November 29, 2021

The news of a new virus variant came out of left field late last week, whacking the major indexes on Friday … though today brought a so-so rally as some think the economic impact of omicron won’t be as bad as feared. We’re not in our storm cellar, but we’re not ignoring the action, either—on the buy side, we advise going slow and starting small, while for names you own, you want to honor your stops and make sure bad situations (losses, etc.) don’t get much worse.

That said, there remain many stocks that are pulling back or consolidating normally despite all the hectic action. Our Top Pick is one of those that already went through the wringer this year, broke out recently and is holding up well

Market Overview

Current Market Outlook

Back to News-Driven, Ping-Pong Action
The news of a new virus variant came out of left field late last week, whacking the major indexes on Friday … though today brought a so-so rally as some think the economic impact of omicron won’t be as bad as feared. Looking at the evidence, the intermediate-term trend of the major indexes is on the fence, and there’s no question the environment is seeing more crosscurrents, with names from different sectors or themes swooshing one way or the other based on the news of the day. We’re not in our storm cellar, but we’re not ignoring the action, either—on the buy side, we advise going slow and starting small, while with names you own, you want to honor your stops and make sure bad situations (losses, etc.) don’t get much worse. We’ll drop our Market Monitor to respect the weakness and see how it goes.

That said, there remain many stocks that are pulling back or consolidating normally despite all the hectic action; if you’re aiming to pick up shares on this dip, those are the names we’d target … and those are many of the names written about this week. Our Top Pick is Trade Desk (TTD), which has held up well and already went through the wringer much of this year. Try to buy on further weakness.

A.O. SMITH (AOS)

Why the Strength?
A.O. Smith isn’t well known, but it’s a big player in the housing market—the company is one of the top global makers of boilers, water heaters (#1 player in North America) and water treatment products for both residential and commercial use. Interestingly, most demand is replacement oriented, which keeps business solid even during down times (in Q3, 85% of North American boiler and water heater demand was replacement). But when the housing market is strong, new construction adds an added boost to the top line—and that’s especially true today, as Smith has boosted sales prices due to cost inflation, which to this point have been swallowed up by clients no problem. That last piece was a big reason for the firm’s outstanding Q3 report and, hence, its recent strength—sales lifted 20% while earnings grew even faster (up 29%), walloping estimates by 17 cents per share and sending analysts scurrying to hike their outlooks. Indeed, Wall Street is now looking for $3.52 per share next year (up 21% from 2021), which is up from an estimate of $3.22 before the report. Smith is also returning a chunk of cash to shareholders, both through a modest dividend (1.4% yield) and share buyback program (likely to spend $400 million this year doing so, about 3% of the market cap). Of course, the virus could always throw a monkey wrench into things, but (a) so far the effect has driven down interest rates, and (b) housing was actually a beneficiary of the virus’ shenanigans last year, so there’s every reason to believe this company’s business will remain strong.

Technical Analysis
AOS’s post-crash rally ran out of steam in March, with shares treading water for many months after that and then nosediving to multi-month lows in early October. But that last dip proved to be a shakeout, with shares motoring higher seven weeks in a row after the low (including two big-volume buying weeks after earnings), and the pullback of the past two sessions looks reasonable. We’re OK starting a position here.

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Camping World Holdings (CWH)

Why the Strength?
RV and camping equipment suppliers were among those that benefited from the pandemic, as many decided to hit the road last year as an antidote to cabin fever. And while some believe the outdoor recreation trend might be coming to an end as the economy returns to normal, Camping World, America’s largest retailer of RVs and camping-related products and services, sees no evidence of this. Indeed, the company recently reported that demand is at an all-time high, thanks in part to a surge of retiring Baby Boomers and increasing interest from Millennials pursuing the “van life.” Record revenue of almost $2 billion in Q3 was 14% above the year-ago quarter, while per-share earnings of $1.98 beat estimates by 17 cents. Further underscoring the momentum was a record EBITDA tally that was up 33% from last year’s record Q3. Another indication that growth prospects for Camping World haven’t diminished was record cash flow for Q3, prompting management to raise cash flow guidance for full-year 2021. The company also increased its full-year EBITDA guidance from a midpoint of $850 million to around $920 million (up 8%). But Camping World isn’t assuming these trends will last forever and is expanding into other areas; it recently started a peer-to-peer RV rental platform, which it believes will increase sales while potentially converting rental customers into RV owners. The company also unveiled its first Electric World location in Utah with plans to sell prototype electric camping trailers and, eventually, electric RVs. But the big idea here is that the massive surge in demand from 2020 looks durable—analysts see earnings up 22% this year even after a record 2020, with the bottom line staying elevated in 2022 as well. The big 4.4% dividend adds a nice bow to the package.

Technical Analysis
After running up from 25 in January to just shy of 50 by May, CWH fell nearly 30% last spring and was a choppy performer for the next several months. But the net effect of the turbulence was the establishment of a lateral base between 35 and 44, and things have been improving of late—the Q3 earnings reaction in early November was bullish, and the stock is now up five weeks in a row. We’re OK with a small position here or on dips, and possibly adding if CWH (and the market) heads up from here.

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Ford Motor Co. (F)

Why the Strength?
A year into its F+ plan, Ford has made some big strides toward its ambitious goal of expanding production of connected and electric vehicles (EVs) to account for 40% of its global sales volume by 2030. To that end, the firm has pumped $11 billion (the biggest investment in its 118-year history!) into manufacturing a supply of essential EV parts as it prepares to launch the highly anticipated 2022 F-150 lightning truck. Ford’s plans are expected to provide it with enough battery production to meet its mid-decade goal of 141 gigawatts, which will support more than a million EVs a year. Ford also intends to prevent future supply shocks by bringing the battery supply chain to the U.S., with plans for battery plants in Kentucky and Tennessee. On the retail sales front, Ford’s all-electric Mustang Mach-E is already a hit with customers and it says the car has brought a “stunning number” of new customers to the Ford brand; management believes global Mach-E demand could approach 200,000 vehicles a year. Capping off what was an eventful third quarter, Ford also announced a new partnership with Argo AI and Walmart for self-driving vehicles to support a multi-city delivery service for groceries and other popular items. Of course, beyond EVs, Ford is doing just fine nowadays—the company reported revenue of $33.2 billion, down 4% from a year ago but up 38% sequentially, driven by significant increases in semiconductor availability and wholesale vehicle shipments; meanwhile, per-share earnings of 51 cents beat the consensus by 24 cents. Looking ahead, management expects cash flow to be more than sufficient to fund growth priorities and reinstated the dividend (2.0% yield), while analysts see earnings remaining elevated (nearly $2 per share) next year.

Technical Analysis
After suffering a chip shortage-induced decline during the summer months, F found its footing in September and bottomed around the 40-week line. The stock blasted off from there and was up nine straight weeks (all of them on above-average volume!) before encountering some resistance around 20 early this month. F has tightened around this level in the last three weeks, which is impressive given the market’s action. We think a dip toward the rising 25-day line would be tempting.

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QUALCOMM Incorporated (QCOM)

Why the Strength?
Qualcomm is in the driver’s seat among chip companies as the commercialization of the 5G phone market continues. The firm is expanding its portfolio of 5G mobile platforms in the U.S. as more 5G network-ready phones become available. The company smashed estimates in fiscal Q4, reporting revenue of $9.3 billion that was 12% higher from a year ago, while per-share earnings of $2.55 (up 76%) beat estimates by 29 cents, prompting Wall Street institutions to upgrade price targets (reasons for the stock’s strength). Smartphone revenue was up 56% in Q4 on strong demand across all original equipment manufacturers. Outside the U.S., where 5G network adoption has just started, Qualcomm believes it has an addressable market of some $46 billion by 2024, growing 12% a year until then. Moreover, the firm said its revenue from Android smartphones in the international market continues to grow impressively. But the company isn’t putting all its eggs in the smartphone basket and is moving aggressively into Internet of Things (IoT) devices and security, as well as connected and autonomous cars, in an effort to diversify. Automotive revenue, for instance, grew 44% in the quarter, thanks to an increase in digital cockpit launches across several car makers, and Qualcomm has made this a major area of focus going forward. Best of all was the recently updated long-term outlook—through 2024, Qualcomm sees its overall licensing revenue growing at mid-teens rates with huge margins, thanks in part to automotive revenue rising 3.5-fold in five years and IoT sales lifting 80% within three years. A modest dividend (1.5% yield) and share buyback program are icing on this blue chip’s cake.

Technical Analysis
After a stellar performance last year, QCOM shifted gears and underperformed many of its semiconductor peers for much of 2021. After running up from a pandemic crash low of 60 last March to 165 in January, shares fell to 122 a few weeks later, then went nowhere for eight straight months. But that prolonged base building finally paid off after QCOM’s latest earnings report, which caused shares to take off on six times normal volume.We’re OK starting small here or on further weakness.

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Roblox Corporation (RBLX)

Why the Strength?
On one hand, Roblox is a gaming app for kids, which isn’t usually a great long-term growth business. But on the other hand, Roblox is a unique gaming and experience-based platform, and that’s why the stock is very strong today—the app’s countless 3D worlds and games allow users to play and compete (and spend virtual money) with their own personalized character, and these worlds are formed by developers who get paid based on how popular their game becomes, as well as any virtual items that are sold. (In Q3, developers collected $130 million, up 52% from a year ago.) The fear here was that Roblox was really a kids’ gaming app that thrived mostly due to the pandemic, but that perception is being wiped away; in Q3, 28% of the top 1,000 experiences saw most users 13 years or older, up from 10% a year ago. But beyond that is the potential for Roblox’s offerings to become marketing avenues for tons of companies: The firm has hosted virtual concerts that have proven hugely popular, with other firms having their own worlds where users can “try” their products or play around in worlds that replicate new theme parks or rides. The possibilities are limitless, and big investors are catching on—in Q3, revenues again grew at triple-digit rates, users were up 31% to 47.3 million while hours spent on the platform rose 28% (and more than half those hours were from users 13 and up). And those trends continued into October, with user growth accelerating to 43%. Moreover, free cash flow came in at nearly 30 cents per share, well ahead of earnings. To be fair, growth is likely to slow (October revenue up 32% from a year ago) after 2020’s moonshot, but it’s likely Wall Street’s estimates (revenues up 20% in 2022) will prove way too low.

Technical Analysis
RBLX came public in March, peaked at 103 in June and built a 22 week, 33% deep base from there. But the Q3 report changed everything, with the stock exploding higher on two straight weeks of crazy buying volume, and while the pullback of late has been sharp, it looks normal in the context of the prior advance. RBLX will be volatile, but if you’re game, you could start small on further dips.

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Saia Inc. (SAIA)

Why the Strength?
Saia is a less-than-truckload (LTL) shipper that operates 174 owned and leased facilities across North America. The firm saw its top line of $616 million increase 28% in Q3 from the prior year (7% above estimates), driven by strong shipping demand and pricing initiatives. The bottom line lifted 83% from a year ago and beat the consensus by 22%, and both sales and earnings set company records for any quarter in its 97-year history. Among others records set in the quarter was a 92% rise in operating income and a 17% operating margin. Saia also continues to see a bullish trend of rising contract renewals on a quarterly basis, including a 14% bump in renewals for Q3 on the heels of an 11% increase in the previous quarter. Sub-metrics were equally sanguine, including a 2% increase in LTL shipments per workday, 11% higher LTL tonnage per workday and a 25% jump in revenue per shipment. And while the firm’s fuel expense was significantly higher compared to the year-ago quarter as diesel prices rose 38%, this was offset somewhat by an 72% increase in fuel surcharge revenue. Growth is still a major focus for the company, which expanded operations in Q3 by opening a new terminal in Virginia and two terminals in Ohio and Connecticut; Saia also plans to open two additional terminals by year end and 10-to-15 new terminals in 2022, not to mention ideas on expanding several existing terminals. Obviously, if the overall economy sinks, that would dent results, but the odds are against that—analysts see earnings up 21% in 2022, which will likely prove conservative. It’s not sexy, but Saia is a solid operator.

Technical Analysis
SAIA entered this year on a high note and rallied for the first few months before reaching a peak of 250 in May. That was followed by what ended up being a picture-perfect cup-with-handle base pattern, with a 25% dip to the 40-week line, a quick rally back to its May highs and then a two-month tight area in the 240-250 range. Since the breakout in October, SAIA has been like smoke up a chimney, with only the recent market weakness pulling shares in to the 25-day line. It looks buyable to us here.

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Trade Desk (TTD) * Top Pick *

Why the Strength?
Most of each day’s 500 billion digital ads are sold by automated online bidding, and The Trade Desk offers up software and analytics for ad agencies and other tech companies – its two main client groups – to run their digital marketing efforts. Trade Desk wins customers by offering tools that it claims allows marketers to spend less and get more bang for their ad buck using data enabled by Internet ads, information unavailable with print and broadcast TV. For instance, Trade Desk can detail how many clicks ads tend to receive within a certain distance of a location, allowing retailers to direct more spending within a given area a while bidding less or not at all for ads fed to mobile users beyond. At about $450 billion worldwide, Global digital marketing spending is now roughly double that of display and traditional TV ads. The company makes money by taking a percentage of total ad spending done through its platform, and management believes it allows agencies to cut out other middlemen, ultimately saving marketing budgets money while Trade Desk takes share from competitors. The company also partners with ad sellers to boost their appeal to agencies, such as with WalMart, which sells ways to target its customers in-store. Despite on-again, off-again fears of slowing growth, the company continues to execute well, with sales and earnings both lifting nearly 40% in Q3, and analysts see the top line growing another 30% in 2022, which is likely conservative.

Technical Analysis
TTD has always been a bit herky-jerky on the chart, and that was seen for most of this year, with shares suffering a huge correction through May (north of 50%) and, even after some recovery, suffering plenty of sloppy action in the summer and early fall. But the Q3 report changed all that, with TTD gapping up and following through to new highs before some recent hesitation. Volatility will be extreme, but we’re fine starting a position here or (preferably) on dips.

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Unity Software (U)

Why the Strength?
Now here’s a big idea: Unity has the leading software platform for 3D content. The company splits its business approach into two parts – Create, for building 3D graphics, and Operate, for running 3D programs. The company made its name in video games, with its software used by programmers to write games on about 20 platforms, includes Windows, Mac, Xbox and Playstation. Games are still a major business for Unity, with 70% of the top 1,000 mobile games made with its software. The company also has made notable headway in getting auto designers, architects and filmmakers to use its modeling software, and Unity is expanding its client base into Hollywood by acquiring Weta Digital for $1.6 billion, a deal that closes soon. Weta was founded by director Peter Jackson to create special effects and the business has won several Oscars. More than just firming up Unity’s presence in video, Weta adds engineering talent and digital assets for expansion into new content. 3D growth is coming from the demand for real-time 3D, where games, VR and the metaverse require instant modeling and user interactions. Right now, that helps incremental gains in Unity’s game share and also helps its newer businesses of selling in-app 3D ads and enabling in-app purchases. That has the business on target to post sales more than $1 billion this year, up about 40%. In the long-term management expects 3D real-time modeling to power new ways of delivering content, such as projecting sporting events onto a tabletop in 3D and creating virtual retail stores in metaverse realities. Management sees a long runway of 30%-plus sales growth, though profits are likely a couple of years away.

Technical Analysis
Unity went public at 52 in September last year and added more than 100 points into year-end. The 2021 tech slump pulled U back down to 81 in May before it gradually worked its way back higher. The Weta deal and earnings caused a moonshot, with U rallying all the way to 200-plus before taking a breather with the market. It’s a high-risk, high-reward situation, but a bit more weakness would be tempting.

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WillScot Mobile (WSC)

Why the Strength?
WillScot Mobile isn’t sexy, but it has a solid, reliable growth story that should persist for years to come. Thanks to the merger of WillScot and Mobile Mini last year, this outfit is the hands-down leader in leasing flexible work space and portable storage solutions, as well as ancillary products (furniture, appliances, lighting, shelving) and services (fencing, generators, etc.). Construction and commercial/industrial applications make up 90%-ish of business, though government, education and energy are customers as well. (No client makes up more than 1% of revenue.) It’s always been a good business, but the merger between the two giants has created a national one-stop shop, leading to better demand, rising margins and a bullish multi-year outlook. In Q3, sales rose a solid 18% (both modular space and storage revenues lifted nicely), while EBITDA rose 16% and free cash flow was nearly $79 million (~35 cents per share, much higher than earnings). Even better than that, though, was management’s bullishness at its Investor Day earlier this month: The top brass sees many built-in opportunities for growth (including bolt-on M&A; they’ve recently sown in four other small operators), with EBITDA likely to see double-digit growth for the next three-plus years, and free cash flow should eventually rising to around $4 per share—in turn leading to greater share buybacks (authorization recently upped back to $1 billion). It’s not changing the world but there’s little doubt WillScot will get a lot bigger in the years ahead.

Technical Analysis
WSC’s big run from last year stalled out in early April, though it’s hard to say the sellers ever really took control—the stock pulled back a maximum of just 14% during the next 20 weeks and found support a couple of times near its 200-day line. The breakout came in September, and after some hesitation with the market during the next three weeks, WSC took off on the upside, rallying six weeks in a row before and after earnings and the Investor Day. Pullbacks toward the 25-day line would be tempting.

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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 December 6, 2021.