. Then came a wave of buying in March when NFT rumors were floated; that buying didn’t last long, but FNKO held firm and, after tightening up for a bit, exploded following Q1 earnings last Thursday. If you want in, you can start small on today’s dip or look for a bit more weakness.

FNKO Weekly Chart

FNKO Daily Chart

Revolve Group (RVLV)

revolve.com

Why the Strength

Even before the pandemic upended the retail fashion industry, Revolve was already shaking things up with its trendy offerings and popular digital platform. The firm has since gained a reputation as being the retailer of choice among fashion-conscious Millennials by offering thousands of luxury apparel, footwear and beauty products from more than 500 third-party brands (as well as its own brands) via two segments, the upscale Revolve and the higher-end Forward fashion product line. Founded in 2003, the company built a revolutionary technology platform with automated inventory management, pricing and even trend-forecasting algorithms to predict changes in fashion taste. Revolve tests hundreds of new styles each week in small volumes, then pursues the most popular trends that emerge, allowing it to sidestep discounts and giving it one of the highest gross margins (54%) of any fashion retailer. Last week Revolve released first-quarter earnings which gave investors lots of reasons for optimism. Sales were up 22% from a year ago and crushed expectations, while a profit of 30 cents per share was an eye-popping 400% higher than a year ago (and topped by 17 cents). Free cash flow increased 300%, and though active customer count decreased 3% (to 1.5 million), it increased sequentially (rebounding along with shopping trends) as visitors spent an average of $256 per order. Revolve also reported that March was the second-highest month in its history for attracting new customers, and it delivered the fastest annual growth in traffic despite mobility restrictions in most markets. As a result, management expressed confidence in the longer-term outlook as the economy reopens. Analysts agree and see 41% and 38% revenue growth for Q2 and Q3, respectively, and it’s very likely earnings estimates (up just 4% for 2021) are conservative.

Technical Analysis

RVLV went from a high of 48 after its IPO in mid-2019, down to 7 after last year’s crash, and up to 25 last August. Then came a tidy base-building effort, and the breakout in December launched an advance that’s continued to this day. Volatility has been crazy at times (check out the late February action), and that popped up again, with last week’s big-volume breakout seeing big selling today. The way we prefer to play these situations is to buy on the way up--if RVLV bounces nicely, it’ll be sign today was a shakeout.

RVLV Weekly Chart

RVLV Daily Chart

Schlumberger (SLB)

slb.com

Why the Strength

To this point, oil service and equipment firms have lagged explorers, but the longer this nascent industry recovery goes, the more demand will develop (especially overseas) for big outfits like Schlumberger. The firm, of course, is one of the granddaddies of the oil service sector, and the industry doldrums had it following the usual script: Costs were slashed and the company reorganized into a few new areas, including its Digital and Integration segment (largest in terms of pretax income), which focuses on helping drillers adopt cloud and automation to increase efficiencies. There’s also a focus on services and technology that address the climate issue (reduced flaring and methane emissions, etc.). But at day’s end, business (and the stock) will likely be driven by the capital equipment cycle of explorers (well construction and reservoir performance segments), and the news is increasingly bright on that front—adjusted for some small divestitures, North American Q1 revenues were up 10% sequentially, free cash flow was positive for the third straight quarter, while international prospects are looking solid (where the vast majority of Schlumberger’s money comes from), with double-digit expected growth in the second half of this year and potential boom times in 2022. Possibly most important was that the company is now lean and mean; management has stated it believes cash flow will return to 2019 levels even if revenues make up only half of the decline! Translation: Sales and (especially) earnings are headed way up in the quarters to come as worldwide energy activity picks up. Analysts see earnings up 63% this year and 42% next, while the dividend (1.6% annual yield) puts a nice cherry on top of this early-stage turnaround story.

Technical Analysis

SLB was at 115 in 2007 and 118 in 2014, but was sitting around 14 at the end of last October, just to give you an idea of how long this stock has been out of favor. But the character of SLB has clearly changed, with a powerful November-through-February rally, a very reasonable seven-week retreat, and now, a pre- and post-earnings move to new recovery highs. As with many in the group, a little chop wouldn’t shock us—you could nibble here, though we prefer to sharpshoot an entry down a point or two from here.

SLB Weekly Chart

SLB Daily Chart

Under Armour, Inc. (UAA)

underarmour.com

Why the Strength

After years of underperformance, Under Armour is one of this year’s most impressive high-profile turnaround stories. The maker of footwear, activewear and casual apparel posted a meager 1% sales increase in 2019 and a 15% sales decline in 2020. But last year’s pandemic obscured an inflection point in the company’s trajectory, as new management implemented cost-control and inventory measures along with a new marketing strategy. The result of these initiatives is a vastly improved, streamlined company that appears to be back on track. In Q1, the top line rose by a mouth-watering 35%, thanks to higher sales in its primary U.S. market. Overseas revenue, meanwhile, rose 58%, including a 69% increase in global e-commerce sales. Footwear revenue increased 47% and accessories revenue increased 73%. Of significance, Under Armour has returned to the black after posting a 16 cent per-share profit—a major improvement from the 34-cent loss a year ago and 12 cents above estimates. Going forward, management believes sales will be up this year at a high-teens rate, with per-share earnings being significantly above former guidance. Wall Street is equally sanguine, with analysts predicting a 71% top line increase in Q2 and 19% higher sales for 2021 (based on a return to “healthy” sales growth in North America). In view of the improved outlook, a major institution upgraded Under Armour last week (a reason for the strength), citing improvements in the firm’s direct-to-consumer (e-commerce) channel, combined with the “analytics to drive stronger product innovation.”

Technical Analysis

UAA was in the doghouse for the last couple years, falling from an apex of 28 in 2019 to a nadir of 7 during the pandemic panic. Shares then spent six months tightening in a narrow range before finally taking flight last October, kissing the 50-day line along the way up in January before hitting resistance near 23 in February. What followed was a tidy 11-week range, with earnings briefly kicking the stock to new highs before sliding back into its base. There’s good support in here, so we’re OK starting a position, albeit with a stop in the low 20s.

UAA Weekly Chart

UAA Daily Chart

WESCO International (WCC)

wesco.com

Why the Strength

Wesco (covered in the December 21 report) capped off a solid 2020 by acquiring cable and electrical wire provider Anixter International, a move which doubled Wesco’s size and cemented it as the U.S.’s largest electrical products distributor. The benefits of that merger (along with the general economic strength that’s boosting demand) is a main reason for the stock’s strength—the company’s Q1 results (released last week) provided validation for the merger, as Wesco outperformed in its end markets, accelerated the pace of its integration plan and delivered significant margin expansion and free cash flow generation. The company is also positioned to benefit from what’s expected to be a strong year for industrial and utility customer spending as the economy rebounds. Wesco reported positive sales momentum across all three of its global business units in Q1, and its backlog reached a record level (up a huge 20% sequentially). The company further reported its highest gross margin since 2016, which it attributed to a focus on value-based pricing. Revenue of $4 billion in the first quarter was a whopping 105% improvement from a year ago (bolstered by the buyout), while per-share earnings of $1.43 (up 57%) beat estimates by 79%. Management is confident with the pace of the Anixter integration, prompting it to substantially raise full-year sales and earnings guidance. Going forward, the company is also focused on reducing leverage (which has already been cut by $500 million in the last three quarters), and expects an improving macro environment to support the optimistic 2021 outlook. Analysts see a bright future for Wesco, with earnings up 20%-ish both this year and next. It’s a solid story.

Technical Analysis

After hitting a panic low of 14 last March, the recovery for WCC was fast but uneven, as shares rose in a choppy fashion and spent several months building a base. The payoff came in November when WCC catapulted higher and kept right on rising, up 11 weeks in a row, which usually bodes well longer term. A three-month, up-and-down consolidation followed, with last week’s earnings-induced breakout looking good. Short term, it’s a bit extended, but we think this kickoff will persist.

WCC Weekly Chart

WCC 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 May 17, 2021.