Cabot Top Ten Trader Issue: February 10, 2025

Note: Your next issue of Cabot Top Ten Trader will arrive next Tuesday, February 18 due to the market holiday next Monday, February 17 in observance of Presidents’ Day.

Upside Testing as Earnings Season Revs Up

When we look at the overall evidence, we continue to see more good than bad out there: Most indexes are testing the top end of their seven-to-10-week ranges; growth and other risk-on stocks continue to hold themselves together, with more breakouts than breakdowns; earnings season has gone well so far, with more gaps up among key names than air pockets; and all of this has happened as headline uncertainty (tariffs, DeepSeek, etc.) has crept into the picture. That said, we’re still waiting for buyers to truly step up, as most peppy stocks (outside of earnings winners) are still seeing lots of selling on strength (big investors aren’t willing to pile on, but instead pare back at higher prices) and most every index is trending sideways. This week is huge for earnings among growth and glamour names, so it’s very possible we’ll see a change in character, but in the meantime, we’re staying relatively close to shore—we’ll leave our Market Monitor at a level 6 for now but could move that meaningfully by week’s end depending on how things go.

All that said, there are opportunities out there, and this week’s list has many of them, with a ton of recent earnings winners, though some are a bit stodgier. Our Top Pick is Take-Two Interactive (TTWO), which has turned super strong after earnings as investors look forward to what should be a huge 2025 and 2026.

Stock 1

Affirm Holdings (AFRM)

Why the Strength
There was a pig pile in the buy-now, pay-later space when it burst on the scene during the easy-money, zero-interest rate times of the pandemic, but the past few years have separated the wheat from the chaff and Affirm has come through it in the leadership position: The firm has always emphasized being clear with consumers about any fees and rates it’s charging, and for corporate clients that have to put up money to fund the purchases, and the firm’s top-notch underwriting and servicing has more and more of them willing to lend. All told, it’s been a benefit to everyone involved: Consumers get more time to pay off larger purchases (Affirm’s own credit card plays into this, with merchandise volume doubling in Q4); lenders make a buck for providing the money; and of course, merchants notch greater sales as consumers are more willing to pull the trigger. Throw in the fact that Affirm has kept a lid on costs, and investors see plenty of runway for growth as Affirm expands into more industry veriticals (GoodRx joined late last year; it re-upped a five-year deal with a big air carrier) and internationally (launched in the U.K. just before the end of 2024). Indeed, Q4 confirmed that business is booming as the firm’s offerings become more popular: Gross merchandise volume lifted 35% (including a 40% lift from the firm’s top five merchants), active consumers grew 23% (the fourth straight quarter of acceleration) and merchants increased 21%, all while operating income grew 48% as margins expanded. Obviously, loan quality here is a huge factor, but all is quiet (in a good way) on that front, with charge-offs of recent customer cohorts tracking to 3.5%—in-line with historical trends. Obviously, a huge economic pothole would be very bad, but barring that, Affirm should continue to grow rapidly as it’s scratching the surface of the potential market.

Technical Analysis
AFRM had a horrible first half of 2024, falling from just over 50 to a low near 23 in mid-summer. The stock surged off its lows at that point and, after two months of hacking sideways, lifted as high as 73 last December. The pullback with growth stocks was tedious (down 29%) but not out of character for this volatile name, and the last two weeks have seen a huge snapback, highlighted by the big-volume, earnings-induced move last Friday. Like many stocks, we’re aiming to start a small position on dips given the choppy market environment.

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Stock 2

Capital One Financial (COF)

Why the Strength
U.S. consumers remain mostly resilient in the face of higher prices and higher interest rates, with experts predicting credit card spending for 2025 to remain healthy, and with mid-single-digit levels of growth expected. Capital One is the nation’s ninth-largest bank and the third-largest issuer of major credit and debit cards, with nearly half-a-trillion dollars in total assets. The company’s business credit cards are widely rated as some of the best available, including the Capital One Spark Cash Select (which allows users to earn 1.5% cash back on every purchase and a one-time $500 cash bonus after spending $4,500 within the first three months). Moreover, after last year’s $35 billion announced merger with Discover Financial Services, the combined company will be the nation’s largest credit card issuer with one of the largest payment-processing networks. (The merger is expected to close early this year, pending shareholder approval on February 18 and final regulatory clearance.) Capital One described the merger as a “singular opportunity” to create a consumer banking and global payments platform with unique capabilities, modern technology, powerful brands and a franchise of more than 100 million customers, with the capability of seriously challenging competitors Mastercard and Visa. Merger aside, Capital One’s domestic card business (the biggest driver of total company marketing) has been solid in recent months, alongside a return to growth and strong originations (up 53%) in the auto loan business in Q4 and stable credit results across its other business segments. Total revenue of $10.2 billion increased 7% year-on-year, and earnings of $3.09 beat estimates by 29 cents (reasons for the latest strength). On the domestic card front, purchase volume lifted 7% in the quarter, with ending loan balances increasing $8 billion, or about 5%. Average loans increased about 6% and segment revenue was up 9%, driven by the growth in purchase volume and loans. Going forward, Wall Street sees low-to-mid-teens earnings growth this year and next.

Technical Analysis
After etching out a multi-month launching pad last year, COF moved out to new highs last October and then gapped nicely higher in early November after Q3 earnings surpassed estimates. Still, sellers sold into that strength, forcing the stock to consolidate for another two-plus months, but the buyers have been back at it since early January, with COF hitting new highs after the Q4 report. We’re OK starting a position after this recent pause, with a tight stop.

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Stock 3

Celestica (CLS)

Why the Strength
Celestica is an electronics manufacturing services company that began life many years ago as an arm of IBM. More recently, in 2020, management embarked on a plan to dial down reliance on one large customer, Cisco, and branch out into other manufacturing services, a process that remains ongoing as two undisclosed customers still account for 36% of sales. Even so, companies continue to gobble up the company’s wares, with Q4 earnings reported two weeks ago showing two thirds of its $9.65 billion 2024 revenue coming from its communications and enterprise business (dubbed CCS, it mostly consists of servers and storage), with the rest in advanced technology services, or ATS. CCS grew 30% in the latest period on strong demand from communications customers for hardware platform solutions like high-performance servers and optimization of cloud storage for the explosion of data coming from AI. Sales in ATS also ended 2024 30% better as AI and machine learning are driving demand for custom silicon chips. Though Toronto-based Celestica may seem exposed to some recent market concerns, like tariffs and the ramifications of China’s on-the-cheap AI DeepSeek, management says both trends are at worst neutral and probably positive for them. Celestica has extensive manufacturing facilities in the U.S. and even has its electricity costs locked in through forward contracts from earlier anticipation of the firm’s long-term demands. Celestica also thinks if AI shifts toward cheaper hardware thanks to DeepSeek, it will accelerate AI adoption by lowering costs and speeding training, opening up even more demand for its storage and hardware expertise. This year should see sales come in at $10.7 billion, up 11% after management bumped up its outlook. Widening margins that should push net income to $4.82, up 24% from last year, and most see those estimates as conservative.

Technical Analysis
CLS formed a somewhat sloppy launching pad during the summer and early fall, but the breakout in October was powerful and led to a huge run, with shares moving above 120 when the DeepSeek news hit. The stock was clobbered on the report, which should have required plenty of time to repair—but instead, CLS snapped right back, thanks in part to the Q4 report, which was abnormally good. Of course, volatility is insane here, but we’re OK starting (or re-starting a position) around here or (preferably) on further dips, albeit with a loose stop in the 105 area.

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Stock 4

Doximity (DOCS)

Why the Strength
Software stocks have picked up steam of late, with some niche-ier cloud names (those that target a certain industry or solution) showing the best growth. Doximity is one and it has a great story, aiming to be a go-to technology provider and information hub for much of the medical industry, which is still mired in the old world (80% of healthcare documents are physically mailed or faxed!). The company’s platform combines professional networking, newsfeeds (medical articles, peer updates, etc.) and productivity tools (telehealth audio and video, e-signatures, messaging, scheduling workflow apps)—and it’s a huge hit, with a whopping 80% of U.S. physicians signed up and with a huge share of nurse practitioners and physician assistants, too, while the top 20 pharmaceutical firms and hospitals are clients that use the offering to find talent, market their wares (marketing is the big revenue driver here) and more. Growth had been solid for a while, but it’s looking like Doximity’s AI integrations are driving up engagement and interest—corporate clients can now tailor data for potential doctor clients, giving them anything from deep dives to bullet points at different times of the week, with Doximity’s goal to provide “consumer-grade marketing tools to healthcare” striking us as a very big idea. Moreover, the telehealth offering is booming, too, with more than 250 health systems and hospitals using it, while over 610,000 active prescribers are using any of the workflow tools (telehealth, but also scheduling, AI tools, etc.). Business-wise, Doximity has such a dominant share that margins are insane—61% EBITDA margins in Q4 and 54% for the entire year—so as growth has accelerated of late, earnings have boomed even faster. To be fair, healthcare spending can ebb and flow and analysts do see next fiscal year (starting in April 2025) showing just 11% top-line growth, but given the recent acceleration in growth, most see that as very conservative.

Technical Analysis
DOCS came public near the market top in 2021, was crushed afterwards and then bottomed out forever before finally coming alive after earnings last August. The run from there was excellent, highlighted by another earnings move in November, but the sellers finally stepped up around 60, leading to a 12-week, 23%-deep consolidation. But DOCS came off its lows starting in mid-January and then the roof blew clean off last Friday, with another monstrous earnings gap to new highs and some follow-through today. Given the market, we’ll aim to enter on dips, but we’re not expecting a big retreat.

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Stock 5

Expedia (EXPE)

Why the Strength
Expedia is one of the big online travel agents (OTAs), operating its namesake brand but also online properties like Hotels.com, VRBO, Travelocity, Hotwire, Trivago and many others. There’s obviously competition in the space, both from other OTAs (Booking.com is the big one, but there are others around the globe), not to mention simply those that prefer to book direct (for status benefits with airlines or hotels), but Expedia is starting to see bookings growth re-accelerate after a slow stretch (helped along by a new CEO that came onboard about a year ago, as well as the overall travel boom), which is getting big investors interested. Indeed, the firm’s consumer business (a bit under 70% of the total) saw bookings accelerate from -3% to +9% throughout 2024, while Expedia’s business-to-business segment (27% of the total) saw bookings lift 24% in Q4, accelerating from prior quarters, and advertising (5% of revenue) lifted 32%, with management seeing many avenues to lift that segment. Like everyone else, the top brass is excited about the benefits AI can deliver, both on the cost and marketing side of things, and investment will be focused on the top brands, especially pushing the consumer business overseas. Thus, business is solid and getting better, but underappreciated here is the model—given that the firm is simply connecting buyers and merchants, Expedia’s margins are very solid, with free cash flow totaling $2.3 billion in 2024 (up 26% from the year before and something like $17 per share), allowing the company to buy back a bunch of shares (Q4 share count was down 6% from a year ago) and initiate a token dividend (0.7% yield), with more shareholder returns likely as business picks up. All in all, Expedia isn’t changing the world, but the new CEO has the numbers pointed up, the industry is doing well and the free cash flow is huge.

Technical Analysis
EXPE actually showed some outsized bullish signs with the market way back in November 2023, but last year was mostly one of base-building—first, with a long (39 weeks), tedious (33% deep at the lows) consolidation that ended with an earnings-induced breakout in November 2024. But that move ran into immediate selling, with shares consolidating for another two and a half months, including an ugly breakdown in late January. But that dip now looks like a shakeout, with EXPE gapping strongly to new highs after the Q4 report on Friday. We’re OK grabbing some shares here or (preferably) on dips.

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Stock 6

Franco-Nevada (FNV)

Why the Strength
Franco-Nevada is a royalty and streaming outfit, providing up-front payments to miners in exchange for the right to buy gold and other resources at a set price. Moreover, thanks to the rising energy prices of recent years, the firm also has growing royalty interests in oil and gas properties across major fracking basins in the U.S. However, gold is still the main focus for Franco-Nevada, and to that end, the decision by industry giant Newmont to sell its Porcupine gold mining operation in Canada (one of the world’s largest) to Discovery Silver Corp. for $425 million has provided Franco with its latest opportunity. In return for providing financing for the purchase, Franco will receive a 10% ownership of a stake in Discovery, along with immediate cash flow from the complex’s established gold production in the form of a 4.25% net smelter return royalty on production from Porcupine (for $300 million); additionally, Franco has the right to purchase future streams and royalties related to the complex. Aside from being a catalyst for the latest share price strength, the deal underscored the company’s strategic focus on Tier-1 (the safest and most liquid) gold and silver assets. Beyond those areas, Franco also has room to grow its exposure to copper with its interest in the Candelaria copper/gold/silver mine in Chile (the firm’s second-largest investment), along with a huge potential opportunity in Panama if the Cobre Panama copper mine comes back online: The mine is not currently operating due to social, legal and regulatory issues, but Panama’s new President Jose Raul Mulino has said reopening Cobre Panama is a major priority which could happen sometime this year. (A major financial institution recently upgraded the shares, partly based on the possibility for the mine’s restart.) Financially, Franco’s Q3 report back in November wasn’t greeted cheerfully by investors, with revenue of $276 million decreasing 11% year-on-year and earnings of 80 cents missing estimates by three cents. That said, Franco’s numbers rose on a sequential basis, driven by contributions from the recently completed Greenstone mine (Canada) and the newly acquired Yanacocha royalty (Peru), and analysts expect steady improvements on both the top and bottom lines from here as it realizes the benefits of higher metals prices.

Technical Analysis
FNV hit a high-water mark around 170 in April 2022 when the gold price peaked early that year, with shares cascading to 110 over the next five months. But while gold was able to turn around after that and run up for the next couple of years, FNV and continued to struggle—it did rally off its lows, but then remained rangebound for many months even as precious metals acted well. Now, though, FNV looks to be changing character, rallying to 15-month highs on a couple weeks of strong volume. We’ll set our buy range down a bit, aiming to enter on a mini-shakeout.

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Stock 7

Kyndryl Holdings (KD)

Why the Strength
Kyndryl (covered in the December 23 issue) is a leading IT infrastructure services company that designs, builds, manages and modernizes information systems that countless companies depend on. The company, which was spun off from IBM in 2021, is benefiting from the AI and analytics trends that have helped it increase profit margins in recent quarters. To that end, a major investment bank just upgraded the shares (a reason for the stock’s latest strength), noting that Kyndril’s Consulting Business is growing at a double-digit pace thanks to its strength in AI and cloud security, while another big bank sees margin expansion-driven free cash flow growth supporting a multi-year rise in capital returns. What’s more, analysts see the growth of the firm’s Consult segment opening new opportunities for Kyndryl’s Managed Services (for tech and cloud infrastructure) unit. In fiscal Q3 (ended December), Kyndryl saw an eye-opening 31% year-over-year increase in signings (totaling $16.3 billion over the last 12 months) and a 26% jump in the Consult unit (driven by demand for modernization, cloud and AI services), both of which contributed to total revenue of $3.7 billion (down 5%) and earnings of 51 cents a share that beat estimates by 25%. Another highlight of the quarter was hyperscaler revenue that surpassed $300 million, tracking ahead of the firm’s nearly $1 billion full-year sales target, while management said Kyndryl’s “3As” initiatives (alliances, accounts and advanced delivery) continue to generate incremental signings, revenue and earnings. Looking ahead, the company guided for fiscal 2025 (ending in March of this year) adjusted EBITDA to “significantly improve” to at least $475 million and for adjusted free cash flow to come in around $350 million ($1.45 per share), while longer term, Kyndryl thinks free cash flow can boom to to $1 billion (north of $4 per share) by fiscal 2028. It’s not a true growth outfit, but sales should turn up in the March quarter and margins have a long way to go on the upside.

Technical Analysis
After spending three months in a narrow range under 25, KD took flight in November on earnings, rising more than 12 points over the next few weeks before taking a rest near 35 or so. Shares remained in good shape after that, though progress slowed, with not much net progress from mid-December to the end of January. But the latest quarterly report brought a couple of big-volume buying days that drove KD to higher highs. We’re OK buying some on this pullback, though we advise using a stop near the recent lows.

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Stock 8

Lululemon (LULU)

Why the Strength
Management’s three-year-old plan to establish the Lululemon brand outside of the U.S. is paying off, which is boosting investor perception and raising hopes of a reacceleration of growth. Mainland China sales were up 39% last quarter while the rest of the world outside North America saw a 27% advance in sales. In China, the business is seeing traction with its “Made to Feel” campaign which tells consumers about the technical attributes of Lululemon clothing and how it helps in everyday life, dovetailing with messaging with the government’s Healthy China 2023 program; revenue is expected to grow at a better-than 30% clip there for the yet-to-be-reported Q4 and for 2025 as a whole. In Europe, Lululemon is seeing a boost from entering new markets – Italy is next – with plans to utilize a franchising model in regions where management sees partners having better local expertise; this year will see franchises open in Denmark, Belgium, Turkey and the Czech Republic. One sore spot for business continues to be the U.S., where the brand has grown stale with its core target of active women. Sales in North America were up 2% in Q3, all thanks to Canada, with the U.S. coming in flat. Still, there’s a sense the domestic business may have stabilized as the company seeks to generate some brand heat by jazzing up the logo and emphasizing clothes beyond yoga pants. Another positive is that trade wars probably won’t hurt Lululemon too much – it sources just 2% of goods sold in the U.S. from China, which is a big factor considering 70% of revenue is still the U.S. For the year just completed, Wall Street expects sales to land around $10.6 billion, roughly an 11% gain over 2023 helped by good holiday foot traffic at U.S. stores. Officially, Wall Street sees modest growth ahead, but it certainly seems like big investors are more optimistic than that.

Technical Analysis
LULU actually looked very good heading into 2024, but the stock topped that January and suffered a horrific decline, falling from 515 to a low near 230 at the market low last August. The damage repair from there was slow at first, then picked up steam in October, with November’s earnings gap catching our eye. Since then, LULU has etched a nice, tight (13% deep, nine weeks) consolidation, though we have seen selling near resistance of late. We’ll set our buy range up from here, aiming to enter on strength.

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Stock 9

Royal Caribbean (RCL)

Why the Strength
Despite rising prices, leisure travel is still a high priority for Americans in 2025, thanks in part to a rise in remote work and a continuation of the post-Covid “revenge travel” trend. The cruise industry in particular is projected to benefit, with a recent report finding that, after increasing by a whopping 53% between 2022 and 2024, the number of cruise passengers will climb a further 5% to a record 19 million this year, with most of them (72%) heading to the Caribbean. As one of the world’s largest cruise lines by annual revenue, Royal Caribbean is well positioned for the current “Wave season” which extends from late December through April. The company’s bookings are off to an excellent start this year—mainly to private Caribbean destinations—with guest spending onboard and pre-cruise purchases exceeding prior years, driven by greater participation at higher prices. Royal Caribbean also just announced the launch of Celebrity River Cruises, a premium offering that will begin taking bookings for European river cruises in 2027 with plans to build up an initial fleet of 10 ships. With this commitment, the company is entering the small but increasingly popular luxury segment of the cruise industry, taking direct aim at Viking Holdings (the leader in the river cruise segment) and expanding into a related but separate part of the industry. As for the here and now, Royal Caribbean just concluded an “exceptional” 2024 and released full-year and Q4 results that, while somewhat mixed, were still strong across most metrics and prompted the stock’s bullish reaction. Revenue of $3.8 billion missed estimates but rose 13% from a year ago, per-share earnings of $1.63 beat estimates by 13 cents and adjusted EBITDA of $1.2 billion jumped 24%. The top brass said it’s encouraged by the demand and pricing environment for this year’s Wave season, with booked load factors in line with prior years—though at higher prices. Wall Street sees earnings up 17% this year as a whole, which is likely conservative.

Technical Analysis
Following last year’s market shakeout in early August, RCL bounced nicely off its 40-week line and, after a bit of rest, broke out in late September and embarked on a terrific run—all told, from the August lows to the early-December highs, shares rose 17 of 18 weeks! Not shockingly, that run did lead to a rest period (15% deep over seven weeks), but such strength usually doesn’t occur at the end of a run—and indeed, RCL popped to new highs after earnings and has held the gains in recent days. We’re OK starting a position here with a stop in the mid-230s.

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Stock 10

Take-Two Interactive (TTWO) ★ Top Pick ★

Why the Strength
Video games are more than just a popular pastime for Millennials and Gen Zers; by some estimates the global number of gamers is approaching a whopping three billion (or 33% of the world’s population!). Moreover, gaming has gained so much prominence in recent years that it has now become a spectator sport in its own right. Known as “esports,” the growing market for watching organized, multiplayer video game competitions among professional players in front of an audience has created another massive opportunity for the companies that sell the games. Enter Take-Two Interactive: The leading video game publisher offers top-selling titles through its Rockstar Games and 2K labels, as well as a new internal studio label, Intercept Games, and its industry-leading portfolio includes the Grand Theft Auto (GTA), Red Dead Redemption, Civilization and Borderlands series. But one of the firm’s most valuable games right now is NBA 2K, which is a big part of Take-Two’s entrance into the esports arena. The company’s bullish guidance after releasing financial results and guidance for fiscal Q3 (ended December, the reason for the stock’s strength) was in large part due to NBA 2K’s success, as the game’s “significant outperformance” in the quarter helped to offset moderation in some of its mobile franchises. To date, the title has sold over seven million units, with engagement “extremely strong compared to last year” and with recurrent consumer spending up over 30%, daily active users up nearly 20% and monthly active users up nearly 10%. All in all, the recent quarter was just OK—total net bookings of $1.4 billion grew 3% from a year ago, while sales and earnings were both flat—but the market is looking ahead to a huge calendar 2025 with several of Take Two’s top-performing video game titles scheduled to have new releases later this year, including the latest version of the blockbuster GTA franchise. Management said it sees 2025 “shaping up to be one of the strongest ever for Take-Two” while guiding for record net bookings each of the next couple of years. Analysts see the bottom line catapulting higher in the quarters to come.

Technical Analysis
TTWO peaked in February 2024 and went on to build a long, flat, tedious launching pad, lasting 39 weeks with shares bobbing between 140 and 170 (ballpark). The breakout in November looked great, but as growth stocks sagged, shares again stalled out, going sideways for another couple of months. Now TTWO is hitting multi-year highs after Friday’s hugely bullish earnings reaction. We think a sustained uptrend could be getting underway—you can buy some here or (preferably) on modest weakness.

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Previously Recommended Stocks

The next Cabot Top Ten Trader issue will be published on February 18, 2025.

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