September 13, 2021

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Current Market Outlook

During the last couple of weeks of August, more stocks, sectors and indexes were getting in gear, which was a change from the past few months of whippy crosscurrents. But as September has progressed, it looks like we’re still in the same overall environment—growth stocks, indexes and funds have again taken hits while some cyclical/value areas have perked up. That’s not necessarily a negative (at least to this point); as we wrote last week, some retrenchment among extended growth stocks was half-expected, and even if it wasn’t, the action is more a confirmation that the choppy environment is still intact, not that the sellers are truly taking control. Long story short, we’re still sticking with the same game plan as the evidence remains unchanged—we’re more bullish than not, but booking partial profits into strength, raising stops as things head higher and aiming to enter on dips is the right way to go.

This week’s list is lighter on growth stocks than in recent weeks, reflecting some of the dents they’re taking, but there are many other names that look to be resuming their advances. Our Top Pick is Antero Resources (AR), which looks like the best play in the natural gas space. Aim to enter on dips.

Antero Resources (AR)

anteroresources.com

Why the Strength

Natural gas prices have taken off on the upside, and combined with the sector’s new cash flow focus, has brought in some big buyers for firms with exposure to that commodity. Antero Resources is one of the go-to plays in the sector—it’s the fourth-largest U.S. gas producer and second-largest natural gas liquids producer, and it has plenty of opportunities to expand if it wants to (it owns 38% of all undrilled, liquids-rich locations in Appalachia, more than 2,000 locations!). But, as with all of its peers, Antero is more focused on raking in the cash than plowing a ton of money into new drilling, using the cash to rapidly pay down debt and, eventually, return some to shareholders: In 2020 and 2021, Antero expects to slice debt by $1.7 billion (debt to EBITDA is already less than two times) and has no note maturities until 2025. All in all, the firm’s outlook was for $750 million of free cash flow this year alone (15% of the market cap!) with $3.5 billion cumulative free cash flow from 2021-2025. However, while prices can move around, the recent rally in natural gas means those forecasts are way too conservative—Antero has only hedged about half of its natural gas production, so all else equal, the recent $1 rally in prices could boost annual revenues by another $400-plus million! Looking ahead, management believes it will hit its debt target early next year, which means the massive cash flow can be returned to shareholders via either huge dividends or potentially large share buybacks. It’s another good story in the energy patch.

Technical Analysis

We gave AR a shot earlier this year, but were knocked out by the sector’s sharp summer correction; AR’s recent dip was 30% and the stock looked in bad shape just three weeks ago. But as natural gas prices picked up, this stock found buyers, zooming above its 50-day line in just a few days, and then pushing further to new price highs two weeks ago! Short term, a dip looks possible, but we’re thinking weakness will prove buyable.

AR Weekly Chart

AR Daily Chart

Celsius Holdings (CELH)

celsiusholdingsinc.com

Why the Strength

Celsius Holdings looks like a follow-on play to Monster Beverage (used to be known as Hansen’s), which was a huge winner years ago as its energy drinks took the market by storm. Celsius has its own energy drinks that have a small but rapidly growing share thanks to some eyebrow-raising benefits: According to the company and some clinical studies, Celsius’ energy drinks (which have no aspartame, high fructose corn syrup, are non-GMO and have no artificial flavors) are proven to boost metabolism and help to burn body fat with no adverse health effects. It sounds a bit too good to be true, and negative press could hurt perception, but there’s no sign of that and there’s also no question the drinks are catching on: The company’s share of the energy drink market has tripled during the past 18 months, yet it still has just 1.6% of the market, and there should be huge upside from here; on Amazon, for example, Celsius is the third largest energy drink seller with a 13% share, which is just 1% behind Red Bull for #2. Obviously, if Celsius can approach double-digit market share then sales and earnings will skyrocket, and the firm is working hard to make that happen, especially on the distribution front—it secured additional distribution deals with Anheuser-Busch, Pepsi, Keurig and MillerCoors in the quarter, now covering 90% of U.S. metropolitan areas. (Celsius is now found in 100,000 stores, up from 80,000 at the start of 2020.) Sales growth has been strong for a while and accelerated nicely in Q2 (up 117%), and earnings have been in the black six straight quarters and should push nicely higher going forward. It’s a good story.

Technical Analysis

CELH is a wild child that’s had a huge run during the past year, so there’s definitely risk if something goes amiss. But there’s even more potential as shares appear to be emerging from a long rest—CELH suffered two big corrections (42% then 29%) starting in January, with the result being no net progress for about seven months. But now the stock is pushing ahead, and while volume hasn’t been overly impressive, the path of least resistance is up. You can enter here, but given the volatility, it’s probably best to keep the position on the small side.

CELH Weekly Chart

CELH Daily Chart

(DOCN)

Why the Strength

Navigating the cloud service space can be complicated and normally involves high-level technical training, but DigitalOcean is making waves with a keep-it-simple approach to infrastructure as a service (Iaas). The company provides a subscription-based cloud platform for developers, startups and (mostly) small-to-medium-sized businesses and generates most of its revenue from its IaaS offerings (such as hosting customers’ apps and websites). DigitalOcean competes with bigger cloud services like Amazon Web Services and Microsoft’s Azure, so there is plenty of competition, but it sets itself apart by making it easier for clients with limited tech backgrounds to quickly and efficiently build and host a website. The firm also provides a vast support network that allows clients to chat with other customers or developers when they have questions, as well as access free tutorials on virtually every aspect of operating on the cloud. And last week’s acquisition of Nimbella means DigitalOcean customers now have access to a server-less computing platform, too. The dual focus on simplicity and convenience has paid off for DigitalOcean, which has seen accelerating sales growth in the last few quarters, with total revenue up 35% from a year ago in Q2 and, while earnings are barely in the red, they should start to surge in the quarters to come. Annual recurring revenue (ARR) has also been growing impressively, increasing 36% in the latest quarter alone to $426 million. Total customer count rose 9% to just over 600,000, and those customers are spending more on average (up 25% in Q2). Looking ahead, analysts see the top line growing 33% for 2021, while management estimates its market opportunity will nearly triple by 2024. It’s a solid story.

Technical Analysis

DOCN came public on March 24 at 47 and dropped to 35 by May before finding its sea legs. As you’d expect from a recent IPO, the action has been hectic, with a massive rally since then, along with some very sharp corrections along the way (59 to 46, then 63.5 to 49). The latest push higher has been impressive, though given the volatility and the overall market environment, we favor aiming for dips and using a loose stop.

DOCN Weekly Chart

DOCN Daily Chart

ICU Medical (ICUI)

www.icumed.com

Why the Strength

ICU Medical is mid-sized (about $1.2 billion of annual revenue) outfit that offers a bunch of key products used in hospitals and (as the name suggests) ICUs—whether it’s IV systems, disinfecting caps, chemo delivery systems, pharmacy automation software, specialized catheters or infusion systems, ICU Medical can provide it. It’s been a solid operation over time, with earnings generally rising at a steady pace and after-tax profit margins (12% in Q2) in the healthy range. But none of that is why the stock has turned strong—instead, a bold acquisition has dramatically improved the earnings outlook and investor perception. ICU has agreed to purchase the Smiths Medical division from a British company for $2.5 billion, making ICU the leading IV therapy company thanks to the addition of Smiths’ syringe and ambulatory pumps, peripheral IV catheters, respiratory systems and more. All in all, it should boost the combined companies’ ability to sell to huge outfits, lead to big synergies and send ICU’s bottom line through the roof—before the transaction, analysts saw the company making about $7.75 per share next year, but management now sees $11 per share (the buyout is expected to close in the first half of next year) with $13 likely once Smith is fully integrated! Granted, ICU will be taking on a good chunk of debt to make this all happen, which raises a little risk, but the company has a solid history of integrating buyouts so the odds favor things going smoothly. All in all, this looks like a special situation that has solid potential.

Technical Analysis

ICUI was a great long-term growth stock for years, but it peaked in August 2018 near 320; three years later, the stock was stuck in the mud around the 200 level with big investors giving it no love. But last week could be a game changer, with ICUI rallying 20% on four times its average weekly volume, reaching its highest level since September 2019 in the process. We think the dip of the past few days is buyable.

ICUI Weekly Chart

ICUI Daily Chart

Innovative Industrial Properties (IIPR)

innovativeindustrialproperties.com

Why the Strength

The legal American cannabis market grew 50% during the last couple of years and is seen more than doubling by 2025 to become a $46 billion market. Cannabis is a capital-intensive business, however, requiring secure facilities that can efficiently grow the plant. Innovative Industrial Properties is a real estate investment trust that owns, manages and leases cannabis growing facilities across the country. The company’s portfolio consists of 74 properties in 18 states where cannabis is legal. They’re 100% leased out on long-term contracts, mostly to the largest growers in the market, including Parallel, PharmaCann and Kings Garden. Right now the company’s properties total 6.9 million square feet, with another 2.5 million under development. Typically, Innovative works with growers to build out capacity as needed, rather than build on spec. Growth of cannabis access will drive the business: 18 of the 50 states have legal cannabis for adult use, while 38 allow it for medical use. That still leaves about 30% of the population with no legal access to the drug, and a larger percentage barred from recreational use. There’s a chance Congress will legalize cannabis federally and even if that doesn’t happen, it appears likely they’ll ease insurance and banking restrictions on the industry, which should help get more capital flowing and spur more facility investments. States continue to expand legal avenues for the plant–New York recently approved cannabis for recreational use, and Florida has legislation to do the same. Existing legal states are also increasing the number of grower licenses they permit, which opens up new sales in maxed-out markets for IPR. Shares paid a $1.40 dividend last quarter, a nice benefit for being in a fast-growing business which should be able to grow sales 30%-ish both this year and next.

Technical Analysis

IIPR had a great run into the 220 area in February before entering a well-deserved correction … a dip that didn’t truly find support until May, when the stock tagged its 40-week line. While the rally from there wasn’t powerful, it has been persistent—helped along by better action in REITs, IIPR rallied 11 weeks in a row to a recent peak of 252. Admittedly, the pullback in recent days has been a bit iffy, but it’s approaching its 50-day line—we’re OK starting a position here with a relatively tight stop.

IIPR Weekly Chart

IIPR Daily Chart

MongoDB (MDB)

mongodb.com

Why the Strength

MongoDB’s database platform is one of the most popular databases for modern apps. Its document-based approach (instead of rows and columns) can be used across a wide range of cases (and with all types of data, both structured and unstructured), reducing the need for customers to use niche technologies that only serve a single purpose. The latest earnings are a big reason for the strength, with a loss of 24 cents that was far less than the 40-cent loss Wall Street expected. Revenue was just shy of $200 million and was 44% above the year-ago quarter (continuing a trend of rapid and accelerating growth), with subscription revenue also rising 44%. The company’s Atlas cloud platform, which represents 56% of total sales, saw revenue mushroom 83% in Q2 while approaching a $500 million annual run rate. Another highlight of the quarter saw MongoDB grow its customer count by over 2,200 sequentially to over 29,000 (up 44% from a year ago), driven largely by demand for Atlas. Management attributed the strong metrics to the need for companies to innovate at a rapid pace in today’s hyper-competitive environment. Atlas, moreover, just became server-less, which the company believes will drive more demand due to the increased ease of use it affords. Another new feature involving versioned APIs affords greater flexibility to customers, who can now update their applications to the latest version of MongoDB on their own time frame. Analysts see revenues climbing 38% this year with many years of rapid growth ahead.

Technical Analysis

MDB had a big pandemic run that finally topped out near 430 in February with most growth stocks. The correction, though, was very sharp—shares quickly sunk below their 40-week line and hit lower lows in May near 230. The recovery from there was solid (six up weeks in a row), but MDB needed another long-ish rest (10 weeks) shy of its old high to gather its strength. The earnings report was the catalyst two weeks ago, and the wiggles since then look normal to us. Aim for dips if you want in.

MDB Weekly Chart

MDB Daily Chart

Pure Storage (PSTG)

www.purestorage.com

Why the Strength

Pure Storage, which provides flash-memory-based storage products for enterprises, is leading the all-flash data center movement while offering some of the most advanced tools and services to automate data management for cloud-native applications. The company had one of its best quarters on record in fiscal Q2 with “strong contributions” from new products, plus the highest operating profit in its history. Revenue grew 23% from a year ago, led by subscription revenue of $172 million (up 31%), which contributed 35% to total sales. Per-share earnings of 14 cents were 9 cents above the consensus and product revenue, meanwhile, was “very strong” with 19% growth—its highest year-over-year growth rate in seven quarters. Management also indicated the firm is benefiting from an increase in enterprise-related Internet of Things (IoT) spending. Other metrics were equally impressive, with remaining performance obligations (RPO, basically all the money under contract due to it in the future) expanding 25% to $1.2 billion, reflecting continued strength of its subscription services—including record sales of unified subscription, pay-as-you-go storage. Pure Storage also saw solid new customer acquisition (380 new customers, up 10%) and saw particular strength with new enterprise clients in the quarter. Going forward, the company is confident that its sustained momentum will continue and guided Q3 revenue to be around $530 million (up 30%) and well above the consensus forecast of $495 million. It’s not changing the world, but after a few years in the wilderness, the wind is at the firm’s back today and the move to a subscription model is paying off.

Technical Analysis

The storage space isn’t the sexiest area of the tech sector, which may explain why PSTG lagged many of its peers following last year’s pandemic crash. It wasn’t until December that the stock finally broke above its 2019 high of 20, a move which began a torrid 10-week rally to 30. That said, PSTG gave back most of those gains in the months that followed before finally tightening up near 20—setting the stage for a big two-week, post-earnings rally. There’s still some old overhead to chew through, so we’ll set our buy range down a bit from here.

PSTG Weekly Chart

PSTG Daily Chart

(SBLK)

Why the Strength

With a global shortage of raw materials, transporting goods to where they’re needed as fast as possible has become a booming industry. Led by demand for basic commodities like coal, iron and fertilizer, the dry bulk shipping market is on fire, with freight levels and time charter earnings setting records this summer. Star Bulk owns one of the world’s largest and most diverse maritime fleets, providing shipping services of dry bulk cargoes with 128 modern vessels ranging from Supramax to Newcastlemax. Its vessels transport major bulks including iron ore, minerals and grain, as well as minor bulks such as bauxite, fertilizers and steel products. The dry bulk shipping boom isn’t expected to abate anytime soon, as reopening economies will increase the need for more ocean shippers; indeed, the Baltic Dry Index (which measures average shipping rates) just hit its highest level in 11 year, with all vessel categories seeing solid demand hikes. And though the order book for new ships is bulging (which will eventually cap prices), most of those orders won’t be delivered until 2023-2024, leaving plenty of upside for many quarters to come. Consequently, Star Bulk reported record profitability in Q2, with a daily time charter equivalent (TCE, a key metric) per vessel across the fleet of nearly $23,000—up 155% from a year ago. While per-share earnings of $1.26 missed the consensus by 17 cents, they were 250% higher than the prior quarter, while revenues of $311 million easily beat estimates and more than doubled from a year ago. Even better, the top brass has declared a 70 cent per share dividend for the quarter, more than double the prior dividend (though we’d expect the quarterly dividend to move around), while implementing a $50 million share buyback and paying down debt, too. Analysts see earnings north of $5 per share both this year and next.

Technical Analysis

SBLK got going last December from a very depressed level and had a great run with most cyclical stocks, effectively topping out in May near 23. The eventual correction to 16.5 was sharp, but it’s hard not to be impressed with the comeback during the past two months, especially with the strong rebound three weeks ago. SBLK is quite volatile and has resistance in the 25 area, so we advise starting small and using a loose leash.

SBLK Weekly Chart

SBLK Daily Chart

Teck Resources Limited (TECK)

teck.com

Why the Strength

Booming demand for electric vehicles (EVs), solar panels and electrical infrastructure, plus supply disruptions in top producer Chile, have created a perfect storm (in a good way) for copper miners. Teck is Canada’s largest diversified resource company and is engaged in mining coal for steel making, zinc, gold, silver and oilsands. But copper is Teck’s calling card, and it has one of the very best copper production growth profiles in the industry with projects located in some of the most attractive jurisdictions in North and South America. The company is mainly focused on accelerating its copper production growth in order to rebalance its portfolio to what it calls “Green Metals” (including zinc) that will benefit from the expected demand growth in alternative energy and EV production thanks to the metals’ use in reducing CO2 emissions. In Q2, Teck’s revenue increased 49% to $2.6 billion (in Canadian dollars), thanks in part to record copper prices in the quarter. Adjusted EBITDA was up 104% compared with the year-ago quarter, led by strong production in copper and zinc. On the metallurgical coal front, Teck benefited in Q2 from two million tons of steelmaking coal sales to China, but the recent Canadian wildfires caused the company to lower guidance for Q3 coal sales by around 650,000 tons, as well as increasing transportation cost guidance. However, analysts don’t expect this to hurt the top line, which is expected to rise 58% while per-share earnings increase 412% in Q3. Further out, Teck expects first production at its QB2 project (one of the world’s largest undeveloped copper resources) in the second half of 2022, which should double its consolidated copper production by 2023. Analysts see earnings remaining elevated at least through next year.

Technical Analysis

As natural resource stocks go, TECK had fairly smooth sailing from last March when it hit a low of 6, until this past February when it peaked at 24. Shares then dropped to 17 over the next four weeks before bottoming and rallying to 26. This time a three-month correction followed, which saw TECK round out a bottom after briefly penetrating the 40-week line in August. The stock has been up for three straight weeks and is almost back to the prior peak, a good sign that August dip shook out the rest of the weak hands. We prefer entering on minor weakness.

TECK Weekly Chart

TECK Daily Chart

Varonis Systems (VRNS)

Why the Strength

The sheer volume of data being created in the world is hard to comprehend–by 2025 data will almost quadruple from 2019 levels to 175 Zettabytes, the equivalent of 175 trillion gigabytes. Varonis Systems provides data security products that are increasingly in demand as information proliferates; this isn’t so much a traditional, network cybersecurity play as it is one focused on protecting sensitive corporate data like financial records, patient/employee data, product plans and the like. Beyond the explosion of data, other trends are improving the outlook for Varonis–the increased use of the cloud, which means more data is exposed to network hacks. Varonis has six flavors of products, including one that automatically finds and shields data that falls under regulatory data requirements (like European Union and California privacy laws), searches for unprotected stale data and walls it off, and monitors user behavior for suspicious activities. The company has a niche in email and spreadsheet protection too–things companies produce a lot of and which are increasingly subject to attack. Lately it’s been expanding protection of data held in Software-as-a-Service products, like Box and Google Cloud. The overall business will pull in $375 million in sales this year, and is growing fast—Q2 revenue was up 33% year-over-year. Subscriptions are picking up the pace too, up 70% this year, which is allowing Varonis to grow recurring revenue at an even faster pace. Also helping results is that current customers are buying more of the company’s offerings—customers with six or more Varonis products are up 129% this year, while earnings are just beginning to lift off. It’s a solid story.

Technical Analysis

VRNS enjoyed a big run through February with most growth stocks, and the pullback was deeper than desired, with shares falling 43% and living under the 40-week line for five weeks. The recovery after that was solid, but deep bases usually need more time to heal, and the stock went dead for another couple of months in the 60 area. Shares kicked into gear late last month, surging back toward their high before the recent pullback, which we think is normal thus far.

VRNS Weekly Chart

VRNS 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 September 20, 2021.