Cabot Top Ten Trader Issue: January 6, 2025

A Good Start

The new year is off to a good start, with many of the areas that took lumps during December (namely the broad market and growth stocks) showing strength through three days—and, just as important to us, more than a few individual stocks have perked up, with some resilient names pushing to new highs and others that dipped to support bouncing. That’s a good thing, but we’re also keeping in mind the fact that early January is often tricky (lots of sharp moves in both directions), that the intermediate-term trend of most indexes and measures is still neutral-to-negative and that there remain lots of crosscurrents among individual titles, with some selling off while others strengthen. As we wrote above, we are encouraged and will nudge our Market Monitor up to a level 6, but, while this is a good first step, we want to see the action continue to conclude that the December air pockets are a thing of the past.

For the third straight issue, this week’s list is heavy on growth stocks, which remains a sign that big investors aren’t hunting for safety. Our Top Pick is Rubrik (RBRK), a name we love fundamentally and whose stock has held up relatively well in recent weeks despite a huge run. If you enter, use a loose stop given its volatility.

Stock 1

Antero Resources (AR)

Why the Strength
Energy stocks have been the dog’s dinner for a couple of years now, but all of the weak hands have been washed out, and now we’re seeing some intriguing action, especially among natural gas, both the commodity itself (prices recently hit a two-year high) and the stocks themselves. Antero Resources is the #5 natural gas and liquids player in the U.S., with incredibly lucrative acreage that includes a whopping 22 years of inventory that’s profitable at a sub-$2.75 gas price (the commodity rose to more than $3.60 today) and wells that outperform peers by 20% or so. Moreover, the firm’s output goes to areas that bring it above-average selling prices (half of its liquids are exported; three-quarters of its gas is shipped to so-called LNG fairway in the Gulf Coast). That’s big because Antero is lean and mean and should do well even in a so-so environment: Even at $3 natural gas, Antero thinks it can crank out an average of $750 million of free cash flow annually during the next four years (north of $2.25 per share per year) with huge increases if prices rise ($4.25-plus per share at $4 gas) as the firm is unhedged for this year and beyond. (The firm’s overall free cash flow breakeven is $2.20 per share, again the lowest of its peers.) Of course, the horrid natural gas environment for most of this year has held Antero back—free cash flow through the first three quarters of the year was $83 million in the red—but this is all about what comes next: It’s obviously not without risk, but should the last couple of years of sub-$3 gas prices give way to a more bullish environment, Antero should be printing money for many quarters to come, and that will lead to greater investor perception and likely generous dividends and/or buybacks.

Technical Analysis
After a big 2022-2023 decline and bottoming effort, AR turned the corner for a time in the spring of last year, but it topped out in May and embarked on a tough correction (down 32% from high to low) that saw the stock nearly break to lower lows in late October. However, the action began to improve then, with a quick, sharp rally back to its old highs, and after a month-long rest, some up action of late that has AR challenging its prior peaks. There is some resistance around here, but we’re OK starting small and buying more should the stock continue higher.

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Stock 2

CyberArk Software (CYBR)

Why the Strength
More than 90% of organizations are victims of an identity-related cyberattack, resulting in a growing realization that merely managing identities isn’t enough. That’s where cybersecurity specialist CyberArk comes in: It offers the only integrated platform that helps enterprises discover threats with context, secure their systems with intelligent (and password-less) privilege controls and automate the management of all identities, from workforce to IT to developers and machines. As more organizations realize the mission-critical nature of securing identities—human and machine—with the right level of privilege controls, CyberArk is growing its customer base among some big players in the banking, energy, retail and healthcare sectors, as well as with government agencies. The company is also seeing more of its customers increase spending across the full breadth of its platform and create “even more strategic relationships” with CyberArk, which in turn is driving recurring subscription growth. This was shown in a stronger-than-expected Q3 as the firm continued to see momentum build in full-platform deals, including with a leading European bank and a major healthcare provider. Another highlight of the quarter was the closing of its acquisition of leading machine identity security provider Venafi in a deal that will expand CyberArk’s total addressable market in a big way. Revenue of $240 million increased 26% year-on-year and earnings of 94 cents beat estimates by a whopping 48 cents (a reason for the stock’s strength). Another highlight of the quarter was total annual recurring revenue (ARR, a key metric) of $926 million, up 31% from a year ago, with subscription-based ARR of $735 million jumping 46%. Meanwhile, a major investment bank just added CyberArk to its Tactical Idea List for 2025 and upped its price target (another reason for the strength). Looking ahead, Wall Street sees the top line lifting north of 30% next year while earnings continue to rally.

Technical Analysis
CYBR rallied nicely from November 2023 to February of last year before sellers showed up around 280. The stock then corrected and consolidated for many months while the 40-week line caught up in August, which kicked off another choppy rally. CYBR has continued to bob and weave its way to higher highs in each of the last five months, with shares popping to new highs after a few weeks of tight trading. We’ll set our buy range down a bit from here.

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Stock 3

Penumbra (PEN)

Why the Strength
Penumbra is a medical device manufacturer that focuses on tools that treat vascular blockages. In the past two years, it’s rolled out three new products that drastically reduce the need for more invasive surgery for deep vein thrombosis (DVT) and pulmonary embolism (PE) as well as help the recovery of neurological vessels after strokes. Its offering, dubbed Lightning Flash, allows the insertion of a very small tube into blood vessels to then use vacuum pressure to remove blockages and monitor for a recovery of blood flow. Similarly, Thunderbolt is an advanced catheter that allows for less-invasive ways to re-establish blood flow through vessels in the brain after strokes. The third, Lightning Bolt, assists with thrombectomies, the emergency removal of blood clots. In the U.S. the product lines are gaining market share at a double-digit rate, helping Penumbra beat estimates in Q3, reported in October. For Q4, ended December, management says sales should come in around $311 million, up around 9%, with earnings growing at about twice that rate. Wall Street sees 2025 improving a bit more, with analysts projecting revenue rising about 15% on the year to $1.36 billion while earnings lift 36% thanks to surging margins. The reason Penumbra could start growing faster than that is it has yet to roll out its latest generation of products to Europe, where the company says physician interest has been high for version 2.0 of Lightning Flash and version 7 of Lightning Bolt. Growth also is coming as the FDA approves use of the products for new variations of procedures. There’s still good potential within the existing market for Penumbra too—while its products are gaining share fast, they still have less than 30% of the market, a figure that should grow. Management says doctors are shifting into a new cycle of upgrading equipment after a long post-pandemic lull, which should bring longer-term tailwinds. There was some industry news today (Stryker is buying Inari) that does introduce some uncertainty (see below), but there’s no doubt the firm’s products are in favor.

Technical Analysis
PEN had a big rally into mid-2023 and then an equally big drop into July of last year before buyers showed up to support the stock. The initial rally phase was fine, but things began to really pick up in October, with the Q3 report boosting shares further. The retreat of late from the highs above 250 was calm and collected, and the stock was off to a good start today—until some sudden selling hit the stock due to the aforementioned acquisition. Whether this is an early-January shakeout or something worse will be easy to determine: We’ll set our buy range up from here, thinking a powerful rebound will lead to a resumption of the uptrend.

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Stock 4

Roblox (RBLX)

Why the Strength
Gaming has fast risen from a niche hobby into one of the world’s biggest entertainment markets. That’s been a boon for Roblox, which has become the go-to platform for online game creation, hosting millions of user-generated video games and other content, including 3D experiences across various devices. After experiencing massive pandemic-era popularity which saw bookings growth peak at 230% in Q2 2020, the company saw bookings growth actually shrink two years later. By Q3 2022, however, the company turned a corner, leading to an impressive string of quarterly growth numbers for average daily active users (DAU) in a sign that the platform remains popular among the coveted Gen Z crowd (the fastest growing demographic on the platform and 60% of the user base). One reason for the firm’s durable success is the generous amount of revenue it shares with its game developers (25%), which serves as an incentive for them to develop more top-level games and other content that bring more eyes to the platform. The continued success of that tactic was again witnessed in Q3, which featured DAUs of 89 million which increased 27% from a year ago, led by 28% growth in the U.S. and Canada, along with bookings of $1.1 billion that jumped 34%. Significantly, average monthly unique players of 19 million increased 30%, with similar gains in hours of gameplay and activity, while average bookings per monthly unique payer were $19.70 (up 4% from last year’s Q3 and up 2% sequentially)—a positive trend that has been steadily improving all year. The upbeat results prompted a number of upgrades from Wall Street, including one that said Roblox “is reaching a broader audience and scaling on new platforms,” pointing to further growth ahead. Going forward, a big part of the firm’s growth strategy involves a focus on Asia (the world’s biggest gaming market), with plans to reach about a billion daily active users down the road. Analysts expects 20%-ish top-line growth this year and next, with free cash flow (FCF) expected to lift as high as $850 million in 2025, up 35% from 2024’s likely tally and totaling about $1.25 per share.

Technical Analysis
We were stopped out of RBLX in late November after the stock experienced some market-related weakness (giving up most of its post-earnings breakout), but shares held up around there and rallied back to new highs as growth stocks had another run. Interestingly, RBLX held firm in recent weeks while most growth titles flailed, and after tagging its 25-day line last week, it’s bounced nicely. We’ll set our buy range down a smidge with a stop just under the 50-day line.

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Stock 5

Rubrik (RBRK) ★ Top Pick ★

Why the Strength
Rubrik certainly has the qualities of new leader that’s bound to get much bigger if management continues to make the right moves. The firm is a new kind of cybersecurity outfit, with the story here revolving around the growing realization and acceptance that cyberattacks and breaches are inevitable in some sense given the increasing complexity of attacks and bad actors (indeed, the frequency and cost of attacks have only increased despite better protections). Thus, while prevention is obviously a huge priority and will always be necessary, one of the new focuses is on what’s called cyber resilience, which involves both data security efforts, and, more importantly, cyber recovery, so that businesses that have been breached can recover their data very quickly (often within hours) and get back up and running … hence slashing the effective cost of these events. The firm is also a leader in what it dubs data security posture management (DSPM for short), which helps protect sensitive data in cloud environments, often thanks to AI—Rubrik, in fact, is the only player in the market to offer DSPM (deals for which doubled quarter over quarter in Q3) and cyber recovery in one integrated platform, which is a reason why the top brass says it’s winning the vast majority of competitive deals it’s in on. As for the numbers, sales here have been growing fast and even accelerating in recent quarters, while subscription annualized recurring revenue moved above $1 billion in Q3 (up 38%) and same-customer revenue growth was north of 20%. Moreover, while earnings are still clearly in the red, free cash flow was positive in the quarter. Sponsorship is still developing but is ramping fast (39 funds owned shares in June, rising to 202 funds at year-end), a trend that should continue should Rubrik remain in the lead in this new field.

Technical Analysis
RBRK spent nearly the first six months as a public company building a reasonable (29% deep) base before flashing some major accumulation in October, surging to 50 in November and then gapping up in a big way after earnings in early December. As with everything else, the stock has pulled in since then, but it looks reasonable, “only” falling to the 25-day line after three weeks of rest. We like the overall action but will set our entry range down a bit from here and use a loose-ish stop.

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Stock 6

Semtech (SMTC)

Why the Strength
California-based Semtech is another name positioning itself for what it’s calling a “generational opportunity” from AI-driven product demand for key data center products, which it sees as a “long-term and transformational growth engine.” A key part of the company’s strategy involves teaming with leading cloud service providers (CSPs), including Amazon Web Services, with Semtech providing a range of products and solutions integral to these clients (especially data center and IoT infrastructure). Semtech’s key products include so-called LoRa technology, a leading platform for IoT connectivity that enables long-range, low-power communication for connected devices, along with optical transceivers and integrated circuits designed for data centers and enterprise networks, plus signal integrity products (for cloud services) and power management solutions (for data centers). The company also plays a pivotal role in the recently unveiled Catalina NVL36 platform, a high-powered server rack designed by Meta specifically for AI workloads, and for which Semtech provides active copper cables (ACCs) enabled by its CopperEdge technology to connect server racks, ensuring reliable data transfer within AI data centers. (Several major companies are currently conducting design work to improve signal integrity using the CopperEdge offering, which Semtech says meet signal integrity requirements not readily achievable with other ACCs currently in use.) Business has been bumpy, but an inflection point was seen in fiscal Q3 (ended October), with growth across each of its end markets, and particularly in the data center: Revenue of $237 million lifted 18% year-on-year and earnings of 26 cents a share beat estimates by three cents and were up from a near-breakeven quarter a year ago. The solid results were led by industrial sales of $131 million that increased 5% from the prior quarter (led by LoRa-enabled solutions), infrastructure sales of $66 million (up 24%) and data center sales of $43 million (up 58%). Sales are expected to lift 25% to 30% during the next few quarters while earnings take off on the upside.

Technical Analysis
SMTC’s comeback trail hit a major speedbump last June when shares got nailed on earnings, eventually dipping 42% from its highs and tagging the 40-week line in August. However, the action has been excellent from there: Shares rallied quickly back to the old highs then rode the 10-week line higher into Thanksgiving followed by a surge after earnings. The tight action during the past month is very encouraging, too, with SMTC holding nicely despite the growth stock wobbles. Like many names, we’ll aim to enter on a bit of weakness.

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Stock 7

Twilio (TWLO)

Why the Strength
As more cloud communications players adopt AI to reach their customers more efficiently, software providers that cater to this space are finding ways to integrate AI into their platforms. This strategy has been paying off nicely for Twilio, whose cloud-based platform enables developers to integrate functionalities into their apps, which in turn allow businesses to reach their customers through different channels—including text, voice, email, chat, video and more. Specifically, Twilio believes that the integration of Realtime API into its cloud platform will enable its clients “to build powerful conversational AI virtual agents leveraging OpenAI’s flagship multilingual and multimodal GPT-4o model.” (Realtime API is a set of protocols that allows apps to exchange data in real-time, and which allows developers to make conversational AI assistants that sound more human.) By providing more human-sounding AI assistants, Twilio in turn believes customer service agents will be able to provide a better customer service experience while reducing operations costs and streamlining efficiency for clients. Another growth driver for Twilio is its Verify offering, which protects user accounts for customers across multiple channels through AI-driven verification technology. Management believes adding capabilities like Verify to its messaging or voice offerings will create follow-on demand for other Twilio products by saving them from losses associated with fraudulent activity. Of course, the heady growth days of the pandemic are long gone, but after a rough stretch, the firm is seeing revenue growth pick up a bit while earnings and cash flow are going wild: Q3 saw the top line lift 10% and earnings of $1.02 topped estimates by 16% and grew a huge 76%. Free cash flow came in around $1.18 per share, and that led to another round of share buybacks (Q3 share count was down a giant 12.4% from a year ago). Also helping the cause was the inclusion by a big Wall Street bank of Twilio in its list of top communication software stocks for 2025, with the bank seeing “reacceleration potential” for the firm this year, while another major institution raised its target price for the stock based on the opportunity for the firm to provide a “mid-to-long-term framework for growth and margins.” Analysts see 17% earnings growth this year, which should prove conservative.

Technical Analysis
We missed getting into TWLO in early November after the stock never pulled back enough to enter our suggested buy range. However, the stock has recently taken a breather that has allowed the trend lines to catch up and, we think, opened up another entry opportunity. Prior to the latest resting phase, shares provided some bullish clues, with a multi-week winning streak and new highs followed by the tight trading range while most growth stocks took big hits. We’ll look to enter on minor weakness with a stop under round-number resistance near 100.

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Stock 8

Victoria Secret (VSCO)

Why the Strength
Victoria’s Secret is a well-known brand in the fashion sector, offering women’s intimate apparel as well as sleepwear, fragrances and body care offerings. However, the brand name did nothing to help business in recent years—as part of giant L brands, comparable-store sales had been slipping for years as competition stepped up, and the firm’s products and its stores (831 namesake stores in the U.S. and Canada to start 2024, another 463 partner-operated locations and a few dozen others) seemed out of date, especially among younger consumers. But now Victoria’s looks like a classic turnaround situation, helped along by a new stemwinder: After firing their former CEO in August, the Board named Hillary Super head honcho in September—Super was formerly CEO of Savage X Fenty (the lingerie brand of Rihanna), as well as Urban Outfitters and Anthropologie, and brings with her an excellent reputation. Most see her as helping the firm continue its move toward offering a more diverse set of offerings (different sizes and shapes, etc.). Investors loved the hire, and they also loved that some of the groundwork that had been put down in recent quarters led to a solid Q3: Sales lifted 7%, the fastest growth rate in at least a couple of years (helped by 20%-plus growth overseas), while same-store sales were actually up 2% (way above last year’s 11% decline; of note, the industry shrunk in the low single digits, so Victoria’s is gaining share), and management sees a 3%-ish gain in that key metric during the all-important holiday quarter. To be fair, Q4’s earnings are expected to be down from a year ago, but (a) the firm has been surpassing estimates of late, and (b) even so, the valuation here is tame and most investors expect brighter times in 2025 and beyond.

Technical Analysis
VSCO was spun off from L Brands in 2021 and imploded from there, spending most of the past year and a half in the teens, down 80%-ish from its highs. However, after holding support in the mid-teens many times, the stock completely changed character in August, rallying strongly off its lows, hitting multi-year highs in November and soaring to nearly 50 (up 10 weeks in a row) as perception improved. Since then, VSCO has dipped three weeks on low volume, with shares tagging the 50-day line. We’ll set our buy range up from here, looking to enter on a resumption of the uptrend.

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Stock 9

Vistra (VST)

Why the Strength
In a sign of the times, Microsoft recently signed a 20-year deal with the famous Three Mile Island nuclear power plant in Pennsylvania to buy its entire power output, mainly to support the energy needs of its AI infrastructure. Not surprisingly, booming demand for AI is one of the main driving forces being the renewed interest in nuclear energy, which bodes well for Vistra. The Texas-based operator is an integrated retail electricity and power company that holds the distinction of being the largest competitive power generator in the U.S., with a capacity of around 41,000 megawatts (MW) powered by a portfolio that includes nuclear, natural gas, solar and battery energy storage facilities. The company’s nuclear fleet is the second-largest competitive fleet in the country, with four plants that can generate over 6,500 MW of emission-free energy. Vistra’s nuclear capabilities are a big reason behind the stock’s strength, as investors are awakening to the enormous power demand that AI applications are placing on the grid, with a major investment bank recently noting that power demand is expected to soar at its fastest pace in over 20 years thanks to AI. Indeed, the company sees the rapid buildout of AI data centers as a major driver behind incremental power demand in the years ahead and expects such centers to add around 35,000 MW of demand over the next five years (equivalent to 35 million homes worth of electricity). Additionally, Vistra expects power demand growth to be supported by the construction of large chip manufacturing facilities in the U.S., the reshoring of industrial activity and the electrification of oil and gas load in the Permian Basin of West Texas (the state boasts the most data center activity in the nation). On the latter score, a leading investment bank just ranked Vistra as a potential top-performing energy stock for 2025 based on its outsized exposure to the state as a merchant power provider. In Q3, revenue of $6.3 billion jumped 54% from a year ago and EPS of $5.33 boomed from a year ago, while the firm raised full-year profit guidance and authorized an additional $1 billion share buyback. Moreover, in the earnings call, management said it’s in discussions with some of the biggest data center developers to upgrade nuclear plants for upping power output. Analysts see earnings lifting over $7 per share this year.

Technical Analysis
VST has had a huge, huge run, which does raise risk that the rug will get pulled out from under it at some point—but so far, it continues to act right. After a sloppy summer correction, the stock went wild on the upside in September before staging two sharp pullbacks to close the year (each bringing shares to or slightly below the 50-day line)—but the buyers appeared soon after those tests, including last week, as VST has rebounded powerfully. It’s very volatile, but a small position on a bit of weakness is fine by us.

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Stock 10

Wix.com (WIX)

Why the Strength
Wix’s pitch is that it makes it easy to get a website up and running through its cloud-based homepage template system, with simple add-ons that build out sites as needed, like adding the ability to accept online payments. The emergence of AI tools fits in nicely with Wix’s focus market of DIYers and small studios that design web products for others. More than 50% of new users are using Wix’s AI-assisted product called Builder, which is resulting in a greater conversion of customers using Wix’s basic free offerings into paying clients for better bells and whistles. That translated into better sales and profits in the third quarter, reported in early November, when sales were up 13% to $445 million, while earnings per share hit $1.50, seven cents better than consensus and up 36% from the year before. There are signals Wix has increasing momentum too, with the quarter being the first to see its customer base grow both year over year and sequentially since 2020. For the full year, ended December and to be reported mid-February, revenue should land up 13% at $1.76 billion. There’s no guidance for 2025, but Wall Street sees sales topping $2 billion annually for the first time, with sales growth accelerating a smidge from the past three quarters. Wix is betting it can expand margins by emphasizing a higher-end site builder called Studio, which it introduced in late 2023 to focus on more sophisticated design houses. Management has been tight with specifics but recently told investors that Studio is generating excellent growth and widening margins, making it a product they expect will be its path to long term growth, moving the business away from its lingering reputation for cheap-looking landing pages. If Studio is as hot as Wix suggests, look for next year’s estimates to prove conservative.

Technical Analysis
WIX had a big run from November 2023 through May of this year then etched a multi-month flat area as the long-term moving averages caught up. The breakout in November of last year was gorgeous, and the tight trading action since is just as impressive given the growth stock wobbles that permeated the market. Early January is always tricky, but if you don’t own any, we’re OK with a small buy here or (preferably) on dips and a stop in the low 200s.

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Previously Recommended Stocks

The next Cabot Top Ten Trader issue will be published on January 13, 2025.

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