November 15, 2021

Further Near-Term Shenanigans Possible

First off, due to our regular schedule (two weeks off all year), there will be no Top Ten next Monday (November 22), though we will likely do a Movers & Shakers update pre-Thanksgiving.

Onto the market, big picture, we remain quite bullish, but near term, we think there’s the possibility of further shenanigans—we’re seeing a few stocks crack key levels, and with most measures of sentiment showing complacency/giddiness, more pain could be in store to raise the discomfort level. We advise following the tried-and-true method of holding your strong, resilient stocks, while keeping stops in place on names that are beginning to wobble. We’re pulling our Market Monitor back down to a level 7 to respect the recent iffy action, though we still think the next big move is up.

This week’s list has a lot of good-looking charts, including another batch of names that recently reacted well to earnings. Our Top Pick is one of those, with a story benefiting from both housing and long-term growth trends.

Market Overview

Further Near Term Shenanigans Possible
Big picture, we remain quite bullish, with the strong trends in the major indexes and the huge amount of big base breakouts (including many on earnings) likely to bode well when looking out a couple of months. Near term, though, we think there’s the possibility of further shenanigans—we’re seeing a few stocks crack key levels, and with most measures of sentiment showing complacency/giddiness, more pain could be in store to raise the discomfort level. That doesn’t mean you should do a ton of selling; taking some partial profits here or there is fine, but we advise following the tried-and-true method of holding your strong, resilient stocks, while keeping stops in place on names that are beginning to wobble. We’re pulling our Market Monitor back down to a level 7 to respect the recent iffy action, though we still think the next big move is up.

This week’s list has a lot of good-looking charts, including another batch of names that recently reacted well to earnings. Our Top Pick is Trex (TREX), which blasted out of a long consolidation on earnings last week.

AppLovin Corporation (APP)

applovin.com

Why the Strength?
Apple’s recent move requiring developers to get user permission to track them across apps and websites presents huge headwinds to marketers, who have relied on tracking to target ads and product pitches to specific customers. Yet the change seems to be benefitting Applovin, which provides marketing and monetization services for app makers. Last week the company reported Q3 revenue that bested expectations, with revenues coming in at $727 million as app makers turned to Applovin’s deep use of statistical modeling and machine learning to replace cookies. Applovin offers publishers services for finding potential new users for their apps, marketing to them and measuring results. It also creates eye-catching ads for clients through its in-house studio, Spark Labs. The company is more than just an ad agency, however: It creates and runs hundreds of games, from various flavors of Solitaire to multiplayer roleplay, creating ad inventory to sell while (most importantly) gathering data on players, which it uses to tweak its algorithms. The biggest news of late came last month, when the firm announced a $1.05 billion cash deal to buy MoPub, Twitter’s business for mobile marketing and advertising. When the deal closes in 2022, MoPub will bring more than a hundred new partners and its own library of 45,000 apps, which should add about $250 million a year in revenue and solidify Applovin’s position in the industry. Analysts see revenues up 32% in 2022 with earnings surging to 83 cents per share (up from 18 cents this year).

Technical Analysis
APP came public in April and ran up to 90 in June before suffering the typical post-IPO droop that took shares back to 55. The stock rounded out its base from there, rallying to 80, tightening up for a bit then breaking out early last month after the MoPub buyout. Since then, it’s been up six weeks in a row, including last week’s massive-volume surge to new highs after earnings. Modest dips look buyable to us.

APP Weekly Chart

APP Daily Chart

CF Industries (CF)

cfindustries.com

Why the Strength?
Nitrogen fertilizer prices are shattering records thanks to rising natural gas and crop prices, which is to CF Industries’ advantage—it’s the world’s leading producer of the anhydrous ammonia that’s used to make other fertilizers like ammonium nitrate and urea, also producing compound fertilizer products and “clean” fuels like hydrogen. In CF’s third quarter, revenue was 61% higher from a year ago, led by strong nitrogen demand and favorable energy spreads, while per-share earnings of $1.02 beat by six cents and was up from a year-ago loss. Although sales volumes in the first nine months of 2021 were lower than the comparable year-ago period (due to lower supply), average selling prices in both Q3 and the first nine months of 2021 were substantially higher across all segments due to strong global demand. More importantly, based on its order book, CF projects the fall fertilizer application season in North America to be the highest since 2012. While nitrogen supply tightness should ease next year, CF thinks that positive industry fundamentals will persist at least into 2023, underpinned by the need to replenish global grain stocks. Additionally, CF forecasts that growers will continue to plant nitrogen-consuming crops (corn, wheat and cotton) at high levels given their relatively high front month and futures prices (another boost to demand). Going forward, management is focused on reducing debt and plans a new $1.5 billion share repurchase program for 2022-2024. Earnings estimates here are huge, with analysts seeing the bottom line leaping to nearly $8 per share in 2022.

Technical Analysis
Fertilizer stocks are still largely shunned by investors despite the recent strength, which we think is a good thing from a contrarian perspective. After sliding into August and bottoming at 43 near the 40-week line, CF took flight and hit 63 in October. A quick pullback to 55 followed, with the latest up leg taking shares to within reach of the 2015 record high of 70. You could start small here, though getting in on dips is preferred.

CF Weekly Chart

CF Daily Chart

Diamondback Energy (FANG)

diamondbackenergy.com

Why the Strength?
For many years, Diamondback Energy was the leader among oil firms, with top-notch acreage (now has 413,000 acres in the Midland and Delaware basins), financial controls (three recent sales brought in $800 million) and execution (capital budget down 19% this year, but oil production will be up 23%!). And now that energy prices are up, the firm’s cash flow profile is as good as any out there. Like all of its peers, Diamondback’s Q3 results were excellent, including free cash flow of $4.06 per share, but even better was management’s early outlook for 2022. First, it plans to keep CapEx flat with current quarter (Q4 2021) levels, which will keep oil production flat next year, resulting in a torrent of cash flow: Even at $60 oil and $3 natural gas (25% to 35% below current prices), the firm is likely to produce around $12.50 per share of free cash flow, and that figure rises to ~$16 per share at $70 oil and ~$19 per share at $80 oil. Moreover, having already slashed its net debt by 21% this year, it’s aiming to return half of whatever free cash flow it does earn back to shareholders—at least $2 per share of that will be through the regular, recently hiked quarterly dividend (1.8% annual yield), with the rest likely to be a mix of share buybacks (which have already begun) and special dividends. (The rest will go to further debt reduction.) It’s true that some other peers might offer slightly higher payouts, but Diamondback’s underlying business and cash flow looks super-strong even if the pricing environment slips. We like it.

Technical Analysis
FANG has been a bit more herky-jerky than some of the leading energy plays, but overall, it looks just fine. The run in the spring and early summer was rejected at 100 near the end of June, leading to a sharp correction into mid-August, and even the initial rebound wasn’t anything to get excited about. But now FANG is free and clear on the upside, and the past month has brought a choppy, sideways rest period, allowing its 50-day line (now nearing 100) to catch up. We think shares are buyable here.

FANG Weekly Chart

FANG Daily Chart

Expedia Group (EXPE)

expediagroup.com

Why the Strength?
It’s uneven and bumpy due to endless variants and COVID waves that come and go, but travel continues to slowly-but-surely rebound as vaccines and booster shots are adopted, and Expedia should be a big beneficiary. The company is one of the largest online travel agencies, operating its namesake site as well as Orbitz, Travelocity, Hotwire, CarRentals.com, Hotels.com and even Vrbo, plus it powers some increasingly popular credit card travel portals (like Chase’s). Business is rebounding from the depths of the pandemic, and investors are optimistic that the best is yet to come—in Q3, revenues were up 97% from last year’s horrid quarter, and EBITDA was roughly level with 2019’s pre-pandemic Q3 despite some mid-quarter issues with the Delta variant (revenues were 19% lower than 2019). However, management said that bookings were strong in the second half of September and that has persisted into Q4, led by domestic and leisure travel, as well as Vrbo. (Domestic lodging bookings were down just 2% in October vs. 2019.) More important than all of that, though, is that 2022 could be setting up for boom times: Expedia has spent many months cutting costs, refocusing on what works (better marketing, technology, making moves into business travel), so as travel trends accelerate, the firm’s earnings and cash flow are likely to (a) easily top estimates and (b) come in much higher than pre-pandemic peaks. The risk here is virus news, with any huge winter wave likely to dent travel, but it’s possible a lot of that is already factored in. All in all, Expedia is an interesting turnaround situation.

Technical Analysis
EXPE’s post-vaccine run ended in mid-March, with shares topping around 188 and sliding as much as 27% to its low in August. The stock recovered quickly in late September before spending most of October chopping sideways as earnings approached—and the Q3 report did indeed kick the stock back to its old highs before some selling reappeared. It’s not quite up and out, but we think a small position in EXPE here with the idea of adding more on a decisive breakout makes sense.

EXPE Weekly Chart

EXPE Daily Chart

The Goodyear Tire & Rubber Company (GT)

goodyear.com

Why the Strength?
Goodyear Tire (covered in the October 11 report) was able to sidestep higher rubber prices, supply-chain challenges and lower automobile production (due to the chip shortage) in Q3, turning in a stellar performance. Goodyear’s third-quarter sales of nearly $5 billion were 42% higher than a year ago, driven partly by the company’s recent acquisition of Cooper Tire, but also due to strong organic sales in its legacy business (even without Cooper, sales still rose 16%). Per-share earnings of 72 cents per were 44 cents above estimates and well above even pre-pandemic levels, despite a 15% increase in raw materials costs in the quarter. And even though original equipment shipments were down (mainly in Europe and China), Goodyear saw a 10% increase in revenue per tire—the most in nearly a decade! By region, sales in the Americas were up 63%, Europe, Middle East and Africa sales increased 21% and Asia Pacific sales rose 17%. Volumes, moreover, returned to pre-pandemic levels in Goodyear’s core replacement tire business. Additionally, Goodyear’s Fleet segment continued to perform well, with fleet tire volume increasing more than 10% from the year-ago quarter. Management also raised its estimates of Cooper deal-related savings by 50%, from $165 million to $250 million by 2023, and the company expects to realize approximately $20 million of those savings this year. There’s nothing revolutionary here, but the Cooper acquisition was a big plus, and higher auto production as the chip shortage eases should only help—analysts see earnings surging 44% next year.

Technical Analysis
GT hit a rough patch this summer, falling from 20.5 in June before bottoming at 14.5 in August. The action after that was impressive, including a string of eight weeks up in a row (an early clue that better things were ahead), and the big-volume, earnings-induced move two weeks ago looks decisive. If you’re not yet in, we’re fine entering during this rest period.

GT Weekly Chart

GT Daily Chart

GXO Logistics (GXO)

gxo.com

Why the Strength?
GXO is the result of a recent spinoff from freight transport company XPO Logistics. GXO provides supply-chain management, including warehousing, shipping, returns and other services. The attraction here is that GXO allows enterprises to outsource their increasingly complex logistics while using cutting-edge technology (like collaborative robots), data science and predictive analytics to provide them with a competitive advantage when it comes to inventory management and shipping. Encouragingly, GXO is already considered the largest player in an otherwise fragmented field, and the firm is quickly taking share; recently, nearly a third of its new outsourced contracts were won from other industry players, and its rapidly expanding client list is a who’s who of retailers, including Apple, Abercrombie & Fitch and Saks. On the financial front, the company reported a blowout quarter in Q3 with revenue of nearly $2 billion easily beating the consensus (up 25% from a year ago), while per-share earnings of 57 cents beat estimates by six cents. For 2022, management guided for revenue to grow 10% at the midpoint (in line with expectations), though that should be conservative as the well-known supply-chain issues should have all sorts of companies looking to improve their operations. During Q3, the company also won new customer contracts with an aggregate lifetime value of over $1 billion (a reason for the strength), and once they sign on, they tend to stick around (contract length is around five years). Earnings are expected to reach $2.50 next year. We like it.

Technical Analysis
GXO came public on July 22 at 48.5 and quickly shot up to 89 over the next four weeks before experiencing its first pullback. The post-IPO decline was both short-lived and mild, as shares bottomed out at 73 in October. The stock turned up from there and has headed mostly higher for the last five weeks. With volume a bit light, we prefer entering on modest weakness.

GXO Weekly Chart

GXO Daily Chart

LendingClub (LC)

lendingclub.com

Why the Strength?
As consumers move increasingly to online banking, financial service firms with a well-developed digital infrastructure are poised to reap the benefits. Foremost among them is LendingClub, the world’s largest peer-to-peer online lending marketplace—and now the only full-spectrum fintech marketplace bank in the U.S. thanks to its recent acquisition of Radius Bancorp. The Radius acquisition is allowing LendingClub to build its loan portfolio, and its reliance on data science and artificial intelligence (AI) is helping it to quickly facilitate loan approvals. LendingClub posted another fantastic quarter in Q3, boasting revenue of $264 million that was a mouth-watering 253% higher from a year ago and per-share earnings of 75 cents that crushed expectations by a mile. Other highlights included a 42% surge in net interest income, a 7% sequential increase in average total deposits and continued growth of its member base (currently 3.8 million). The results prompted a major Wall Street firm to substantially raise its price target for LendingClub (a reason for the strength) and inspired an upbeat forecast from management: The firm now plans to accelerate growth investments in the coming 12 to 18 months—particularly in infrastructure and new products—while remaining focused on growing profits. The company raised 2021 loan origination guidance to $10.2 billion (up from the prior $10 billion) and sees total full-year revenue at a midpoint of $801 million (up from a prior outlook for $765 million). Analysts are equally sanguine and see the bottom line mushrooming nearly 346% in 2022. It’s a good story.

Technical Analysis
After a horrid few years, LC turned the corner this year, gapping up from 16 to 24 on record volume in July after earnings. Nine weeks of choppy progress followed, with shares kissing the 50-day line in early October. The latest earnings inspired yet another big-volume gap higher, and the pullback of the last two weeks looks normal while volume has dried up. Dips of another couple of points would be tempting.

LC Weekly Chart

LC Daily Chart

Livent Corporation (LTHM)

livent.com

Why the Strength?
With the International Energy Agency (IEA) estimating that EV-related lithium demand will soar 40-fold by 2030, the race is on to open new mines in a market plagued by supply shortages. Livent (covered in the August 16 report) is the largest U.S. lithium-only miner and is well positioned to meet this demand. Reflecting the strong market conditions, Livent’s third quarter featured an impressive array of beats and guidance hikes. Revenue of $104 million was 43% higher from a year ago and 21% above consensus; per share-earnings of 3 cents missed estimates but were nicely above the year-ago loss. The company said a “large portion” of its 2021 contract commitments (generally at lower prices) were fulfilled in Q3, allowing it to take advantage of higher current market prices for the remainder of the year and prompting management to increase full-year 2021 guidance for revenue (from a previous $380 million midpoint estimate to a $400 million midpoint) and EBITDA (from $62 million to $70 million). Just as important, Livent also provided an update on its near-term capacity expansions, with a 5,000-metric-ton hydroxide addition at its North Carolina facility, and a lithium carbonate expansion of 10,000 metric tons in Argentina, with both expected to reach commercial production by Q3 2022 and Q1 2023, respectively. Moreover, Livent was the target of an upgrade by a big Wall Street bank based on tight lithium market fundamentals (another reason for the strength). Analysts see sales up a strong 26% next year while earnings nearly triple.

Technical Analysis
LTHM ran up to around 24 in January before building a big (29-week, 39% deep) launching pad for the next few months. It appeared to be off to the races in August when shares leapt to new highs, but the market wasn’t ready, leading to another, tighter consolidation (9 weeks, 19% deep). And now shares are freewheeling on the upside again with a great-looking volume cluster before and after earnings. We’re fine entering after the recent pullback.

LTHM Weekly Chart

LTHM Daily Chart

Seagate Technology (STX)

seagate.com

Why the Strength?
The shift of data storage from the home and business to the cloud seems like it would suggest dire times for established hard drive maker Seagate. But it’s the opposite: Cloud providers need to write customer data somewhere and, as the cloud matures, the volume they have to store is doubling every three years. In 2019 computers stored 41 zettabytes (ZB) (1 zettabyte equals 1 trillion gigabytes (GB) of data), growing to 175 ZB in 2025. The surge comes from many trends, like smart factories, which need 1 million GB a day capacity, to home DNA testing, which requires 100GB per person. Seagate is focused on growth in the mass-capacity market (very large storage units used by cloud providers) while continuing to serve its niche in disk drives. The latter remains an expanding market as more PCs still get sold every year worldwide than the year prior. Mass capacity is more important, though, having just surpassed the legacy business as the bigger contributor, at 57% of Seagate’s $10.7 billion FY2021 (ending in June) sales. Seagate believes a new technology it has developed, called heat-assisted magnetic recording, will allow for less expensive, more data-dense mass capacity drives. The approach provides the ability to write data not just across the surface of a disk but in layers of its depth too. Management believes such drive sales will grow 20% annually with a predictable base of business—indeed, a big reason for the recent strength is an expectation that Seagate will be a big beneficiary of Facebook’s huge new cloud and data center expansion plans. Analysts see current fiscal year earnings soaring 57% to nearly $9 per share.

Technical Analysis
STX broke out in late January from a big base and ran to 100 or so in May before topping out. The correction after that was a tedious one—26% deep and lasting 25 weeks in total—but it appears to be over, with STX rallying the past five weeks, including a strong-volume move to new highs to end last week. The action is a bit wild, so if you want in, aim for controlled dips.

STX Weekly Chart

STX Daily Chart

Trex Company (TREX) * Top Pick *

trex.com

Why the Strength?
Trex is the rare housing-related company that both benefits from the strong construction market, but also has a longer-term wind at its back as well—the company is the leading player in the composite decking and railing industry, charging a higher price than regular wood but offering low-to-no maintainance and far better lifetime economics. Composites are gradually gaining share on wood (should be nearly one-quarter of the decking market this year), and every percentage point increase in share is worth north of $50 million annually for the industry. Moreover, 70% of new homes built don’t even have a deck, though some of that is changing post-pandemic, with people spending more time outdoors at their homes (38% of home improvement spending come from exterior property improvements). All of this plays right into Trex’s hands, and the stock has broken out as these factors came together to produce a great Q3: Both sales (up 45%) and earnings (up 55%) soared and topped expectations, with EBITDA margins (32.2%!) wowing even the bulls, especially given continued pricing pressures. (Recent price increases should help going forward.) Even better was the outlook, with the top brass mentioning the big pickup in home improvement permits and announcing a third construction plant to meet demand. There’s nothing revolutionary here, and a big pickup in interest rates (hurting housing) could dent the stock. But Trex is a great, well-managed company whose growth story remains in good shape—analysts see earnings up 22% next year, which will likely prove conservative.

Technical Analysis
TREX rallied strongly (though choppily) for most of last year and into early 2021 as the housing market went from strong to red hot as the pandemic raged. The top came in February, which began a long period of consolidation—shares had three prolonged dips after that (bottoms in March, August and October), with the last one shaking out below the 40-week line. But now the buyers are in control, with TREX ripping higher the past four weeks, including last week’s earnings-induced breakout. We’re OK entering here or (preferably) on dips.

TREX Weekly Chart

TREX 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 November 29, 2021.

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.