Cabot Top Ten Trader Issue: April 29, 2024

Encouraging Snapback—but Not Out of the Woods Yet

As we like to say “up is good,” so last week’s snapback from the major indexes and many stocks and sectors is certainly a good thing (in fact, an inability to bounce from very oversold levels would have been very iffy), and we like that many stocks have actually built six- to 10-week launching pads (because of the churning that began in February). Thus, if the rally can continue, (a) it will make the recent weakness look like one big shakeout, which often leads to powerful upmoves, and (b) there should be plenty of names to sink our teeth into assuming earnings season goes well. However, first things first: The market and most stocks aren’t out of the woods yet, having “only” rallied back into resistance, and earnings season is still in full swing, which is obviously a risk for many stocks—so until we see some real green lights, we advise remaining cautious. We’ll leave our Market Monitor at a level 6, but we’ll change that quickly if the bulls show some follow-on buying.

This week’s list is a hodgepodge of earnings winners, resilient growth names and some commodity ideas as well. Our Top Pick is Onto Innovation (ONTO), a volatile chip equipment maker whose Dragonfly system is perfectly suited for the AI revolution. Earnings are due next week, so keep it small here and see what the quarterly report brings.

Stock 1

Alphabet (GOOGL)

Why the Strength
The company formerly known as Google needs no introduction, as it owns the world’s premier internet search engine (with a market share of over 90%), as well as YouTube, the most popular video-sharing platform, with nearly three billion users worldwide. Alphabet has recovered nicely from the online advertising slump of 2022-2023, thanks in part to a major cost-cutting initiative last year, and the firm is now focused on what it’s calling the “Gemini era” in reference to its artificial intelligence model that powers many of its products, including its chatbot (also called Gemini), as well as its email service (Gmail), online document editor (Google Docs) and search engine. Thanks in part to Gemini, Alphabet said there’s “great momentum across the company,” with its AI research and infrastructure positioning the company for the next wave in AI innovation, and providing the company with “clear paths” to AI monetization through ads and the Google Cloud platform, as well as subscriptions. (For instance, cybersecurity analysts are using Gemini to help spot threats, aggregate and analyze security data in seconds instead of days, while YouTube video creators are able to make AI-generated background shots.) Last week’s Q1 report featured a 15% year-on-year revenue increase, to $80 billion, along with an eye-popping 53% bump in earnings to $1.74 a share (the reason for the stock’s strength). The Q1 strength was led by a 14% increase in Google search revenue, a 21% increase in YouTube ad sales and a big 28% jump in Cloud revenue. The stellar results pushed Alphabet’s market cap above $2 trillion, joining only three other companies in reaching this milestone (Apple, Microsoft and Nvidia). Alphabet also just initiated a token dividend (a 0.5% yield), with quarterly payments to begin in June, as well as a new $70 billion share buyback authorization. Going forward, Wall Street sees low-teens revenue growth and a big earnings gain for the rest of this year.

Technical Analysis
GOOGL was in a steady, if unspectacular, upward trend last year, but then got whacked on its Q3 report and, despite some upside, lagged the overall market during its solid uptrend of the past few months. Even so, the stock wasn’t a disaster, and after hitting new price highs in January, essentially consolidated for the next three months, with no net progress despite some ups and downs. Last week, the Q1 report has gapped GOOGL to new price and relative performance peaks, though we did see some selling show up today. We’ll set our buy range up from here, looking to enter on a resumption of the post-earnings strength.

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Stock 2

AutoNation (AN)

Why the Strength
There’s nothing revolutionary when it comes to car giant AutoNation, which is one of the largest nationwide players in the industry—nearly half of revenue comes from new car sales (average revenue is $50,614 per car!), with about 30% from used cars and the rest from after-sales revenue and financial services. Business here went wild during the pandemic, not because of any huge company initiative but because of the virus’ effects—with limited supply, especially of used cars, prices and margins went wild and drove AutoNation’s bottom line through the roof, from $4.57 per share in 2019 to a ridiculous $24.57 in 2022! That’s now reversing, which is why earnings have been falling off, but the stock is strong for two main reasons: First and foremost, management used a lot of the excess profits seen in the past few years to buy back mountains of shares; not only was the Q1 share count down 8.8% from a year ago, it was down a bit more than 50% from four years ago (just as the pandemic began), which has obviously bolstered per-share metrics. (The firm just reloaded the buyback program, too, putting another $1 billion on the tab.) Moreover, like a lot of items, while prices have come back down to Earth, they’re not falling through the floor, and with the after-sales business providing some stability and growth, most analysts actually see AutoNation’s bottom line stabilizing later this year and expanding in 2025. If that happens, the tame valuation (8x earnings) and continued share buyback program should keep buyers interested. It’s not changing the world, but we think the stock can surprise on the upside.

Technical Analysis
AN looked etched a nice base in early 2023 and broke out on the upside, but the market topped soon after and pulled shares down into what ended up being a long consolidation—shares spent 40 weeks mostly in a 25-point range. However, some buying appeared in March, and after one more shake with the market this month, AN gapped nicely on earnings last Friday … though, like many names, it ran into some selling on strength after the gap. Like many names in the past couple of weeks, we’ll follow a buy-on-strength plan: We’ll set our entry range up from here, looking to add a position if the stock sees follow-on buying.

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Stock 3

Boot Barn (BOOT)

Why the Strength
We’ve always liked Boot Barn’s fundamental story, but ironically, it’s still adjusting to life after the pandemic—though that may be changing soon. The company is a unique lifestyle apparel brand, leading the way in western-, country- and blue-collar-style clothes and accessories; it’s a good-sized opportunity (north of $40 billion) around the country and it’s growing in popularity as many areas it’s tied into (Nascar, country music, hunting/fishing, ranching) grow as well. Impressively, there’s a very enticing cookie-cutter aspect to the story here: Boot Barn should finish April with about 397 stores, up 15% from a year ago, and it has a target of 900 by 2031 (about a 12% annual growth rate from here). And this is bolstered by outstanding store economics, with first-year sales of $3 million and an average payback on the initial investment of just one and a half years. So why is business relatively flat? It goes back to the pandemic—when the virus was everywhere, Boot Barn’s business went wild as the outdoor, rural lifestyle was all the rage; in fiscal year ending March 2022, same-store sales here rose a wild 54%! Impressively, that metric actually remained flat last year but is finally beginning to fall off, with same-store sales off 9.7% in the December quarter, with more declines likely this year. However, the stock is strengthening because, despite the fall-off, earnings are holding miles above pre-pandemic levels, and most see sales and earnings growth not only in the black but accelerating starting in the back half of 2024. To us, then, Boot Barn has a very solid long-term story that has, in a sense, been masked because of the pandemic’s after-effects—but if all goes to plan, the rapid and reliable underlying growth story should take control soon, which should help investor perception. Earnings are due May 15.

Technical Analysis
After a big bear market decline, BOOT rallied back in a couple of stages up to around 100 last summer before another tough retreat, with the stock falling 36% through October and then bottoming out into January. The action since then has been better, with BOOT rounding out a launching pad, nosing to new highs in early April and ignoring the market’s recent wobbles. Dips of a few points would be tempting.

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Stock 4

Emcor (EME)

Why the Strength
Boom times in the building of hyperscale data centers, domestic semiconductor plants and clean energy components, plus parallel trends in artificial intelligence and cryptocurrency mining, are among several reasons for the strength behind Emcor. The Connecticut-based global engineering and specialty contractor is focused on electrical and mechanical construction along with building, industrial and facilities services, and it has exposure to each of the aforementioned trends through its many footprints (it comprises over 80 separate companies!). Last week, Emcor turned heads on Wall Street with strong top- and bottom-line beats in its Q1 report, which featured record sales and operating margins in two of its key construction segments. The firm’s domestic Electrical and Mechanical construction segments generated combined sales of $2.2 billion, up 27% from a year ago, contributing to total revenue of $3.4 billion (up 19%), while per-share earnings of $4.17 surprised estimates by a ridiculous 47% (another reason for the strength). Also contributing was the firm’s Industrial Services segment, which reported its best sales quarter in five years, led by the completion of some large projects, while the U.S. Building Services segment returned “solid” high-single-digit operating margins, led by strong demand for Emcor’s energy efficiency, building controls and retrofit projects. Helping the cause was continued strong demand for data center construction, which Emcor attributed to the expansion of AI (which necessitates greater computing power). Management also mentioned health care as a “good long-term market” for the company, noting that hospitals often involve advanced manufacturing systems that the firm provides. On the M&A front, Emcor just closed three acquisitions in the mechanical construction and building services sectors, with another major acquisition pending. Analysts see double-digit sales and earnings growth this year, but given that Emcor usually trashes estimates, most think that will prove conservative.

Technical Analysis
EME spent the six months between August and February building a tight, narrow base between 200 and 225, save for a brief dip under the trading range floor in October. Shares broke free in early February and embarked on a stunning upmove with basically zero pullbacks, lifting shares to an all-time level of 370 three weeks ago. The recent shakeout found support near the 10-week line, with some upside following earnings. If you want in, you can take a swing at EME here or on dips with a stop just under the 50-day line.

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Stock 5

Kirby Corp (KEX)

Why the Strength
The United States boasts one of the world’s most staggering intra-national shipping markets for goods of all kinds, with more than five trillion ton-miles (!) of freight transported annually across several channels. While truck and rail transport command most of the revenue, shipment along the country’s waterways is often overlooked but plays a crucial part in the overall domestic transportation industry. Kirby is the nation’s premier tank barge operator, transporting bulk liquid products including petrochemicals, crude oil, refined products and ag chemicals throughout the Mississippi River System, the Gulf Intracoastal Waterway and along all U.S. coasts. Meanwhile, its subsidiary, Kirby Offshore Marine, transports liquid products as well as dry bulk things like sugar and coal. Last week, the company announced head-turning quarterly results that pushed shares to multi-year highs in spite of weather-related delays and continued supply chain issues in distribution and services. Revenue of $808 million increased 8% year over year, led by a 15% increase in its marine transportation segment, with earnings of $1.19 beating estimates by 21% and EBITDA of $163 million jumping 37%. Customer activity was said to be “robust” in the quarter with overall barge utilization rates (coastal and inland) running in the low-to-mid-90% rnage throughout the quarter. A big part of the story is overall inflation and limited barge capacity, which is leading to solid pricing and margins—indeed, prices were up in the low-to-mid-single digits sequentially and in the 15% range year over year, helping push pre-tax profit margins north of 10% for the second straight quarter. Management indicated the company was off to a “solid start” for 2024 and maintained a favorable outlook for the rest of the year (forward-looking orders and backlog were very solid in Q1), guiding for “significant” free cash flow despite high levels of CapEx this year. (Most of that cash flow is earmarked for share repurchases; the Q1 share count was down 2.5% from a year ago). Wall Street expects the bottom line to plow ahead for many quarters to come, with earnings lifting 40% this year and something like 25% in 2025.

Technical Analysis
KEX climbed almost 25 points in the first several months of last year, peaking at 87 in mid-September. The stock pulled back after that to test the 40-week line several times over the next few months, all the while carving out a fresh base that served as the launching pad for the ensuing rebound that got underway in February. KEX gained steam in March, hitting new highs, with the advance accelerating into April and boiling over last week when the Q1 report crushed estimates. We’re not chasing it here, but a bit more of a near-term exhale would be tempting.

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Stock 6

Onto Innovation (ONTO) ★ Top Pick ★

Why the Strength
Onto is a Massachusetts-based business that specializes in sophisticated gear needed in the computer chip-making industry, including instruments that see minute defects in wafers during the manufacturing process which can cause defections and dent output for manufacturers. Onto also sells a lot of machines that allow for the speedy manufacturing and packaging of advanced IC substrates (AICS), an intermediary that makes it possible to utilize increasingly tiny circuits in things like CPUs and memory systems. While Onto occupies a highly specialized part in the computer chip supply chain, the reason investors are excited is easy to understand: AI. Specifically, Onto’s clients need its high-volume (yet exacting) inspection tool called Dragonfly to be able to churn out more AI-ready products that require more connections among chipsets in order for AI to do its heavy mathematical work. AI-related revenue is still only a piece of business, so it hasn’t yet been able to offset revenue declines in other parts of the business in recent quarters, but the declines are decelerating and Q1 should see revenue hitting between $215 and $230 million, a 12% rise over last year, with earnings coming in around $1.10 a share, also up. Management feels AI is a long-term tailwind for them, one they hadn’t even expected a year ago when the company was dealing with the restriction of sales into China, which is why sales have been slipping in the first place (down from a 2022 peak of $1 billion). AI demand, though, seems like it will more than replace China, with very strong orders and backlog. Analysts see earnings growing 25% to 30% both this year and next, though more will be revealed on May 9, when Q1 results are due.

Technical Analysis
ONTO broke out in May 2023 and has been in an uptrend since, albeit with many rests and sharp dips along the way. The latest of those base-building efforts began in early March when the entire chip sector hit a peak, with a quick drop to 170 and, when the market dipped in April, a deeper retreat to 162. Even so, the total drop was “only” 17% from top to bottom, and ONTO has rebounded nicely in recent days, a good sign. Earnings next week are a risk, but if you want in, you could start small here on minor weakness.

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Stock 7

Pan American Silver (PAAS)

Why the Strength
Silver has long enjoyed the reputation of being the so-called “sister” precious metal—and it typically benefits from strengthening gold demand due to its cheaper price. But silver also plays a pivotal role in the worldwide energy transition, owing to its excellent electrical conductivity (the highest of all metals, in fact) and widespread use in applications ranging from wind and solar energy production to electric vehicles and other industries associated with alternate energy. This is one of the key drivers behind the strength in Pan American, which is one of the world’s biggest silver producers, as well as a miner of gold, zinc, lead and copper, with operations in several countries throughout North and South America. Financial results for the company were mixed in Q4, as revenue of $670 million soared 78% from a year ago (thanks to its buyout of Yamana Gold), but the per-share loss of four cents missed estimates by 13 cents. However, silver prices have exploded to three-year highs in recent months, which is expected to dramatically boost profits going forward; Pan American guided for all-in sustaining costs (AISC, a key metric) for its silver segment to average $17.25 per ounce this year, which is $10 below current prices. Meanwhile, the company’s AISC for the gold segment is projected to be around $1,525 per ounce, while total production of around 22 million ounces of silver and close to one million ounces of gold is pegged for 2024, with the second half of the year projected to exceed the first half in terms of output. At a recent investor conference, management reiterated its positive year-ahead outlook based on what it sees as rising industrial demand for silver, coupled with increased investment-related buying for both silver and gold, likely keeping prices elevated. The sanguine outlook also prompted a Wall Street institution to include Pan American on its list of top silver mining stocks (a reason for the stock’s strength). After a couple of barely profitable years, the bottom line is expected to start pushing higher later this year and surge into 2025. The Q1 report is due out May 8.

Technical Analysis
PAAS spent a good chunk of last year treading water within a six-point range despite some upside in silver prices. The stock actually hit new lows in February, but it’s been all up since then, with shares moving back above the 200-day line in late March, kicking off a beautiful, big-volume run higher that met resistance around the 20 level. The two-week rest since then has been classic, with PAAS trading tightly and giving up little ground. We’re OK buying a little on any minor shakeout, with a stop near 16.

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Stock 8

Skechers (SKX)

Why the Strength
Skechers is a Fortune 500 company that sells a variety of footwear via more than 5,200 locations around the world (including more than 1,600 of its own stores, with the rest franchised and licensed; the total figure has grown five-fold in the past 10 years), and while it’s not a new story, the growth has been impressively consistent for many years, egged on by top-notch marketing and sponsorship deals (including a new one with Snoop Dog). All in all, it’s the #3 athletic footwear brand, but really, there’s not one dominant reason or new aspect to the story here, just a variety of positive factors pulling results higher: In the just-reported Q1, sales were up 12%, and the gains were broad, with direct-to-consumer revenue up 17% and wholesale revenue up 10%; U.S. sales up 8% while international revenue lifted 15%; while margins lifted nicely, too, helping earnings expand by 43%. Moreover, for the company, inventories actually decreased by 11% in the past three months (!), while the top brass continues to slowly chip away at the share count (down just over 1% from the prior year). And looking ahead, the good vibes should continue, with Skechers likely to open 155 to 170 new company-owned stores alone for the full year, which should help contribute to a 15% to 20% earnings gain this year, with more upside next—and even those estimates should prove conservative given the Q1 beat ($1.37 per share topped by 20 cents). If you’re looking for something revolutionary, look elsewhere, but Skechers offers a solid, well-run operation with a reasonable valuation that should continue to do well going forward.

Technical Analysis
After a multi-month rest and correction last summer and fall, SKX looked like it was ready for great things, as shares moved straight up (nine weeks in a row) to new highs following the October market bottom. But the stock has spent all of 2024 correcting and consolidating, with a shake down to its 40-week line two weeks ago, just in time for the quarterly report—which, encouragingly, gapped the stock to new price highs on great volume last Friday. Near-term wobbles are certainly possible, but we’re OK starting a position around here or on dips with a relatively tight stop (percentage-wise) near 60.

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Stock 9

Tidewater (TDW)

Why the Strength
Rising tensions in key oil-producing regions of the globe, coupled with strong domestic gasoline demand and falling inventories, are big reasons for this year’s runup in energy costs. Adding to the upward pressure for oil prices is the latest economic data from the eurozone which showed business activity across the region is expanding at its fastest pace in nearly a year. These are just some of the factors providing opportunities for Houston-based Tidewater (covered in the March 18 report). The company is a leading global purveyor of larger offshore support vessels and marine support services to the global energy industry, including services for offshore crude oil and natural gas exploration, field development and production and windfarm development and maintenance. In an acknowledgment of the strength underlying the offshore exploration industry, Tidewater noted that the rise in dayrates for its vessels was increasing “faster than anything we have seen in the industry” heading into 2024. What’s more, the shortage of vessels across the industry, coupled with a record-low vessel newbuild order book and improving offshore vessel demand, were mentioned as supporting factors behind what the company sees as improving operational performance for this year and beyond. (It didn’t hurt that Tidewater itself has expanded its vessel count in a big way via M&A the past couple of years, giving it more market share and, hence, negotiating muscle.) The company subsequently guided for revenue to grow 40% and gross margin 60% in 2024. In Q4, revenue of $300 million increased 62%, while EPS of 74 cents a share more than doubled from a year ago, while the $61 million in free cash flow Tidewater generated (easily over $1 per share) more than doubled from the prior quarter, too. When the company reports Q1 results on Thursday (post-market), Wall Street expects a 62% increase in the top line, while earnings should boom through 2025 at least.

Technical Analysis
We missed getting into TDW last month when the stock never dipped into our buy range, but now we’re seeing it (and many oil service names) offer potential entries. Shares have been in a long-term uptrend for a while, and broke out of their latest base on earnings at the start of March, leading to a solid run to the century market about a month later. Now TDW has dipped near its 10-week line and begun to bounce, albeit on low volume, ahead of this week’s quarterly report. If you’re aggressive, you could nibble on dips ahead of earnings, or just see if the stock provides an entry after the report.

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Stock 10

Viking Therapeutics (VKTX)

Why the Strength
Viking Therapeutics is a clinical-stage biopharmaceutical company focusing on therapies for metabolic and endocrine disorders. The big idea here is that the firm aims to have its own entry in the obesity treatment competition—VK2735, a dual GLP-1 and GIP receptor agonist (Eli Lilly’s Mounjaro is a dual agonist as well). Viking said last quarter the treatment successfully achieved its primary endpoint and all secondary endpoints in trials, demonstrating significant weight loss in obese patients—in short, it appears to work, with patients losing up to 15% of their weight in 13 weeks; the key point is that in trials, Viking’s offering has worked better than those from Lilly or Nordisk, which is obviously a good thing. Viking’s drug is an injection right now, but Viking says early trials on a pill version have seen patients lose an average of 5% over a month. Management expects to start new trials for the injection and pill this quarter. Its other leading drug candidate is VK2809—as the lack of a commercial name suggests, it’s still in development as an oral treatment that for lipid and metabolic disorders. The drug is currently being evaluated in a Phase 2B study for the treatment of biopsy-confirmed non-alcoholic steatohepatitis (NASH) and fibrosis. NASH is a fatty liver affliction that can lead to cirrhosis and liver failure in people who drink little to no alcohol. Studies so far have shown reductions in liver fat between 30% and 55% for most patients, with associated improvements in LDL cholesterol levels, suggesting long-term benefits to the treatment. Both drugs are a while from getting to market, but Viking has close to $1 billion cash from a recent stock offering and little debt. Viking is clearly speculative, but there’s a belief that the firm could eventually capture a good share of the weight-loss market—if not be an M&A target itself.

Technical Analysis
Like many development-stage outfits, VKTX has huge swings, including its dip last summer/fall from 26 to 9, followed by an enormous advance from there, most of which came on a gigantic gap up from 39 to nearly 100 in late February after its latest batch of bullish trial results. Not surprisingly, VKTX has backed off since then, but it’s found support near 60 twice and has begun to perk up in recent days, too. It’s not for the rent money, but if you want to roll the dice, a small buy here or on dips and a loose stop near 60 is fine by us.

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Previously Recommended Stocks

The next Cabot Top Ten Trader issue will be published on May 6, 2024.

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