March 29, 2021

The Song Remains the Same

Current Market Outlook

First off, a heads up that our offices will be closed on Friday for Good Friday. So we’ll probably be sending you Movers & Shakers a day early this week.

As for the market, the split environment continues, with many major indexes closing last week near new highs, while the Nasdaq is still languishing beneath its 50-day line. Overall, the song remains mostly the same—growth stocks are mired in a correction (including some big winners from last year that can’t get out of their own way), and while many cyclical-related stocks are holding up well, few are really making much upward progress. There are some pullback opportunities here and there, and to be fair, we are seeing more potential setups in growth land. But at the moment, the market action resembles a kid scribbling on a piece of paper, with jerky movements that don’t persist. Thus, we continue to think you should mostly play it safe, keeping new positions small and holding a generous amount of cash until we see the next sustained uptrend get underway.

This week’s list is mostly turnaround-based, with some strong travel and retail stocks that could be decent entries on dips. Our Top Pick is Urban Outfitters (URBN), which staged a longer-term breakout a month ago, with this first pullback likely buyable.

Alaska Air Group (ALK)

alaskaair.com

Why the Strength

Alaska Air is the fifth-largest U.S. airline in terms of annual seat-miles flown, with a focus on serving destinations in the western U.S. The company (which includes the Alaska Air and Horizon Air brands) had over 1,300 flights a day in 2019, prior to the pandemic, serving 115 destinations in the U.S., Mexico, Canada, and Costa Rica. Alaska Air’s main hubs cities are Seattle, Los Angeles, and San Francisco, all desirable markets for domestic flights as well as for making international connections to U.S. destinations. The company’s revenue grew nearly 50% from 2016 to 2019, due in part to a merger with Virgin America Airline in 2016. Like all airlines, Alaska’s business has been in a tailspin because of the pandemic—Q4 revenue was down 64% and, even after grounding a bunch of planes and cutting back on routes, its flights were just 45% full! However, as with all its peers, the market is looking ahead to better times—possibly boom times—in the quarters to come. Even in Q4, the firm was able to raise its fares a bit (2%), while the industry as a whole saw prices sink 18%, and now it’s broadening its reach as it anticipates a strong travel recovery, adding a bunch of new routes in the past couple of weeks (again, mainly out of the west coast), while industry-wide metrics (March 12 saw the largest number of U.S. air travelers since March 15 of last year!) continue to improve and bookings point to good things down the road. Analysts see revenues booming 67% this year and another 39% in 2022, while the loss improves this year and the company surges back into the black next year. And, usually the way these things go, those estimates will prove conservative after major cost cuts last year (Q4 loss of $2.55 per share was 35 cents better than expectations).

Technical Analysis

Like all airline stocks, Alaska Air shares plunged due to the pandemic and was still languishing through Halloween. But last November, “reopening stocks” got a boost as vaccines were proven effective, and Alaska Air’s share price has surged since. The past few weeks have been more hectic, with two short, sharp dips (69 to 60, then 74 to 64), but both found support well above the 50-day line. We’re OK starting a position here or on weakness.

ALK Weekly Chart

ALK Daily Chart

Alliance Data Systems (ADS)

alliancedata.com

Why the Strength

With “digital landscaping” growing fast as shoppers transition from on-site buying to e-commerce, companies that facilitate this development are thriving (or set to thrive). That includes Alliance, which provides loyalty and marketing services to companies worldwide (such as private label credit cards, coalition loyalty programs and direct marketing). For 2020, Alliance reported 10 years’ worth of digital growth in the first quarter alone—thanks largely to its online payment solutions—and reduced fixed costs by nearly $240 million, largely by improving automation. Key to Alliance Data’s growth strategy is creating online services for consumers through multiple touch points, such as self-service capabilities. Late last year, for instance, Alliance launched its Enhanced Digital Suite, a collection of marketing and credit applications intended to increase customer awareness and adoption of payment options by promoting credit earlier in the shopping experience (designed to help brands increase sales and customer acquisition rates). And the recent acquisition of digital payments provider Bread should boost the firm’s addressable market of small and medium-sized merchants. While revenue was 24% lower in Q4 compared to a year ago, it rose 6% sequentially thanks to an increase in receivables. Alliance also added over 60 new online merchants in Q4 (bringing the total to over 500). It further guided for credit sales to rise in the high single digits this year as the economy recovers, with low double-digit growth by year-end. With a cheap P/E (13 times trailing earnings) and solid earnings estimates (up 26% this year and 15% next), Alliance Data should continue to find buyers.

Technical Analysis

ADS established a major peak at 310 six years ago, then commenced a long slide that ended last March at 20. The recession kept the stock stuck inside a narrow trading range between roughly 35 and 55 for most of last year until the vaccine—and the prospect for improved consumer borrowing rates—pushed ADS out of this range and on to new yearly highs. Interestingly, there was another rest period that started in December, but ADS broke out powerfully in February and kited as high as 120 before its recent rest. As with most stocks these days, if you want in, we prefer targeting weakness.

ADS Weekly Chart

ADS Daily Chart

Callon Petroleum (CPE)

callon.com

Why the Strength

We could mostly copy and paste our write-ups from some prior Top Ten energy stocks and include them here, as Callon Petroleum is strong mostly for the same reasons. First off, thanks to solid management and top-notch assets (north of 200,000 acres in the Midland and Delaware basins (two-thirds of output), as well as the Eagle Ford shale, which makes up the remaining one-third), the firm has been highly profitable in recent years, even through the pandemic. But now that Callon has built up its business (including via its purchase of Carrizo Oil in late 2019), it’s focused on keeping output about level, keeping costs in check (it’s cut about 75 cents per share worth of operating costs since 2019) and throwing off a ton of free cash flow—through 2023, the firm sees annual production growing 1% to 4%, but at $50 oil, it sees a cumulative $500 to $800 million of cash flow after CapEx (an average of nearly $5.50 per share annually!), which will mostly be used toward debt reduction, effectively de-risking the entire company. (Callon has no debt maturities until 2023 but is chipping away at the debt balance anyway.) Plus, there are many reasons to think that outlook could prove conservative, as oil prices are already hanging around $60 per barrel, and while they talk a good game, many explorers like Callon could goose production a bit more (it’s only operating three rigs and one to two completion crews) if something crazy happens on the upside in terms of oil prices. All in all, Callon is another relatively cheap energy play that could have upside as the economy booms.

Technical Analysis

CPE is more speculative than some other, more well-situated names, as the stock was languishing under 5 in November, but today finds itself in the upper 30s! Like most of its peers, the stock has finally begun to consolidate, with a sharp 12-point dip over six days before a very strong bounce in the back half of last week. With volatility this extreme, we think it’s best to pick your spot—ideally trying to enter on a pullback and using a loose loss limit.

CPE Weekly Chart

CPE Daily Chart

Expedia Group (EXPE)

expediagroup.com

Why the Strength

Over the past 20 years, Expedia has built a huge network of online travel sites resulting in an industry-leading base of 112 million unique monthly visitors. As of year-end 2020, Expedia’s online platform contained 2.9 million property listings, made up of around two million alternative accommodations (condos, houses, apartments, etc.) and 880,000 hotel rooms. Expedia also ranks as a top-10 travel-related mobile app in 11 countries, which is more pervasive than rivals TripAdvisor (#16) and Booking.com (#128), respectively; the company boosted its growth potential in emerging markets by establishing a business collaboration with Ctrip (ironically known as the Expedia of China). This should be a key competitive advantage, as China is expected to make up around 30% of online booking growth over the next five years, according to analysts. Also, Expedia’s Vrbo brand gives it a leading share in the fast-growing online vacation rental market. Obviously, none of those fundamentals mattered last year, when business fell off a cliff due to the virus; even in Q4 there were few green shoots as rolling shut-ins were enacted as the second wave of the virus ramped up (sales were down 67% with bookings down 66%). But this is all about the future, with industry-wide metrics looking good (most expect a second half boom in travel as vaccinations spread—51.6 million folks are now fully vaccinated in the U.S.). Analysts see revenues up north of 40% both this year and next, and possibly more important than that is the fact that Expedia’s longer-term growth trajectory is back on track—analysts see earnings leaping above $6 per share in 2022 and growing nicely from there.

Technical Analysis

EXPE followed the same path as most of its travel-related peers, with a crash last March, a quick recovery, a few months of dead trading and a blastoff in early November. The rally after hit a pothole in late January, but the action since then has been excellent, with seven weeks up in a row (five of which on above-average volume) before getting yanked around a bit last week. Pullbacks would be buyable in our view.

EXPE Weekly Chart

EXPE Daily Chart

Nexstar Media Group (NXST)

nexstar.tv

Why the Strength

It’s no secret that linear television is in decline, with cord cutting resulting in a continually shrinking audience—and lower ad sales—for most broadcasters. But Nexstar has managed to buck this trend thanks to some timely acquisitions and a shift to digital. Nexstar is America’s largest local TV station operator with 198 so-called full power stations in 116 markets addressing nearly 62% of U.S. television households. It holds affiliations with major networks NBC, ABC, CBS and Fox, with most of its revenue derived from advertising. The company purchased Media General in 2016, and more recently, Tribute Media in 2019, which has allowed it to leverage its scale and the growth of its digital properties. The result of all this has been a significant increase in free cash flow, revenue and earnings growth. Despite last year’s headwinds, Nexstar posted record fourth quarter and full-year results across several key metrics, with revenue and free cash flow coming in at the highest levels in its history. The top line rose 25% in Q4, beating estimates by 28%, due largely to higher political ad sales. Per-share earnings were up an eye-popping 237%, while free cash flow was 155% higher in the quarter and up 191% for the year. In fact, the company sees an average of $1.3 billion in free cash flow each of the next two years, compared to a market cap of $6.5 billion! Nexstar’s focus on growing digital operations also resulted in record digital network growth and audience engagement in 2020, ranking #1 in local news every month and reaching all-time highs in average monthly users, total page and video views and other key metrics. A solid dividend (current yield 2.0%), a ridiculously low P/E ratio and a recent $1 billion repurchase authorization are icing on the cake. It’s a solid story.

Technical Analysis

A four-year upward trend in NXST was interrupted by last year’s crash, which sent shares careening from 133 to 43 in just two months. The rebound from the low was swift, with the stock hitting 104 by June, though that was followed by several months of consolidation. November’s election season (increased viewership and ad sales) provided the catalyst for the next leg of the advance to record highs. The most recent pullback has seen some distribution, but the stock has held its 50-day line thus far. We’re OK taking a swing at NXST here, albeit with a reasonable loss limit.

NXST Weekly Chart

NXST Daily Chart

RH Inc. (RH)

restorationhardware.com

Why the Strength

Furniture retailers have been among the biggest pandemic winners, as millions of Americans have shifted their spending away from travel and dining to house-related projects. RH (formerly Restoration Hardware), a luxury home-furnishings company which sells merchandise through its massive galleries and via the web and catalogs, is seeing strong sales because of this, and is poised for growth even as the economy reopens. Q4 continued a bullish trend as the top line expanded 22% while the bottom line grew 36%. For full-year 2020, revenue rose 8% as per-share earnings improved by an eye-opening 53%. The company last week further indicated that demand has “accelerated sharply” in February and the first two weeks of March, up 73% and 96% respectively, from a year ago (granted those are vs. easier comparisons). Meanwhile, analysts expect the expansion to continue as revenue is predicted to rise 18% this year, with per-share earnings expected to increase 15%. Looking ahead, RH plans to create a new line of luxury products and services the company thinks could significantly increase its addressable market. And unlike many storefront retailers, RH is set to expand its physical footprint by opening new galleries in four major U.S. cities this year and showrooms in Paris and England in 2022. Like everyone else, RH is also putting more emphasis on e-commerce with plans to unveil The World of RH, a digital portal presenting its products, services and spaces, this fall. All told, management believes revenue will continue expanding at a 10% to 15% annual clip for at least 10 more years; while we wouldn’t bet on 10-year forecasts, it’s clear the growth story has a long way to play out.

Technical Analysis

RH made its debut in 2012 at 24, but it wasn’t until 2019 that the stock really took off, with shares rocketing from 85 to 244 over a six-month period. Last year’s Covid crash sent shares cascading to 73, but RH was swift to recover and has since outperformed a number of mega-cap retailers. The latest consolidation started in mid-January, with shares etching a nine-week, double-bottom base, and the breakout on earnings has been powerful. Given the market, we advise aiming for dips.

RH Weekly Chart

RH Daily Chart

SeaWorld Entertainment Inc. (SEAS)

seaworldentertainment.com

Why the Strength

A gutsy reopening move has helped push SeaWorld ahead of many of its theme park competitors, positioning it to benefit from the long-awaited return of tourism. SeaWorld, of course, is a leading entertainment company headquartered in Orlando, Florida, with 12 recreational destinations in the U.S., including seven theme parks (including Busch Gardens and Sesame Place) and five water parks. As you can imagine, SeaWorld’s theme parks have experienced strong headwinds since last year’s shutdown. In the fourth quarter, overall attendance at its various parks dropped 53% from a year ago, while the top line plunged 48% and the bottom line posted its fourth consecutive quarterly deficit. But not everything was bleak as signs suggest the stormy waters are abating, including per-capital revenue gains of nearly 10% in Q4 and higher in-park spending for those who ventured out. Moreover, SeaWorld’s 2.2 million guests in the quarter was a 22% sequential improvement from Q3, further underlining the improvement. Also accounting for the recent strength is the fact that SeaWorld Orlando was central Florida’s only major theme park to stay open during Q4, hosting outdoor events like its Halloween Spooktacular. The company has also been more aggressive in its reopening plans, with seven of its 12 theme parks open by December and all three SeaWorld parks open as of March. What’s more, some of the major new attractions and rides that were to have been unveiled in 2020 will now be opened by this year’s peak vacation season, which should keep the sequential improvement trend intact. Said another way, for SeaWorld, the pandemic is basically over, and analysts see the top line more than doubling this year and rising another 37% next year, while earnings turn positive later this year and boom in 2022.

Technical Analysis

SEAS was sunk by last year’s shutdown, falling from 38 in February before hitting bottom at 7 in March. Four months of base-building followed, then the stock launched an (at the time) inexplicable rally, breaking above 20 and hitting 30 by year end. The late-January shakeout seemed sharp at the time, but SEAS’ move since then has been jaw dropping, with shares soaring to 50 before hesitating during the past few weeks. If you’re game, we think dips of a couple of points could provide an opportunity.

SEAS Weekly Chart

SEAS Daily Chart

Urban Outfitters (URBN)

urbn.com

Why the Strength

Urban Outfitters is a standout success story among brick-and-mortar retailers making the transition from storefront to online sales. Urban is a lifestyle retailer targeting young adults with a mix of his and hers fashion apparel, footwear, accessories and beauty and wellness products. Indeed, the last couple of quarters have shown that Urban has deftly navigated Covid-related challenges by placing heavy emphasis on digital sales channels. Urban’s digital segment reported strong sales growth across all categories in Q3 and Q4, even as reduced hours of operation and occupancy caps weighed on store sales. While Urban saw 7% lower revenue in Q4 (due to reduced store traffic), its Anthropologie and Free People (FP) branded stores actually reported solid traffic growth in the quarter (including 9% comparable store sales growth for the latter). Most impressive was the 138% customer growth and 150% sales increase for its FP Movement activewear line—in fact, management believes Movement is poised to grow from around $100 million in revenue last year to over $250 million by 2024 and sees the brand as a long-term growth driver. Management also indicated that customers appear to be more willing to spend, and the firm is designing more in-house products to exploit this trend. Analysts, meanwhile, expect sales to improve from here, with a 48% revenue bump predicted for Q1 and 23% growth in Q2. Going forward, Urban’s Nuuly, a subscription-based rental and resale business for premium brand clothing, has shown promise in just the first six months since launch. Nuuly has already exceeded expectations with 27,000 active subscribers, and while not yet contributing to profitability, the firm believes it could add to the top line this year. Urban is a solid turnaround story with some true growth drivers as an added kicker.

Technical Analysis

URBN was in decline even before last year’s pandemic hit, with shares falling from a peak of 53 in 2018 to 12 a year ago. URBN needed time to find its legs after the post-crash low and spent a few months consolidating before breaking out last August. It hit a one-year high in November, but then built a new three-month base, with the fresh breakout coming last month. The latest wobble looks buyable to us.

URBN Weekly Chart

URBN Daily Chart

Wayfair (W)

wayfair.com

Why the Strength

Wayfair has always been a controversial stock—to some, it had the makings of another Amazon.com, growing rapidly (but losing money) as it expanded share in the monstrous (north of $800 billion and growing rapidly) home furnishings market, while others saw it as another “we lose money on every sale but make it up on volume” failure. The pandemic changed everything last year, with Wayfair’s business taking a step-function leap higher, including its first-ever profit ($5 per share) and sterling sub-metrics across the board—in Q4, not only did results crush expectations ($1.24 per share topped by 38 cents), but active customers leapt 54% and repeat customers made up 73% of orders, so once people start buying on Wayfair (and there were a lot of new customers last year), they tend to come back many times in the months/years ahead. Again, though, there’s a split concerning the company’s future: Wall Street sees last year as something of a one-time event, with earnings likely to get cut in half this year while revenues grow “only” 12%. But it’s looking like big investors disagree—the stock is one of the peppiest growth titles out there, hovering just a few percent below its all-time high and showing no signs of distribution since late January (see more below) as mutual funds pile in (1,031 owned shares at year-end, up from 797 six months before). We’re open to anything, but it’s certainly looking like the bulls are winning the battle over the large short position (12.9 million shares short, more than six days of trading), with this year’s estimates likely to prove conservative.

Technical Analysis

W’s recovery from last March’s crash was truly eye-opening, with the stock rocketing higher for months before finally hitting a wall near 350 at the end of August. What followed then was a four-month dip to the 40-week line, and while there was a brief short squeeze in January (during the reddit craze), W fell back and began tightening up—shares closed five weeks in a row near the 290 level (give or take) and is now up four weeks in a row despite all the growth stock potholes out there. Volatility is extreme, but we’re OK starting small with a loose loss limit around here.

W Weekly Chart

W Daily Chart

ZoomInfo (ZI)

zoominfo.com

Why the Strength

Technology stocks are clearly not where it’s at in this market environment, but ZoomInfo has the story, numbers and (with a little more work) chart to be a leader once the sector (and growth stocks as a whole) kick into gear. In a nutshell, the company looks like a follow-on opportunity in what’s become a massive customer relationship management (CRM) sector—while CRM (usually cloud-based) software has become more common, the usefulness of it depends on the data imbedded in it. That’s where ZoomInfo comes into play: The firm has a best-in-class “intelligence platform” that uses AI and machine learning of publicly available data (plus information sharing among clients) to dynamically update its contact data. In practice, that means the firm can do a lot of the initial screening and legwork, allowing salespeople more time to sell and develop leads. ZoomInfo is the clear leader in the field, monitoring millions of web sites and potential sales targets (something like 100 million businesses!), while being integrated into many top CRM platforms already. And it’s also broadening its reach, including a recent solution (dubbed Targeted Audiences) that businesses can use to shape their digital campaigns to other firms. Growth has been both rapid and reliable, and earnings are already ramping in a big way, with Wall Street seeing 40% and 31% earnings gains this year and next (respectively). (Indeed, Goldman upgraded the stock last week, seeing a long runway of growth ahead.) We like the story, as do big investors—240 mutual funds already own shares, up from 185 at the end of September.

Technical Analysis

ZI came public last June, rounded out a big post-IPO base and looked like it was ready to get going in February, but the market had other ideas—the growth stock meltdown saw the stock rejected at resistance near 60, with the sellers keeping at it until shares dipped into the low 40s. However, the stock steadied itself from there and actually got back into the high 50s late last week before backing off. ZI still has some work to do (some quiet trading would be nice) and remains very choppy, but you can either nibble here or just keep an eye on whether it can tighten up.

ZI Weekly Chart

ZI 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 April 5, 2021.