Cabot Top Ten Trader Issue: December 16, 2024

Stock by Stock

After a huge run, last week definitely showed some short-term (sometimes intermediate-term) character changes for many stocks, especially leading titles, with some flashing legitimate abnormal action; even among the top-down evidence (major indexes), we’ve seen sluggishness, with the broad market showing wear and tear (though most indexes have thus far held support) even as sentiment remains relatively buoyant. That said, there are still plenty of stocks either holding their own or still doing well, too, including some growth-y themes that are seeing fresh buying of late, a sign big investors aren’t going into hibernation. When you put it all together, we do think paring back some and seeing how things play out makes sense, but it’s as important as ever to take things on a stock-by-stock basis, lightening up on names that are struggling and focusing any new buying on names that are fresher and have recently shown outsized power. We dropped our Market Monitor to a level 6 and will leave it there today, but we’re flexible and could ratchet it higher if growth stocks act bullishly from here.

This week’s list has a wide assortment of names—but nearly all of them are growth-oriented, which we take as a good sign that some money is rotating into fresher ideas. Our Top Pick is Broadcom (AVGO), a mega-cap that staged an awesome breakout on earnings last week. Near-term wobbles are possible, but we think big investors will support any dip.

Stock 1

Amer Sports (AS)

Why the Strength
Amer Sports is a collection of 10 sporting goods brands anchored by outdoor clothing’s Arc’teryx, ski and shoe brand Salomon and ball and racket maker Wilson. The three brands account for 90% of sales, with a clutch of skiing and baseball brands like Atomic and Louisville Slugger rounding out the business. Amer was taken public earlier this year by Lululemon founder Chip Wilson and four Chinese companies/investors including ANTA Sports and Tencent. The Chinese connection is important because greater China is where Amer’s best growth is. In the third quarter, sales rose 17% to $1.35 billion, powered by a 54% gain in Asia-Pacific, while Europe and North America grew just 2.5%. Amer is covering China with stores for Arc’teryx and Salomon, appealing to the middle-class consumers with money to spend and a desire to be outdoors while also being fashionable; Salomon’s hybrid hiking-waking shoe, for instance, has become a category of its own this year. Management is planning to do much the same with Wilson, with Tennis 360 stores opening up across China, driven by voracious interest in racket sports – tennis stemming from a good Olympics showing, and paddleball and padel tennis becoming hugely popular in China just as in the rest of the world. A recent tour of China by NBA star Steph Curry also was so well received that at least one city stop was called off by authorities out of safety fears due to the huge crowds he was drawing. Outside of China, Wilson leads growth for Amer, with a just-launched Roger Federer line of tennis gear doing well and a WNBA star Caitlin Clark brand providing a notable boost to basketball sales. Top-line growth here is solid and should stay that way (analysts see 14% growth in 2025), but margins and earnings are surging. The risk is that Chinese consumer may close their wallets, but government stimulus seems intent on goosing spending.

Technical Analysis
AS’s February IPO didn’t bring in many buyers, with shares stagnating for a couple of months before nosediving to 10 in the summer. Earnings in August helped the stock to turn the corner, with Chinese stimulus news helping perception further a few weeks later. And then, after a couple tests of the 25-day line, AS went vertical following Q3 earnings, which easily surpassed estimates. We’ll aim to enter on pullbacks.

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Stock 2

Broadcom (AVGO) ★ Top Pick ★

Why the Strength
Semiconductor and infrastructure software giant Broadcom just concluded what it called a “transformative” fiscal 2024, with full-year sales growing 44% year-on-year to a record $52 billion, driven in part by the closing of the VMWare acquisition but also by (what else?) tremendous AI-related demand; in last week’s earnings call, the company said its serviceable market for custom AI accelerators (or XPUs) could reach $90 billion annually by fiscal 2027 alone! (The eye-opening figure is based mainly on Broadcom’s three current hyperscale customers, Alphabet, Meta Platforms and ByteDance.) The surge in the firm’s AI-driven offerings helped push its market cap above $1 trillion in fiscal Q4 (ended November), placing it among the world’s most valuable companies. Total revenue of $14 billion increased 51% from the prior year’s Q4, with earnings of $1.42 beating estimates by three cents and EBITDA (the better profit metric for the company) of $9 billion increasing 50% and accounting for an amazing 65% of revenue. The sales strength was led by AI revenue which grew by an astounding 220%, driven by Broadcom’s leading AI XPUs and ethernet networking portfolio, pushing semiconductor revenue to a record $30 billion. While AI is expected to be the key driver in the next three years, the company also said its broad portfolio of non-AI semiconductors (which it provides to multiple end-markets) saw a cyclical bottom in fiscal 2024, with further recovery expected at the industry’s historical growth rate of mid-single digits. But artificial intelligence is where Broadcom sees most of the opportunity ahead, with the firm seeing the AI chip business rapidly outgrowing the non-AI semiconductor business going forward. For fiscal Q1, the top brass guided for revenue of $15 billion (up 22% if realized), led by semiconductor and infrastructure sales growth of 10% and 40%, respectively, while adjusted EBITDA is expected to comprise a record 66% of revenue (ahead of the firm’s three-year target).

Technical Analysis
AVGO was one of the big-cap leaders of the chip group from its blastoff in the spring of 2023 into the peak in the summer of this year. What followed was a sloppy consolidation, as the stock fell as much as 31% but twice found support near the 40-week line, though the rally back to its highs in October led to another 15% drop—all told, five-plus-months of no net progress. But that all changed last week, with a monstrous-volume gap to new highs and an outstanding follow through today. Yes, AVGO could shake out, but given the power here, the odds are against a big retreat.

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Stock 3

Carvana (CVNA)

Why the Strength
Carvana is doing its part to make the inconvenience (and, at times, aggravation) of using traditional dealerships to buy used cars obsolete. Its platform (which includes 360-degree views, a seven-day test run and a guarantee no car has been in a reported accident) allows buyers to purchase vehicles online, while either having them delivered directly to their homes or allowing them to pick them up at one of the company’s iconic “vending machines.” Indeed, the continued success of this vertically integrated business model was on full display in Q3, which featured record performance in virtually every key financial metric, including revenue of $3.7 billion that increased 32% year-on-year and per-share earnings of 64 cents that beat estimates by a whopping 34 cents. Even more impressively, EBITDA (a much more accurate profit metric for Carvana) of $429 million nearly tripled while setting a record, while EBITDA margin of 12% was a new all-time best for any firm in the industry, which management said cemented Carvana’s position as the industry’s “fastest-growing and most profitable automotive retailer.” Moreover, the company was able to deliver a 30%-plus jump in the number of cars sold in the quarter despite relatively flat inventory levels. In the earnings call, Carvana emphasized its plans to continue expanding—its market share is just 1%—and it sees “significant opportunities” for further improvement in every part of the automotive sector. To that end, the company has built out reconditioning infrastructure to support over one million retail units per year, and it said its physical real estate will support over three million retail units per year, with more reconditioning centers being built closer to its customers to allow for faster delivery times. (By comparison, total retail units sold in Q3 was 108,651, so the top brass is thinking big.) The excellent financial results in Q3 prompted a number of Wall Street firms to upgrade the shares (a reason for the strength), with one major investment bank stating that Carvana has achieved “escape velocity” on profitable growth being more durable than most analysts envisioned, while also generating enough positive free cash flow at a level that supports self-financing and debt repayment. Looking ahead, analysts see continued strong bottom-line growth.

Technical Analysis
After rounding out a bottom ahead of the big turnaround that got underway last year, CVNA has spent most of this year recovering a huge chunk of the ground it lost during its prior bear market. It’s clearly no longer in the early innings of its advance, but we remain impressed with how “under control” it acts, with volatility actually decreasing some of late as shares have effectively consolidated. With the 50-day line catching up, we’re OK nibbling on dips.

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Stock 4

Ciena (CIEN)

Why the Strength
Networking equipment and software giant Ciena is benefiting from the accelerating requirements from enterprise customers for high-speed optical networking products thanks largely to the ongoing artificial intelligence and cloud computing buildouts. Despite a mixed earnings report last week, the stock boomed after the company provided a strong outlook for 2025 on the back of growing cloud and AI demand, which it sees quickening revenue growth and boosting market share going forward—and which Ciena believes extend beyond its compute business to other areas of the data center sector as the “massive” AI super cycle is “flowing to all parts of the network.” Ciena, which specializes in optical and routing systems for the telecommunications industry, is seeing improving demand from its North American service provider customers, while the AI bandwidth needs among its hyperscaler customers are also set to pick up. For fiscal Q4 (ended November), Ciena reported revenue of just over $1 billion that was down 1% year-on-year, with earnings of 54 cents a share missing estimates by 11 cents. However, the firm’s Platform Software and Services revenue increased 22%, while the important Optical Networking segment saw quarterly sales growth of 4%. The latter category has also seen its share of the market (ex-China) grow from 22% in 2022 to 28% in the first half of this year, prompting a major investment bank to upgrade shares from Neutral to Buy while raising its price target (a reason for the stock’s latest show of strength). More importantly, Ciena owns around a 60% share of the 800G coherent optical equipment port market, which analysts see playing a big part in the future growth story. What’s more, management said the company’s recent order growth is exceeding revenue growth and guided for full-year fiscal 2025 (ending next October) and three-year annual top-line growth of around 10%, while Wall Street sees the bottom line growing much faster than that in the year ahead.

Technical Analysis
CIEN got off to a lively start in 2024, running up 40% to a two-year high at 63, but the stock ended up giving most of that back by mid-April and proceeded to move sideways for another few months after that. However, the stock got going in August and took out multi-year highs in October, with some normal ups and downs (supported by the 50-day line) in the weeks that followed. Then came last week’s huge earnings reaction, one of a number of strong moves in the networking space. If you want in, aim for modest weakness.

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Stock 5

Coinbase (COIN)

Why the Strength
While there’s a lot of hype around bitcoin these days as it continues to probe the $100,000 level (today looks like a nice breakout, though we’ll see how it goes), from an intermediate-term perspective the move still looks to be on the early side, with crypto “just” breaking out after the election following a big correction this spring and summer, and spending most of the past two or three weeks consolidating. That means the recent dip in Coinbase could be just a setup for another leg higher. The company is something of a Schwab/NYSE hybrid for the crypto world, offering trading services as well as bunches of other products that make it easier to hold, trade and earn money with crypto. At this point, trading revenue is still the main driver, though it’s extraordinarily volatile on a quarterly basis: In Q3, trading revenue (which was just over 50% of revenue) was nearly double that from a year ago but also down nearly half from two quarters ago, to give you an idea how business can swing—long-term, of course, the trend of trading activity is up, and Q4 should clearly see a huge pickup there. (Interestingly, trading activity is well-rounded here, with nearly two-thirds occurring in coins other than bitcoin.) Just as important, though, is Coinbase’s move into non-transaction areas like stablecoins, staking and even subscription offerings that bring with them lower trading fees and extra tools, which tend to be far less volatile; in Q3, that made up nearly half the total and grew 66% from a year ago. To be fair, after a couple of years of very tight reins, expenses have floated higher (mostly tech investments) of late, but EBITDA has been in the black seven quarters in a row and earnings are likely to ramp, too. Obviously, Coinbase isn’t a buy-and-hold-forever stock as perception here will go hand in hand with crypto prices, but the odds favor that being a good thing in the weeks and possibly months to come.

Technical Analysis
COIN has always been wild and wooly, and that has been seen during the past year, with the stock more than tripling from last October through February before stalling out and eventually losing nearly half its value into the summer. However, we see an early-stage, solid setup developing here: COIN zoomed higher after the election, and while it’s traded tediously during the past four weeks, it’s remained rangebound as the 25-day line has caught up. We’ll set our buy range up a bit from here, thinking a powerful resumption of the post-election strength will lead to higher prices. If you enter, use a liberal stop.

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Stock 6

Guardant Health (GH)

Why the Strength
Guardant Health, the company, has always had a good story and it’s been executing well for many years even though, until recently, the stock has had a very rough go of it: Guardant is a leader in liquid biopsies, with its various Guardant 360 offerings able to perform genetic testing for advanced-stage cancer patients that can guide their therapy selection, all via a tube or two of blood, a market the firm thinks can be worth north of $10 billion (helped along by reimbursement price hikes). That’s led to solid top-line growth over time—Q3 saw sales boom 34%, helped by a 21% increase in clinical test volume and a 40% gain in biopharma test volume, though the bottom line and free cash flow remained deep in the red (as they have for many years), which has kept the stock under wraps. Still, the core business is clearly looking good and should continue to grow nicely going forward—and investor perception is starting to bubble up thanks to a new product: Dubbed “Shield,” it’s a blood test to detect colorectal cancer, with thousands of real-world results showing solid detection capabilities; the test got the FDA thumbs up earlier this year, achieved a Medicare price of $920 per test and began to roll out in recent months. Long term, there’s no reason Shield can’t be a major colorectal cancer screening alternative, especially compared to stool-based alternatives that are more of a pain and have similar detection rates. Guardant also has other cancer tests being tried out, but the next few quarters should be mostly about the Sheild ramp. At this point, analysts see sales growth slowing and free cash flow burn decreasing next year, but if Sheild ends up being a big hit, those estimates will almost surely prove conservative.

Technical Analysis
After a humongous, prolonged bear phase, GH’s big-volume turnaround in May and June caught our eye, but the market’s summer correction (and the fact that the stock likely needed more time to set up) caused the rally to fail badly, with shares falling most of the way back toward their lows. But now all of that looks like part of a bottoming process: GH exploded higher after earnings last month and eventually pushed all the way to 15-month highs before exhaling in recent days. We’re OK starting a position here or (preferably) on dips with a looser stop toward 30.

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Stock 7

Shopify (SHOP)

Why the Strength
E-commerce continues to grow rapidly and is expected to continue outpacing the overall retail market, with digital sales expected to make up almost a quarter of all retail sales globally by 2027 (up from 19% last year). A major beneficiary of this trend is Shopify, which is the leading e-commerce platform in the U.S. by market cap and the third-biggest globally—in part because it allows users to sell directly to their customers without relying on a middleman (unlike competitors Amazon or eBay). Last month’s Q3 report featured revenue of $2.2 billion that increased 26% from a year ago, led by a 25% jump in gross merchandise volume (GMV) to an eye-popping $70 billion (the reason for the recent share price strength), while earnings of 64 cents a share more than doubled from a year ago. Commenting on the sanguine results, Shopify said it has grown free cash flow margin sequentially each quarter this year (expanding to 19% in Q4), which it says reflects the “durability” of the business. A big part of that success has been the company’s focus on enhancing merchant automation by providing features that make it easier for clients to run their businesses more efficiently, including recent product rollouts like Shopify Flow (a low-code workflow automation app), Shopify Inbox (an AI-infused product that suggests customer inquiry replies based on a merchant’s unique store information), Shopify Tax (which allows merchants to automate their tax preparation while facilitating cross-border transactions), and most recently, Shopify Finance (a suite of tools that provides faster payouts, business credit, quick loan funding and automatic bill pay for merchants). Meanwhile, Shopify merchants posted nearly $12 billion in sales during a “shopping frenzy” between Black Friday and Cyber Monday, setting a four-day record for the platform and rising a solid 24% from last year. The top brass sees “multiple avenues for growth” going forward, thanks in part to recent e-commerce partnerships with Roblox, YouTube and PayPal, and guided for Q4 sales to grow at a mid-to-high 20% rate. It’s not the go-go stock it was many years ago, but Shopify should crank out solid growth for a long time to come.

Technical Analysis
SHOP had a huge run between November and February before the wind came out of its sails—shares sagged back to almost where the rally started by early August, a huge 47% downdraft that made the stock look like yet another failed former pandemic winner. But instead of spending time building a base, SHOP turned on a dime (huge support volume at the August lows) and spent the next few months climbing toward resistance. After a brief tight area, the stock exploded higher on earnings, with the relatively calm rest period since then a good sign the selling pressures are light. If you’re not yet in, we’re OK buying here.

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Stock 8

SoFi Technologies (SOFI)

Why the Strength
SoFi is a tech-savvy lender that targets young, high-income individuals who aren’t drawn to work with a traditional bank. It’s purely a digital business – no brick and mortar here – which isn’t unusual these days. But what makes SoFi unique is the comprehensiveness of its offerings, ranging from student loans to fractional IPO share offerings to estate planning and much more. SoFi has had success partnering with large, more traditional banks – it recently began offering robo-advisor investment products with BlackRock, giving consumers access to the huge asset manager’s funds without the minimums BlackRock typically demands. The ability to originate loans in partnership with other firms means SoFi makes money that isn’t limited by its capital base; its tech edge is important, allowing it to offer products relatively cheaply while still making money with improving margins as the business grows, and the improving financial environment (customer delinquencies are dipping while lower rates improve volumes) is also helping. In the third quarter, SoFi posted $689 million in net revenue, up 30% over the prior-year period, with net income of $0.05 a share, the fourth straight quarter in the black. Underneath the hood, things look even better, with net revenue per customer (adjusted for the number of products each client has) rising more than 50% to $81 a year. There remains plenty of runway for growth – SoFi’s credit card business is relatively small with 300,000 customers, for one, and the business is seeing increasing rates of customers using more than one financial product. Full-year 2024 should see revenue up 22% to $2.55 billion. Management hasn’t guided 2025 but sees the positive trends in delinquency rates and loan originations continuing—Wall Street projects $3 billion in 2025 revenue with $0.28 earnings per share, more than double this year’s likely tally.

Technical Analysis
SOFI came public in 2020, was destroyed in the bear market and spent a couple of years in single-digit territory, building a bottom until perception changed. And it did in October, when shares moved above low-level resistance early in the month and just kept going, easily taking out major resistance in the 10 to 11 area a couple of weeks later and zooming above 16 to end November. This month has seen a rest, but SOFI has given up zero ground and actually nosed to a new high today on light volume—we’ll aim to enter on minor dips with a stop near 13.5.

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Stock 9

Warby Parker (WRBY)

Why the Strength
Warby Parker is a small-cap stock, but it’s a relatively well known name in the eyewear field, generally thought of as a mid-range player with reasonable prices and decent quality. When it comes to the company or industry itself, there’s nothing groundbreaking here, just a well-run operation in a slowly growing field—but the stock is strong today because the top brass is making the right moves, and the firm has loyal clients and is embarking on a good-sized expansion plan to take market share in this fragmented market (it currently has just 1% revenue share in the U.S.). First, in terms of loyalty, Warby’s clients keep coming back—every customer cohort going back to 2015 has shown a consistent re-order rate (about 25% every year afterwards; after four years they’ve re-ordered at a 100% rate) even as total customers continue to crank ahead (2.43 million active customers in Q3, up 5.6% a year ago), helping revenue per customer ($305, up 7.5% from a year ago) lift nicely. More enticing to us is a surprisingly bullish cookie-cutter story: At the end of Q3, the firm operated 269 shops, up 13%-plus just since the start of the year, and those new locations have excellent economics, too, with a payback of the initial investment in just 20 months on average. Long term, too, the firm thinks it can have north of 900 locations in the U.S. and Canada, so the pace of openings should remain rapid. Of course, eyewear is not AI, so growth here is solid but not spectacular—mid-teens top line, with likely faster EBITDA and earnings growth—but that’s more than enough to attract more big investors (320 funds owned shares at the end of Q3). It’s an intriguing, little-known growth story.

Technical Analysis
WRBY came public right near the bull market top in 2021 (good for the company, bad for shareholders) and procedded to tank below 12 in 2022, and the last couple of years saw a few bottoming attempts mostly fall flat. That said, the latest consolidation that started at the end of May looked more proper, and the breakout in early November marked a real change of character, with WRBY zooming to two-and-a-half-year highs. The 25 level has provided some near-term resistance of late, so if you want in, look for dips with a stop just above 20.

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Stock 10

XPO (XPO)

Why the Strength
XPO (covered in the November 4 issue) is the world’s fourth-largest less-than-truckload (LTL) transportation provider, with coverage spanning the U.S., Canada, Mexico, the Caribbean and Europe, with a fleet of more than 38,000 semi-trailer trucks across 562 locations. The LTL industry in North America has been caught in the headwinds of excess capacity and softer demand among retail shippers over the last couple of years in the wake of freight giant Yellow’s exit from the business. But while this has led to declining weight per shipment and a lower fuel surcharge for most carriers, other key metrics are showing improvement, including rate per pound and graduated pricing structures that allow carriers like XPO to put higher rates on lighter shipments (all thanks to the big drop in competition given that Yellow was a big player). Moreover, while overall LTL demand has declined on a year-over-year basis in 2024, industry experts note that it’s closer to equilibrium than the full truckload sector, which remains “stuck in the doldrums” in the words of one analyst. Another development that points to an improving outlook for the LTL industry is the growing trend toward carriers moving more into the industrial freight business and away from the weaker retail side. On that score, XPO is placing more of its focus on the industrial economy, particularly electrical equipment manufacturing and machinery. The company is also working to increase cost efficiency by reducing its reliance on outsourcing trucks (mainly through an “insourcing” initiative that involves deploying more driver teams in sleeper cab trucks for long-distance linehaul runs—a strategy the company expects will reduce outsourcing miles to under 10% next year). Wall Street is bullish on these moves, and big investors are optimistic the industry could accelerate next year and beyond. Intriguingly, XPO is also the object of M&A speculation after an industry source said the firm has attracted takeover interest from an unidentified potential buyer. Q4 results could see earnings slip a bit, but analysts see the bottom line having another solid growth year in 2025.

Technical Analysis
XPO had a solid run from 2023 through the early part of this year after Yellow’s bankruptcy lifted the entire industry. But following the extended rally, the stock hit resistance at 130 in April and afterwards entered a multi-month consolidation phase with shares falling as much as 26% from high to low and making no net progress for nearly nine months. But XPO turned the corner in late October on earnings, with follow-up strength into December pushing shares to new highs, and the tight-ish trading since is constructive. We suggest buying on pullbacks.

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Previously Recommended Stocks

The next Cabot Top Ten Trader issue will be published on December 23, 2024.

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