March 22, 2021

Still Consolidating

Current Market Outlook

There were some intra-week ups and downs, but overall, not much changed with the evidence last week—the major indexes mostly closed down 0.5% to 1.5%, which keeps the broad market in an uptrend but also means growth stocks and the Nasdaq are still in corrections and consolidations. With many names now five to seven weeks into new launching pads, we’re looking for definitive signs that the buyers are coming back for growth stocks—and indeed, we have seen some encouraging action during the past two sessions—but it’s too soon to conclude the environment is changing. Thus, we’re sticking with the same stance: Some small buys of strong stocks on pullbacks is fine, but we’d stay relatively close to shore until the bulls prove that the buying pressures are spreading and more solid entry points emerge.

This week’s list has something for everyone, whether you’re looking for different sectors or setups. Our Top Pick is LGI Homes (LGIH), which has reemerged on the upside and could be leading a new group move in the homebuilders.

Aclaris Therapeutics (ACRS)

aclaristx.com

Why the Strength

A surge in the world’s geriatric population has led to an increase in rheumatoid arthritis (RA) cases, with North America accounting for more than half the global RA drug market. Aclaris, a clinical-stage biopharma company that develops treatments for autoimmune diseases, is aiming to address this need. The company grabbed the spotlight earlier this year after releasing positive top-line results in a Phase 2a clinical trial of its ATI-450 treatment for patients with moderate to severe RA. (The drug demonstrated “marked and sustained reduction” in disease-activity scores in the placebo-controlled study.) ATI-450, a novel oral MK2 inhibitor, is one of five candidates in Aclaris’s drug and program pipeline. Its other leading drug candidate is ATI-1777, an investigational “soft” Janus kinase 1/3 inhibitor for treating moderate to severe atopic dermatitis, a chronic condition where the skin gets red and itchy; last week the company completed enrollment of a mid-stage trial for this drug and anticipates trial data this summer. There’s also ATI-2138, an investigational treatment for inhibiting psoriasis and inflammatory bowel disease. But ATI-450 is the main attraction, and Aclaris is targeting three indications with this drug: RA, Covid-19 and other rare inflammatory disorders. At this point, Aclaris is still in the development stage, but all the focus is on the future—the global autoimmune disease market is an estimated $65 billion in size, with rheumatoid arthritis accounting for around 26% of that figure. It’s an interesting speculation.

Technical Analysis

ACRS spent a good part of the last two years below 5, but its fortunes suddenly improved in late 2020, when shares broke decisively above 5 in December. And then they soared more than 200% in January after releasing the promising results on the ATI-450 clinical trial! Encouragingly, the stock then consolidated while the 10-week line caught up before pushing higher the last two weeks. If you’re game, you could start small here or (preferably) on dips.

ACRS Weekly Chart

ACRS Daily Chart

Alcoa (AA)

alcoa.com

Why the Strength

With the U.S. economy entering boom times, cyclical industries like aluminum have been outperforming and Alcoa, one of the world’s largest aluminum producers, stands to benefit. Its operations include bauxite mining (aluminum ore), alumina refining (for smelting), and primary aluminum manufacturing. With aluminum prices at nine-year highs, Alcoa is expected to see significantly higher free cash flow going forward. That’s a big reason for the recent strength, but another is the anticipated increase in automotive demand for aluminum—after an 11% sequential improvement in sales of value-added aluminum products, Alcoa saw an additional 13% volume growth in Q4, particularly in the auto sector. (Aluminum is second to only steel as the most used material in vehicles.) After a 15% drop in 2020, the National Automobile Dealer Association forecasts 7% higher auto sales for 2021, which many analysts think is conservative. Moreover, global aluminum consumption this year is expected to increase 7%—the fastest rate since 2014—based on fiscal stimulus and central bank looseness. On the financial front, while revenue was 2% lower in Q4, Alcoa posted consensus-beating per-share earnings of 26 cents, a huge rebound from the $1.17 per-share loss in Q3. For the current quarter, the top line is expected to increase 11% from a year ago while the bottom line rises to 48 cents (up 85% sequentially). All in, Alcoa is a cyclical play but the upside is big if the economic recovery continues. Add to that a possible dividend reinstatement within a year and we like what we see.

Technical Analysis

AA’s post-election blast-off to a one-year high was briefly interrupted by a sharp earnings-related decline for the stock in January. But shares found a supporting bid at 18 (accompanied by some unusual bullish activity in the options market) and resumed climbing to its latest high of 33 as volume really picked up. With support down in the mid 20s, we’re OK starting a position in AA here or on pullbacks of a point or two.

AA Weekly Chart

AA Daily Chart

Cimarex Energy (XEC)

cimarex.com

Why the Strength

Every energy stock has had a nice move in recent months, but as the advance gets a bit more selective (the group has finally begun to pull back during the past two weeks), the wheat should separate from the chaff and we’re thinking Cimarex Energy will be a name big investors continue to gravitate toward. The company is mostly focused in the Permian basin (235,000 net acres in the Delaware basin), though it also has a rig up and running in Oklahoma as well, and both have many years of drilling inventory. Cimarex is following the same script as other successful names in its group—the company has cut costs (drilling cost per foot should be down 13% this year after a 15% drop last year; total cash costs were down 16% last year), has a pristine balance sheet (no debt maturities until 2024) and is aiming to expand production in a controlled fashion (oil output up a couple of percent after taking into account Q1’s weather-related shut-ins in Texas). And because of all that, Cimarex is going to throw off a ton of cash—even at $35 oil and $2.50 natural gas the company will be solidly cash flow positive after accounting for its solid dividend (1.8% annual yield), and at $55 oil and $3 natural gas, free cash flow should explode to nearly $750 million, or about 12% of the firm’s current market cap! For now, much of this is going to debt reduction, but the firm has a history of hiking the dividend (raised by 23% last year!) and, if prices stay elevated, there’s no reason supplemental dividends, hikes or increased drilling couldn’t take place. As with its peers, perception would be damaged if oil prices really took a hit, but given the industry’s emphasis on producing cash and not expanding production, the odds of a sustained downturn seem minor. We like it.

Technical Analysis

XEC is two weeks into a pullback, and given the run from the November blastoff, the dip could certainly carry on longer. But so far, the correction has been textbook—volume has sloughed off both weeks, the stock has so far found logical support at its 25-day line and volume on Friday’s bounce was above-average. Given the big run, we still think it’s best to aim to enter on further weakness, or as the 50-day line (now at 54 and rising quickly) catches up.

XEC Weekly Chart

XEC Daily Chart

IAC/InterActiveCorp (IAC)

iac.com

Why the Strength

IAC Corp. is effectively an incubator outfit that buys stakes in young startups, helps them develop and, if all goes well, those firms are then spun-off (in whole or in part), allowing them to be valued more fully (and benefiting shareholders in the process). Match.com was the firm’s biggest claim to fame, but the stock is strong today for other reasons. The first is the value of just a couple its holdings—IAC owns 84% of ANGI Homeservices (ANGI), which is currently worth about $6.9 billion, while the company also owns 59 million shares of MGM Resorts (MGM), which is around $2.3 billion. (Combined, these two stakes total about half of IAC’s market cap.) But there’s much more, as IAC owns stakes in a bunch of privately-held firms like Dotdash, an online media publisher that itself owns the brands Lifewire, Investopedia, The Balance, Serious Eats, Brides, Liquor.com and more (revenues here were up 33% in Q4); Ask Media Group, which owns a bunch of search-related sites including Ask.com, Reference and Shopping.net (revenues up 39% in Q4); and, most importantly, Vimeo, which offers tools for businesses to create, manage and share videos (including live streams) for a very reasonable price ($75 per month is the most expensive plan and includes unlimited live streaming). Vimeo is one of the catalysts here, as the firm is expected to be spun-off from IAC Corp. sometime in the second quarter. Because of the structure of the company, the sales and earnings numbers are basically meaningless—instead, IAC is a play on overall asset values for online properties, which remains very strong. It’s an intriguing special situation.

Technical Analysis

IAC had a booming recovery from last March, reaching the mid 130s by the end of July before resting for a few months. A new uptrend kicked off in November, and it was very impressive—shares rallied 13 weeks in a row all the way above 260 before the weakness in growth stocks finally brought in some sellers. But the dip was reasonable, and so far shares have respected their 50-day line. If you’re game, you could start a position around here and add if IAC perks up.

IAC Weekly Chart

IAC Daily Chart

Jack in the Box (JACK)

jackintheboxinc.com

Why the Strength

Restaurant chains were among the hardest hit by Covid, but Jack in the Box was an exception, as its value-oriented menu is bouncing back with big profit surprises and share price gains. Founded in 1951, the company now operates and franchises 2,241 fast-food restaurants in 20 states, though it’s concentrated in California (41% of stores) and Texas (27%). The chain has transformed itself in recent years from mostly company-owned to predominantly franchised restaurants; this shift to more of an asset-light business model (similar to McDonald’s) dramatically cut costs, boosted margins and profits and made the business more resilient overall. Jack in the Box earnings per share (EPS) posted positive surprises in each of the last three quarters, and by an average of +33% over analysts’ estimates, and EPS growth actually was strong and accelerating during that period, with an 85% gain registered in Q4. After posting full year EPS of $4.61 in 2020 (which was remarkably still up 6% from 2019 despite the pandemic), Jack in the Box is expected to deliver EPS of $6.44 in 2021, up 40% year on year! Besides the booming earnings gain in Q4, Jack in the Box saw a whopping 12.5% gain in same-store sales (a year ago it was just 1.7%), and management said the first half of Q1 was delivering similarly bullish trends. This firm doesn’t have the long-term growth prospects of some others, but its high-margin (14%-plus after-tax profit margins), reliable earnings and solid dividend (1.4% annual yield) should keep big investors interested.

Technical Analysis

JACK had a great initial comeback after last March’s crash, and then built a three-plus-month base in August, September and October before moving up again. The century mark proved sticky starting in late January, but seven weeks of ups and downs have given way to buyers again, with JACK taking off in recent days on elevated volume. We’re OK buying some here.

JACK Weekly Chart

JACK Daily Chart

LGI Homes (LGIH)

lgihomes.com

Why the Strength

Homebuilders were up and down for a few months despite the red-hot housing market, but recent action suggests the group is getting going again, and LGI Homes appears to be one of the better plays in the sector. The company is a mid-sized builder (10^th largest in the country) that’s generally focused on first-time homebuyers in some of the faster growing places in the country (mostly the central and southeast U.S., as well as Florida), allowing it to expand relatively quickly as it builds up new communities (generally suburban and located near retail or business centers)—the goal is to eventually double in size and become a top-5 homebuilder in the U.S. And given its execution during the past eight years (founded in 2013) there’s no reason to doubt it. As for the here and now, business is very strong: Q4 sales (up 48%) and earnings (up 106%) blew away expectations as home closings (+35%) and average sales price (up 9.3%) surged, which again resulted in industry-best margins (north of 27% gross margins despite cost pressures). The fear, of course, is that higher mortgage rates and skyrocketing prices will crimp the housing market to some extent, but we think there are bigger factors at work, such as people reassessing where they want to live (moving out of the cities, etc.), and the industry’s decade-plus of under-building relative to history. As far as homebuilders go, we think LGI has a bright future both short and long term.

Technical Analysis

LGIH crashed last year but quickly recovered back to its old high after it became apparent the housing market was actually benefiting from the virus. The breakout came at 95 in June and shares quickly moved to 125 a few weeks later, but that was it for a while—late last month, the stock was actually sitting under 110. But now LGIH has staged a fresh breakout, and while it’s not a perfect picture, we like the volume cluster in recent days, which usually portends good things. We’re OK buying some around here.

LGIH Weekly Chart

LGIH Daily Chart

Spirit AeroSystems (SPR)

spiritaero.com

Why the Strength

Boeing had a rough last couple of years after getting the grounding of its 737 MAX commercial plane following two fatal accidents. But in late 2020, the FAA cleared the 737 for takeoff once again. That’s good news for Boeing’s suppliers such Spirit Aerosystems, which is one of the world’s largest manufacturers of aerostructures for commercial and defense aircraft, making fuselages, pylons and wing components, as well as maintenance and repair services. As a former Boeing subsidiary, Spirit produces fuselages for the 737 and its other planes, with the 737 accounting for a large part of its sales in recent years (though it supplies other major aerospace firms as well). Spirit is also diversifying in adjacent areas, including a recent acquisition of the assets of leading business jet company Bombardier; management believes the post-pandemic recovery for business jets will arrive before commercial aviation. (Bombardier assets are expected to provide $700 million in revenue this year and grow around 15% annually with future margins north of 10%.) Spirit posted a big earnings miss in Q4—fuselage and propulsion system sales were both down 59%, while wing systems were down 45%—but there were some bright spots. The defense business grew by over 20% in 2020, and while the firm expects negative free cash flow in 2021, it’s also expected to be “significantly improved” from 2020. Analysts, moreover, see revenue increasing 18% in 2021 and earnings turning positive in 2022. Finally, Spirit is benefitting from bullish comments from several Wall Street analysts who see it as one of the best ways to play the 737’s return. It’s a solid turnaround story.

Technical Analysis

After several halcyon years, SPR took a turn for the worse in 2018 following the 737 MAX disasters, tumbling from 100 down to 20 last March. SPR finally found support and spent several months basing around 20 before taking flight again in November. The stock hit an air pocket at 40 and spent a few weeks consolidating in December and January, but SPR has been strong since a late-January shakeout. We’re OK taking a swing at it here or (preferably) on dips.

SPR Weekly Chart

SPR Daily Chart

Steel Dynamics (STLD)

steeldymanics.com

Why the Strength

Steel is one of the strongest-performing industrial metals right now, thanks in part to lingering supply shortages that popped up with the pandemic last year. Automakers and aerospace parts manufacturers have had to scramble to secure steel supplies, with inventories at their lowest levels since 2004 and hot-rolled steel prices recently hitting highs not seen in decades. Steel Dynamics is one of America’s largest producers of carbon steel, used in buildings, bridges, rails and pipelines—making the company a potential infrastructure spending play. Thanks to rising demand, Steel Dynamics reported near-record levels of nearly 11 million tons of steel shipments for 2020. Revenue of almost $10 billion, meanwhile, was the fourth highest in the firm’s history. The company also reported record fabrication volume and steel shipments that were only 1% shy of a record, which management described as a “phenomenal performance” in view of prevailing economic condition last year (and despite below-capacity steel mill operations). One advantage Steel Dynamics has over other steel producers is its use of electric arc furnaces, which greatly reduce energy requirements and allow steel to be made from 100% scrap metal, allowing the company to produce the metal more cheaply than most of its peers while boosting utilization (and maximizing the benefit of higher prices). Management expects Q1 profitability from steel operations to come in significantly higher than Q4, driven by flat roll metal demand, and expects an “even stronger” Q2. Meanwhile, the consensus expects a 34% top-line bump in Q1 and a 66% rise in Q2. A 2.2% annual yield ties a nice bow on this package.

Technical Analysis

STLD peaked at 52 back in 2018 and bottomed at 15 after the March panic a year ago. In the last 12 months, the stock has almost completely recouped its losses from the 2018 top! More recently, STLD’s brief dip under the 10-week line in January refreshed the uptrend, and the stock has since gone on to make new yearly highs on a pickup in volume. The stock’s latest breather looks buyable to us.

STLD Weekly Chart

STLD Daily Chart

TripAdvisor (TRIP)

tripadvisor.com

Why the Strength

Spring fever, coupled with pent-up travel and dining-out demand, are expected to contribute to a strong showing for the lodging industry this year. Restaurants, hotels and vacation resorts hope to attract customers after last year’s tourism collapse, and many of them are turning to travel platforms like TripAdvisor to help drive business their way. TripAdvisor operates various travel-related websites and a mobile app, as well as offering online hotel reservations and bookings for transportation, lodging and restaurants. The company’s websites draw more than 400 million visitors each month and the firm has taken steps to monetize this by offering a subscription service. The biggest news of late is its new TripAdvisor Plus, currently in beta, which costs $99 a year and provides deals from hotels and vacation services for customers. This was a big reason for the latest strength, as Plus inspired an upgrade from a big Wall Street firm, which predicted 10 million members and an additional $1 billion in revenue from the service over time. Although revenue in Q4 was down 65% due to Covid-related restrictions, management indicated that pent-up travel demand is growing and expects travel could come “roaring back” in the second half of the year. And while analysts expect one more rocky quarter for revenue in Q1, the consensus sees the top line exploding 229% in Q2, followed by several more quarters of growth. Moreover, TripAdvisor achieved a target of $200 million in cost savings in 2020 and upped its liquidity position (to $400 million in cash). All told, the firm appears fully prepared for a 2021 reopening, with the Plus offering providing a long-term growth catalyst.

Technical Analysis

TRIP went public in late 2011 and peaked at 111 in 2014 before commencing an extended slide to a lifetime low of 15 last March. Shares then spent several months tightening in a lateral trading range before finally breaking out in November on optimism over a vaccine and economic reopening. TRIP’s rebound has accelerated in the last two months on massive volume (most of the excitement surrounds the new Plus service), with shares reaching a two-year price high last week. We suggest aiming to enter on further weakness.

TRIP Weekly Chart

TRIP Daily Chart

Williams-Sonoma (WSM)

williams-sonomainc.com

Why the Strength

Williams-Sonoma is one of many retailers that quickly adjusted to a more online-heavy sales strategy during the pandemic, while its focus on high-quality home goods is also helping as consumers “upgrade” their houses and kitchens. The company operates more than 600 specialty retail stores in the U.S. and internationally, offering cooking, dining, and entertaining products, plus home furnishings and accessories under the Williams Sonoma and Pottery Barn brands. Earnings growth has exploded since the pandemic hit, and the Q4 results (reported last week) were fantastic: Sales growth (up 24%) accelerated again, while earnings (up 85%) obliterated estimates by 65 cents per share and same-store sales grew a whopping 26% (thanks in large part to a 48% gain in e-commerce revenue; the firm saw a 130% uptick in buy online/pick-up in store orders). Even better, management sees the good times continuing, guiding to mid- to high-single-digit revenue growth, which topped expectations. Analysts see the bottom line rising just 4% this year and 8% next, but odds favor that will prove conservative. The big risk here is spending moving from people’s homes to other areas (like travel), but there’s obviously no sign of that yet. A 1.3% dividend yield (recently hiked) adds a cherry on top to this solid story.

Technical Analysis

After an initial, strong snapback from the pandemic lows a year ago, WSM did encounter plenty of chop in the ensuing months, making upward progress but with three probes below the 10-week line along the way. The latest hiccup came in late January and lasted seven weeks, but the Q4 report last week brought back the buyers—WSM gapped up strongly on Thursday and followed through nicely on Friday, both on huge volume. We suggest trying to enter on dips of a few points.

WSM Weekly Chart

WSM 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 March 29, 2021.