September 7, 2021

Pullback Wouldn’t be Surprising

Current Market Outlook

We traded in our crystal ball years ago, especially when it comes to short-term predictions, but our screens over the weekend told a clear tale: While it’s not 1999 out there, many growth stocks and indexes have enjoyed good moves of late, and when you combine that with some signs of complacency, a retrenchment looks possible. (Today, in fact, might be the start of that, as many growth stocks were hit.) Still, this isn’t some grand market call—overall, the environment remains the same, with some divergent and rotational action, but also more and more names acting well—but our point is more to make sure you’re still sticking with great-looking stocks at decent entry points, as opposed to chasing things higher. We’ll leave our Market Monitor unchanged this week.

This week’s list has a bunch of strong names thanks to recent earnings reports and other news items. Our Top Pick is Ambarella (AMBA), which staged a massive blastoff on earnings—we’re OK starting small here or on dips.

Academy Sports and Outdoors (ASO)

academy.com

Why the Strength

It’s not thought of as a pandemic winner, but Academy Sports & Outdoor has certainly been a big beneficiary of the new reality, partly because of a shift in consumer preferences and partly due to deft business moves. The company operates a chain of retail outlets in the Southeastern U.S., specializing in sporting goods, bikes, footwear and even ammo, all of which has seen a big pickup in demand as many people are spending more time doing stuff outdoors (whether in the backyard or out in nature) given the virus’ lingering effects. The other boost comes from e-commerce—while Academy’s online business made up just 7.4% of total sales in the quarter ending in April, total e-commerce sales quadrupled from two years prior (pre-pandemic), and because half of those online orders see customers pick up the item in the store, shipping costs are under control, allowing margins to flourish. Even before the full benefit of reopening, Academy got off to a strong start in Q1 with revenue rising 39% from a year ago and record per-share earnings of $1.89 ($1.06 above consensus!). Comp sales also improved (by 39%) for the seventh straight quarter. Existing customers are also discovering more products in new categories as Academy expands its offerings and merchandising efforts. Academy’s success on those fronts enabled it to make significant balance sheet improvements in Q1, including paying down 25% of its term loan, while repurchasing $100 million of its stock. Analysts see earnings remaining at elevated levels for a long time to come. Earnings are due this Thursday morning, September 9.

Technical Analysis

ASO came public last October at 12 and never looked back, motoring to 43 by June. The stock paused just long enough to catch its breath in July, dipping 22% from high to low, then recovered its stride in August and hit new price highs last week. The big test will come Thursday morning—you could nibble ahead of the report, though we’re fine waiting to see the reaction, as a solid rally should be buyable.

ASO Weekly Chart

ASO Daily Chart

Ambarella (AMBA)

ambarella.com

Why the Strength

The emergence of driver assist functions in autos means the average car built last year had 1.5 cameras. Some newer vehicles on the road, like the Tesla 3, use eight cameras. Future vehicles will have more: Next year’s Cadillacs and forthcoming electric Hummer will use 16! Ambarella makes the software that turns the data those cameras capture into images drivers see and, more importantly, translate it into information cars use to recognize objects on the road. The software to make cameras work intelligently differs from other kinds of programming, and Ambarella has built its own AI system specifically for autos, pouring money into R&D in recent years to shift the business away from providing software to consumer products like GoPro cameras. Q2 earnings, out last week, show the focus on computer vision is starting to pay off: Sales were up 58% to $79 million, with about a quarter of the firm’s projected fiscal current-year sales of $316 million will be computer-vision for autos. Management says it has won about 65% of the auto business put up for bid, suggesting future business will be stronger. Ambarella’s original, core business of security cameras is less sexy but equally robust—cameras are shifting from video people watch into data streams for computerized security systems to digest, including interpreting visual spectrums human eyes don’t register. There are about 900 million security cameras in the world right now, almost all plain video. Those will get replaced over the next four to six years, many of which will be adding in AI capabilities such as those offered by Ambarella. Analysts see sales up 35% this year while earnings skyrocket.

Technical Analysis

AMBA spent 2018 to late 2020 in a range between the low 30s and 70s as management devoted resources into the rise in computerized vision. Signs that the plan was paying off late last year broke shares out of the long-term range to 127 in February. The tech sector’s spring slump pulled shares back where they tested and largely held support at the 200-day moving average over the summer, and now AMBA is blasting off—the strong Q2 results gapped shares higher to new all-time highs on the heaviest weekly volume in two years. We think you can enter here or (preferably) on weakness.

AMBA Weekly Chart

AMBA Daily Chart

Asana Inc. (ASAN)

Why the Strength

Asana has new leader written all over it, with what looks like a best-in-class work management platform that allows clear insight into projects, tasks, milestones, missions and big-picture objectives across a range of departments—this isn’t just a new and fancy spreadsheet but is usable by everyone. Not surprisingly, it’s now seeing accelerating adoption among big employers as the world has permanently changed into a more mobile environment and big firms with countless things going on; one study by IDC said Asana’s platform cuts time spent on emails by 33% and leads to 42% faster execution of tasks! The stock is strong today because the industry as a whole is booming ($50 billion-plus addressable market; other peers are doing good business) and Asana’s own quarterly report was a barnburner—not only did sales growth pick up again, but big investors are stampeding to its door. Indeed, while overall same-customer revenue growth was a solid 18%, that metric was 25% for those spending at least $5,000 per year with Asana and a whopping 45% for those clients spending at least $50,000 per year. Management hiked the overall revenue outlook as well, now expecting 58%-ish top-line growth for all of 2021. Beyond the numbers, though, is the big idea here: While there’s competition and earnings and cash flow are still in the red, Asana’s platform appears to have the potential to be the standard of its sector, which would lead to hundreds of large enterprises signing on and continuing to expand their usage, which in turn would push the top line through the roof. Said another way, Asana looks like a company that’s set to get much, much bigger over time. We like it.

Technical Analysis

ASAN isn’t a well-known name, but as is often the case, we think that’s a good thing—it’s shown rare power since the growth stock low in May, breaking out in June and seeing three massive-volume buying weeks. The action after that was volatile (including a one-day 13% shakeout in July!), but the stock never violated support, and after tightening up a touch, exploded higher after earnings last week. If you want in, aim for dips.

ASAN Weekly Chart

ASAN Daily Chart

Avalara (AVLR)

avalara.com

Why the Strength

Taxes are, as the saying goes, one of life’s certainties. That means lots of opportunity for Avalara, a company that offers in-depth, comprehensive tax compliance software for businesses. Companies of all stripes have a myriad of levies to pay. Avalara has compiled data on thousands of taxes, from local sales fees to product-specific tariffs, like on alcohol, and to border taxes. Its cloud-based system allows clients (usually consumer-selling firms that sell across state lines) to calculate taxes immediately, generate invoices and transfer tax payments and filings to the proper entities, from the IRS on down. Just gathering and maintaining all that tax content is a competitive moat for Avalara, as are its partnerships with platform providers that bundle its software, including Salesforce, Shopify and Wish. Marketplace providers like the latter two that gather thousands of individual sellers are a fast-growing segment, with the number of clients that generate $100,000 or more in revenue rising during 40% the past year. Large enterprises have been the biggest customer base to adopt Avalara, but the growth of the gig economy and the boom in start-ups has management looking to attract Mom-and-Pops too. Growth will also come from adding more jurisdictions to its offerings: Right now Avalara sells in North America, Europe, ex-Russia, India and Brazil. Sales are expected to lift 34% this year and another 23% in 2022, though both figures are likely conservative as Avalara regularly beats expectations. The bottom line is still in the red but big investors respect the successful land grab going on.

Technical Analysis

AVLR was a “pandemic winner” last year as more business went online, but like many growth stocks it hit a peak a while ago (December) and entered a big correction and consolidation. The three-month dip below the 40-week line almost surely wore out the weak hands, and after a solid rebound into July a few tight weeks set the stage for a solid (not explosive) move to new highs. Like most strong stocks these days, we advise aiming for dips of a few points as the moving averages catch up.

AVLR Weekly Chart

AVLR Daily Chart

Chipotle Mexican Grill (CMG)

chipotle.com

Why the Strength

Chipotle Mexican Grill isn’t the young buck it once was, but it turns out the new economic reality (more take-out and drive-through rather than dine-in) has changed the business model for the better, which in turn is creating a step-function hike in the bottom line. The basic story here remains the same—fast-causal Mexican food, with some new menu additions (lifestyle bowls, cauliflower rice, quesadillas and soon smoked brisket) attracting new customers. But the big idea now is that the store economics have changed: Management used to think each restaurant’s max annual sales would be around $2.5 million, but given the advent of digital ordering and, increasingly, Chipotlanes (drive-through pick ups just for digital order), that’s all changed—the top brass thinks $3 to $3.5 million could be the new max, which not only greatly increases the revenue potential from the existing store base (it has around 2,800 locations) but meaningfully boosts the payback of new stores (by about 10 percentage points). Add in a still-solid cookie-cutter story (about 200 new locations this year and the potential for 6,000 restaurants in the long run) and the future looks miles better than it did a year or two ago—yes, sales and earnings were up huge in Q2 off of easy comparisons, but more important to us is that earnings are expected to leap to north of $25 per share this year (up 81% from 2019’s pre-pandemic figure) and add another 31% in 2022, with more growth beyond that. To be fair, Chipotle is already well followed and known, so nobody is going to argue that the stock will double overnight, but we think the sea change in store economics provides the impetus for another run higher.

Technical Analysis

CMG has been in a long-term uptrend for years, and it was one of the first big-cap names to push out to new highs last year. However, shares hit some resistance one year ago, and while it did push to new highs later on, by June it was back to its levels from nine months prior. But since then the buyers have been flexing their muscles—CMG set up nicely into mid July, gapped on earnings and have acted very much “under control” since then, with higher prices and very tight ranges. We’re OK grabbing some here or on weakness with a stop near the 50-day line.

CMG Weekly Chart

CMG Daily Chart

Floor & Décor (FND)

flooranddecor.com

Why the Strength

In a world full of cloud software, networking and e-commerce stories, Floor & Décor’s tale is much easier to tell: The company has effectively emerged as the Home Depot of hard surface products, with things like tile, laminate and luxury vinyl plank, decorative accessories and wall tile, installation materials and tools and wood making up north of 90% of revenue. Long term, hard surfaces are steadily taking share from carpets and the like, and Floor & Décor’s 150 massive warehouses (far more inventory on hand than other specialty stores) are a hit among professionals and DIY’ers alike. Business has been great for a while—earnings have ramped up many years in a row, and this will be the firm’s 13^th straight year of higher same-store sales—and remains so today, with sales (up 86%) and earnings (up more than five-fold) booming in Q2 off of easy comparisons in 2020. The worries here are that (a) growth may slow after the housing rush of last year and earlier this year, and (b) higher costs (including shipping) will eat into profits going ahead. While there’s some validity to those, it doesn’t change the big-picture cookie-cutter story (the company is on its way to opening 27 new warehouses this year (growing the store base by 20%), and even as comparisons get tougher, growth has remained solid—in July, for instance, same-store sales were up 11% from a year ago. Near-term, the renewed plunge in mortgage rates doesn’t hurt the housing market’s cause, and analysts still see earnings soaring 64% this year and another 17% in 2022 (likely conservative).

Technical Analysis

FND looked to be getting going twice since it hit a wall last December, first in April (when shares briefly hit new highs before turtling) and again in July (when earnings caused a three-week dip). But we think the third time could be the charm—FND tested its breakout level and 50-day line two weeks ago and has since rebounded nicely, though volume has been just so-so. If you don’t own any, you can start small here or on dips and add on further strength.

FND Weekly Chart

FND Daily Chart

Macy’s, Inc. (M)

macysinc.com

Why the Strength

“Death of storefront retail” predictions have proven elusive as shoppers have swarmed malls during the economic reopening and hard-on-their-luck retailers have made moves to survive—and even thrive. Far from killing fashion retailers, the pandemic has resulted in shoppers wanting to inspect firsthand the latest clothing trends at store locations before buying. (Curbside pickup and from-store shipments have also increased, giving stores added value.) Macy’s is seeing a tailwind from this phenomenon, as the lifting of virus restrictions—including a return to work and schools—has resulted in higher at-store shopping volumes. Macy’s has also embraced a store-within-a-store strategy, just announcing a partnership with Toys’R’Us; Macy’s will host the toy retailer in more than 400 stores in 2022 as part of its focus on the under-40 demographic. And like many traditional retailers, Macy’s is now focused more on digital sales as part of its inventory and expense reduction initiatives. All of this is paying off in a surprisingly big way: Macy’s obliterated estimates in Q2, delivering a 59% revenue increase (off a low pandemic comparison) and per-share earnings of $1.29, compared to expectations of 23 cents! Macy’s also posted a comp-store sales increase of 6% (compared to the year-ago 10% decrease), while digital sales improved an eye-opening 45% from the last quarter and up 32% from a year ago. Macy’s advertising outreach has also paid dividends, as shown by the five million new customers it attracted in Q2 (up 30% from 2019!. Also contributing to the strength was Macy’s reinstatement of a dividend (yield 2.8%), along with a $500 million share buyback authorization. Going forward, management guided for Q3 revenue to be $5.1 billion (up 28%), while Wall Street sees earnings of nearly $4 per share this year.

Technical Analysis

After lifting off from 6 last November (when enthusiasm over an economic reopening started to become widespread), M skyrocketed as high as 22 during the meme craze in January, which effectively began a multi-month consolidation. The stock didn’t get hit too badly, finding support repeated in the 16 area, and after shaping up in August it blasted off on earnings a few weeks back before a reasonable dip of late. We think you can start a position here with a stop near the 50-day line.

M Weekly Chart

M Daily Chart

Nutanix (NTNX)

nutanix.com

Why the Strength

Nutanix is a cloud infrastructure company that deals in hyper-converged systems, which combines servers and storage into a single platform, providing a flexible solution that allows customers to easily move different apps between clouds. The company’s shift to a subscription model has caused the growth numbers to take a hit, but that’s starting to change and the long-term business looks better than ever. Nutanix reported estimate-beating revenue of $391 million in Q2 that was 19% above year-ago levels (its best growth of the last three years), while the per-share loss of 26 cents came in 16 cents above expectations. (Thanks to a focus on cost control Nutanix expects to be profitable by the second half of 2022.) But more important are the forward-looking metrics that point to accelerating growth ahead: Total billings, emerging product billings and million-dollar deals hit new records, annual contract-value (ACV) of billings lifted 26% and annual recurring revenue (ARR) mushroomed 83%. Moreover, the average contract length in the quarter backed down 11% to 3.8 years, resulting in shorter-term, higher-value contracts—instead of discounted longer-term ones—to make it easier for the company to sell new products to existing clients. For fiscal Q1 2022, management guided for ACV billings of around $175 million, up 27% at the midpoint. Analysts, see steadily rising sales and earnings from here, and Nutanix believes it’s playing in a giant, expanding market—with the transition to a subscription model well underway, big investors are discounting rapid, reliable growth for a long time to come.

Technical Analysis

NTNX etched out a tight base for several weeks around its 40-week line this spring before taking off in May, rallying nine weeks in a row and taking shares from around 30 to 40 by June. That was followed by yet another base-building period, this one a double-bottom formation, with a shakeout three weeks ago getting rid of the weak hands and then, last week, earnings causing the liftoff. We’re OK taking a swing at it here or on dips.

NTNX Weekly Chart

NTNX Daily Chart

Quanta Services (PWR)

quantaservices.com

Why the Strength

The White House’s emphasis on infrastructure and renewable energy is music to the ears of Quanta Power, which has exposure to both areas and provides end-to-end solutions in the electric power sector, building generating stations, substations and transmission lines for pipeline, industrial and telecom customers. Last week, Quanta acquired Blattner Holdings in a move designed to give it a greater presence in the renewable energy infrastructure sector, and that’s the reason for the latest strength—Quanta expects the deal, projected to close in Q4, to add a whopping 90 cents to its 2022 per-share earnings, along with revenue of around $2.6 billion. Business was already picking up, too, with Q2 revenues rising 20% from a year ago and earnings lifting 43%, both topping expectations. Even better for a company like Quanta is the total backlog, which came in at a record $17 billion at the end of Q2 (including $9 billion that’s expected to be recognized during the next 12 months), both major improvements over comparable periods from 2020. The strong momentum is expected to continue, with Quanta seeing “accelerated renewable generation development” and related demand for its transmission, substation and energy storage solutions. Management said the firm is on track to generate high single- or double-digit operating income margins for the remainder of 2021. Quanta also expressed a commitment to capital returns through its dividend and repurchase programs (though both have been modest thus far), as well as a focus on strategic acquisitions. Analysts se the bottom line rising a solid 20% this year and 15% next, though any large contract signings will probably have a bigger impact on investor perception.

Technical Analysis

PWR spent most of 2017 to 2020 etching a base between 30 and 44, but the breakout last August was a great one and led to a massive, persistent run, taking the stock to the century mark in May. The consolidation after that was very tame (just 17% correction) and never touched the 40-week line, and now the uptrend is resuming, with a very bullish reaction last week to the Blattner acquisition. If you’re game, aim to enter on dips.

PWR Weekly Chart

PWR Daily Chart

(TX)

Why the Strength

Thanks to this year’s revival of the global economy, 2021 has been stellar for industrial metal producers like Ternium. The company manufactures a wide range of high-quality steel products for housing and infrastructure works, with fully-integrated production centers throughout Latin America and the U.S. Elevated global steel demand, low inventories and strong pricing contributed to record quarterly sales, margins and EBITDA for Ternium in the Q2, along with “significant” free cash flow. The results were partly driven by a successful ramp-up of a hot rolling mill in Mexico (the company’s main steel market) in the quarter. Management expects the new facility will enable Ternium to increase its market offering of high-quality steel products by around 600,000 tons over the remainder of the year (a 50% increase). Consensus-beating revenue of $3.9 billion in Q2 more than doubled from a year ago (partly attributable to easy comparisons), while per-share earnings of $5.21 beat estimates by $1.74, driven by a 25% increase in steel shipments. Though Ternium expects lower steel prices in the second half of 2021, it also sees steel production limits in China (due to environmental regulations) and taxes on Russia’s steel exports contributing to a continued strong global market environment for the metal going forward. The company also has high hopes for its new mill in Mexico, believing it will drive growth in the second half due to high demand for HVAC-related products, electrical motors and household appliances, as well as a strong auto market. Analysts see earnings mushrooming to $16 per share this year (P/E of 5!), and even after some retrenchment, coming in at $10 in 2022.

Technical Analysis

TX has had a great run during the past year, but unlike most peers, shares have enjoyed a nice run in recent weeks even as many peers are still in the neighborhood of their May/June highs. Indeed, TX motored higher eight weeks in a row to decisive new highs in July and August, and a three-week rest has allowed the 25-day line to catch up. Expect volatility, but we’re OK grabbing shares on modest weakness.

TX Weekly Chart

TX 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 13, 2021.