Cabot Top Ten Trader Issue: June 24

Early Signs of Rotation

We have been starting to see signs that the stretched rubber band (where some mega-cap tech stocks were running but most else was languishing) might be snapping back a bit, with a few strong areas (especially chip stocks but growth in general) taking on water while the Dow Industrials and the broad market rally; Friday, in fact, brought the lowest number of new highs on the Nasdaq since late April and today saw the pattern continue. It’s something to watch and, if it gets a head of steam going, could launch some new leadership while denting some popular names. That said, while we are seeing a few names begin to emerge, it’s still early, so we’ll see how things play out, especially as the end of Q2 (and the first half) is this week, which can often bring some volatile trading. All in all, we remain in our current stance and are taking things on a stock by stock basis—we’ll again keep our Market Monitor at a level 7, but our antennae are up should big investors change their focus.

This week’s list has some familiar names, but also a few that have recently come under big accumulation on some sort of news. Our Top Pick is Ollie’s Bargain Outlet (OLLI), which has been sleepy for a few months but has come alive after earnings as the long-term growth plan (buoyed by some industry consolidation) comes into focus. Aim for dips to enter.

Stock 1

Arista Networks (ANET)

Why the Strength
Arista Networks is effectively the Cisco of our time: It’s the leading networker out there, offering what it dubs the best data center portfolio of switches, routers and the software that runs them all for many of the big hyperscalers out there; indeed, Meta and Microsoft combined represented 39% of revenues last year! Even so, Arista is best in class, so the firm has ridden the various upgrade cycles in recent years, with 2022 and 2023 bringing a big move into 400G offerings and causing the firm’s sales and earnings to surge. Today, though, investors are focused on AI, which of course should bring with it an avalanche of technology infrastructure spending … but investors have had two concerns about that when it comes to Arista. The first is timing, with the top brass thinking this is more of a 2025 event and some thinking even later, but as we head into the second half of the year, the payoff is getting closer. The second and more important factor revolves around competition and technology standards—the first wave of AI deployments used switches with a different standard than Ethernet (Arista’s specialty), and some were wondering if that would change over as expected. But more and more, it’s looking like it will (good for Arista): Broadcom’s recent quarterly conference call had its top brass saying, “Next year, we expect all mega-scale GPU deployments to be on Ethernet,” which means Arista’s business should be very strong. As of now, the firm still sees “only” $750 million in AI sales in 2025, but many are thinking the ramp will be much sharper than that. In the meantime, business is solid and earnings regularly top expectations, so this year’s relatively modest outlook (up 14%) should prove conservative.

Technical Analysis
After a big shakeout in October, ANET gapped up on earnings and then chugged along its 10-week line into March with many growth stocks. But after that, there have been a lot of ups and downs, with a 22% correction in April (on the back of a bearish analyst note), a spike back to new highs in May (after Q1 earnings) and another dip just under 300 in May/June (on competition fears); net-net, shares went nowhere for about three and a half months. But the latest Ethernet AI tidings from Broadcom have caused a fresh rally, and we think it may stick—we’re OK buying some here or (preferably) a bit lower with a stop near the 300 level.

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Stock 2

Birkenstock (BIRK)

Why the Strength
London-based Birkenstock isn’t a new story—it has been around for a remarkable 250 years—but its advanced age hasn’t stopped the growth. The company is well known for its unique, anatomically shaped footbed sandals and clogs made of materials like cork, latex and jute, which are designed to last a lifetime. And because it has cultivated a reputation for high quality and durability, the demand (and prices) for its varied footwear offerings remains consistently strong. What’s more, with the peak summer sales season for its famed sandals underway, analysts and investors are anticipating even more strength in the months ahead. In Q2, revenue of $519 million surprised estimates by 4% and increased 23% year-on-year on a currency-neutral basis while soaring 60% from the prior quarter. Earnings of 44 cents a share were flat but beat the consensus by 14% and more than quadrupled sequentially (the reason for the latest share price strength). Birkenstock said it saw strong growth in its established markets, with sales of its five core offerings growing north of 20%, which the top brass said underlines the brand’s limited exposure to fashion cycles (and discounted offerings) as well as its continued relevance. At the same time, the firm is seeing solid demand in largely untapped white space areas across several countries, channels and product categories. In particular, the bullish Q2 results were led by growth in Asia, Africa and the Middle East, which collectively jumped 42% in the quarter; since these regions account for only around 12% of current business, Birkenstock sees a big expansion opportunity here going ahead. In the wake of Q2 earnings, the company raised its full-year sales growth outlook from 18% to 20% while a major Wall Street bank just placed a “buy” rating on the stock based on Birkenstock’s “industry-leading margins,” adding that there’s plenty of additional potential to expand margins “further above peers.” It’s a good retail story that should crank out solid growth for a long time to come.

Technical Analysis
BIRK went public in last October at 41 and ran up for a few weeks until it hit 50 in December, but that led to the start of its first IPO base—it did nose to new highs in February, but then came a 25% correction and consolidation. Net-net, shares went nowhere for about six months, but the Q1 report changed that, with BIRK gapping to new highs, and it’s pushed ahead on good volume the past few weeks. We’re not chasing it here, but dips of a couple of points would be tempting.

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Stock 3

Coinbase (COIN)

Why the Strength
While there’s competition, Coinbase remains the go-to way for investors to play the crypto market’s long-term growth, as the firm is something of a Schwab/NYSE hybrid, serving retail and institutional customers that want to securely trade, invest in, transfer and store various types of crypto. And when things are hot, they can be very hot: Transaction revenue is still the largest piece of the pie and can swing wildly up and down depending on if crypto is in favor; in Q1, when Bitcoin and the like were surging, trading activity went wild, causing transaction revenue to double sequentially (!) while the number of transactions lifted 93% from Q4. To be fair, most see Q2 down in a big way from Q1, but the major trend is up (crypto market cap as a whole hit a new all-time high in Q1, eclipsing its peak from a couple of years ago) as coins become more commonplace among users and investors. As we’ve written before, the other two pieces of the pie here are also important: First, Coinbase has a steadily growing subscription and service segment that includes stablecoins (sort of a money market equivalent, with 5%-plus yields), blockchain rewards, interest, fee and custodial income, as well as its Coinbase One subscription (more than 400,000 members pay to have lower trading costs, higher staking rewards and more)—in Q1 all of these were up 36% from the prior quarter. And then there’s the cost side of the equation, with total expenses up just 5% sequentially and with the top brass aiming to be able to churn out positive EBITDA in any environment. Earnings estimates here should be taken with a big grain of salt as things will move around, but long term, Coinbase should be a winner given the increasing acceptance of crypto and expansion into new geographies, and near term, there’s little doubt business should explode if and when crypto has another run.

Technical Analysis
COIN remains crazy volatile (moves about 15 points per day from high to low), so we’re on the lookout for potential setups—aiming to get in if (and only if) the stock confirms a new uptrend. That’s looking like a possibility here: After a huge run from last October through March, the stock corrected hard (31%), though not abnormally, and then rallied back into mid-June. Now COIN has retreated again with crypto/Bitcoin, and who knows, maybe it falls apart—but we think it could be a shakeout, with a rally back above the 50-day line in the days ahead paving the way toward higher prices.

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Stock 4

Hims & Hers Health (HIMS)

Why the Strength
Hims and Hers Health is an online pharmacy, but instead of offering everything under the sun for as little as possible, the company has focused on a handful of in-demand areas for guys and gals, including things like hair loss, ED, dermatology, mental health and, more recently, weight loss. Importantly, more and more customers are chatting with one of the 650-ish physicians and nurse practitioners Hims has deals with to develop personalized medications that will work for them; of the 1.7 million users, 602,000 now take some sort of personalized medication, up from just 218,000 a year ago—and the personalized uptake is much higher among newer offerings like dermatology and weight loss, all of which leads to higher re-order rates. (Beyond that, the firm has many custom offerings, like ED mints or vitamin combos for hair health, that are popular.) Business has been solid for a while, with 40%-plus sales growth, rising EBITDA and a bottom line that’s recently lifted into the black—but what lit a fire under the stock recently was its announcement that it would offer compounded GLP-1 treatments (using the same active ingredient that’s used in Lilly’s and Novo’s offerings) for a reasonable price (as low as $200 a month). Obviously, hopes are high that many will choose to go this route instead of getting a prescription (especially given that they’re still capacity restrained) … and while they do that, many might pick up a few other meds from Hims, too. The business model is terrific, with 90% of all revenue recurring and with renewal/re-order rates healthy in the 80%-plus range, so it’s no surprise that all metrics (sales up 46% in Q1, earnings in the black, subscribers up 41%, 82% gross margin, EBITDA lifting off from low levels) are looking great. There is and will be competition, of course, but Hims has a big head start and its brand name and advertising programs should help. We like it.

Technical Analysis
HIMS changed character after Q4 earnings in February, which caused a monstrous gap up and a big run above 17 … but the following pullback, while starting normally, got out of control, dropping the stock a whopping 35% in six weeks! However, shares did steady themselves after earnings, and a couple of weeks later the GLP-1 news caused a buying rush even bigger than the prior one (nearly 10x volume), causing the huge run to 25 before the retreat late last week. It’s not for the rent money, but we’re OK nibbling here or on a bit more weakness with a loose stop.

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Stock 5

Intra-Cellular Tech (ITCI)

Why the Strength
Major depression is one of the most common mental illnesses, afflicting more than 8% of U.S. adults every year and up to 15% of children ages 12 to 17. Intra-Cellular is a biopharma that develops drugs for patients suffering from neuropsychiatric, neurologic and other disorders, specializing in treatments ranging from schizophrenia and Alzheimer’s disease to bipolar disorder, and it’s currently riding one big drug to great success. Indeed, the stock’s latest strength is the result of the company’s FDA-approved Major Depressive Disorder (MDD) therapy, lumateperone (sold under the name Caplyta), reaching the main goal in a Phase III trial in combination with antidepressants. The success of the latest study forms the basis for a potential Caplyta label expansion for MDD patients who have had an inadequate response to anti-depressants; Intra-Cellular plans to submit a new supplemental drug application for later this year. Although the MDD field is crowded with multiple treatments, Caplyta is considered by industry analysts to be unique due to its pharmacologic profile targeting serotonin, dopamine and glutamate pathways—the drug is actually the only one approved to treat both bipolar I and II, and both by itself or in conjunction with other drugs. That’s a reason why growth has been fantastic for many quarters—management expects revenue for the drug to be around $660 million this year, up more than 40% from 2023—but that could be child’s play compared to what’s to come, with analysts projecting peak annual sales down the road above $3 billion if the MDD label is approved. (The top brass also thinks the drug’s addressable market will increase to 80% of annual antipsychotic market prescriptions with an MDD approval, up from 50% today.) The company posted a sterling Q1 report, led by a 52% year-on-year revenue increase, to $145 million. Meanwhile, the per-share loss of 16 cents narrowed significantly from prior quarters and beat estimates by 17 cents. Wall Street sees about $1 per share of earnings next year, but the way these things go, that’s likely to prove conservative.

Technical Analysis
After spending the better part of two years treading water in a range between 42 and 67, ITCI looked like it was breaking free last December, but the rally didn’t really get legs, with resistance showing up near 75 and leading to another few months of chop. There was an attempted liftoff in April that was quickly smacked back, though ITCI repeatedly held firm in the low 60s—and now it’s showing strength following the trial results. It’s a bit higher risk given that there’s still overhead, but we’re OK starting small here, albeit with a tight percentage stop just under 70.

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Stock 6

Ollie’s Bargain Outlet (OLLI) ★ Top Pick ★

Why the Strength
Ollie’s is one of the nation’s largest retailers of closeout merchandise and excess inventory, selling everything from food, housewares, cleaning supplies, clothing, toys and much more, offering discounts of up to 70% compared to fancier store prices. That’s a strong selling point in the wake of tighter budgets as inflation has struck and as price hikes continue to linger in some categories, and this was made clear in the company’s Q1 earnings, which saw cash-strapped shoppers taking advantage of Ollie’s many bargains. Revenue of $509 million rose 11% from a year ago, thanks in part to a 3% comparable-store sales increase, while earnings of 73 cents lifted 49% (and beat estimates by eight cents). Adjusted EBITDA increased 40%, to $69 million, while margins and expenses were better than expected. The company attributed the solid results to consumers remaining “under pressure,” while also “seeking value in their purchases.” The cookie-cutter story here is also vital, with Ollie’s opening four new outlets in the quarter and ending Q1 with a total of 516 stores across 30 states (up 8%), with the top brass thinking it has room for 1,300 down the road. Interestingly, it just purchased 11 stores from the bankrupt 99 Cent Only Stores chain in key markets at what management regards as a bargain $15 million—and which analysts see boosting Ollie’s expansion potential. And there could be more opportunities to buy on the cheap going forward, as peer Big Lots not only plans on closing stores across several states this year but could be heading into Chapter 11 eventually, which would cut competition and add opportunities for expansion, too. Overall, growth here isn’t going to be lightning fast, but after some hiccups in past years, big investors see steady expansion ahead: Ollie’s raised its full-year comp sales outlook to around 2%, up from 1% previously, which combined with the store count expansion, should result in 8% to 11% top-line and slightly faster bottom-line growth through 2025—and likely for many years after that, too.

Technical Analysis
OLLI was hitting new multi-year highs last fall before hitting its head against a ceiling in the low 80s, leading to a prolonged trading range—shares bobbed between the upper 60s and low 80s from that point through mid-May. But shares got a head of steam going from there, briefly tagged new highs after earnings to start June and, after one more dip, took off strongly in recent sessions on excellent volume (bolstered by some positive analyst commentary). We’ll set our buy range down a bit, looking to grab shares on a normal exhale.

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Stock 7

Robinhood (HOOD)

Why the Strength
We consider digital brokerage leader Robinhood to be the glamour play in the Bull Market sector, thanks largely to its exposure to volatile areas like crypto, options and even the resurgent meme stocks, not to mention many unique attractions (via its paid Gold membership for $5 per month, you can get higher rates on cash, more trading tools and even good deposit matches). And if the bull continues to heat up, the company should be a prime beneficiary from the increase in trading activity among small participants that typically follows, thanks to the aforementioned perks and a user-friendly platform that has advantages over stodgier big-name competitors. To that end, Robinhood’s equity trading volume for May expanded 76% from a year ago and rose 23% from April, to $87 billion, while assets under custody (AUC, a key metric) of $135 billion were up 65% year-on-year. Net deposits were $3.6 billion, translating to a 35% annualized growth rate compared to April’s AUC; net deposits through May are already more than 2023 as a whole. (Like many peers, the firm also benefits from larger interest spreads.) To keep the growth trend on track, the firm is making an aggressive push into 24-hour trading (it already offers this service for 900 stocks and ETFs). The company is working with partners to provide the needed liquidity for this endeavor in a move that could force bigger brokerages to follow Robinhood’s lead in offering round-the-clock trading—a move the top brass thinks will attract more assets to the platform. On the crypto front, the company just acquired global crypto exchange Bitstamp, adding an institutional business to Robinhood’s stock and crypto trading app segments. And Robinhood’s pipeline of new offerings continues to grow, including retirement accounts that are bringing in a wider asset pool, plus a credit card offering that will enable the firm to become a bank as well as brokerage. Additionally, Robinhood is expanding its presence internationally: It just launched in the U.K. earlier this year, with plans to add more countries in the coming months. Obviously, the path of stocks and crypto will be key, but if the bull market rolls on, big-picture investor sentiment (which is still just so-so) should improve, bringing more people and assets to Robinhood.

Technical Analysis
Following a huge coming-out party after Q4 earnings, HOOD tagged round number resistance near 20 in late March and was then carried lower with the broad market, eventually finding support above 16 in early May. A turnaround attempt was temporarily cut short after a Q1-related wobble, but the shakeout didn’t last long, with the stock seeing big volume buying after that shakeout—and the big volume continued the next three weeks as well, a good sign. The latest dip has seen shares fade on very light volume as shares meet up with their 25-day line. We’re OK taking a swing at it here, with a stop under the 50-day line should the selling continue.

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Stock 8

Sarepta Therapeutics (SRPT)

Why the Strength
Gene therapy leader Sarepta is focused on leveraging RNA technology and gene editing to treat rare diseases caused by a single genetic mutation. Most of its therapies are indicated for Duchene muscular dystrophy (DMD), a fatal neuromuscular disease that occurs in one in every 3,300 boys worldwide, and progress on that front was the catalyst for the stock’s latest strength. Last week, Sarepta shares exploded after the FDA granted accelerated approval for a label expansion for one of its DMD treatments (dubbed Elevidys) to include patients who are non-ambulatory. (Prior approval was also granted for patients who are ambulatory, with both indications requiring patients to be at least four years old.) The company said this could lead to “the most profound year yet” in Sarepta’s fight against DMD’s symptoms, as well as serving as a “bellwether for the transformative potential of gene therapy for rare disease.” Additionally, Sarepta got a boost when a major Wall Street institution upgraded shares in anticipation of the label expansion, as well as from the stock’s recent inclusion in the S&P MidCap 400 index. On the financial front, the company’s roster of treatments (along with some one-time milestone payments) resulted in revenue of $414 million in Q1, up 63% from the year-ago quarter and led by Elevidys sales of nearly $134 million (up from zero a year ago). Earnings of 73 cents a share topped estimates by 43 cents and were a giant improvement from the year-ago loss. Management noted that since the accelerated regulatory approval for Elevidys last June, the treatment has already posted over $334 million in sales, far exceeding all other gene therapies approved in the last few years combined, which highlights the huge opportunity here. Among its other programs, Sarepta has begun dosing for a Phase III multinational open-label clinical trial of SRP-9003, a treatment of limb-girdle muscular dystrophy type 2E, in which the company hopes to restore function to the muscle. But Elevidys is the main attraction here, and analysts see it contributing to 60% revenue growth this year and 50% in 2025 as earnings explode higher.

Technical Analysis
SRPT topped near 160 last spring, had a tough correction in the fall and then imploded near Halloween on fears the FDA would give a thumbs down to any Elevidys label expansion. Shares did march back to 140 by February but then proceeded to again gyrate wildly after that, with support near 115 (and the 40-week line) but plenty of selling on strength, too. Last Friday, though, might have brought the character change the bulls have been hoping for, with SRPT tagging new price and relative performance highs since the FDA approval. It’s going to be volatile, but we’re OK with a small position on dips and a loose stop.

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Stock 9

Synopsis (SNPS)

Why the Strength
Synopsis is one of the unsung heroes of the artificial intelligence revolution. A leading provider of semiconductor engineering design automation (EDA) software and simulation tools, its offerings allow chipmakers to design and test their silicon chips before commercializing them. Importantly, it’s also the industry’s leading EDA provider for AI chip designers, thanks to its generative AI-infused Synopsis.ai software suite (which helps engineers quickly isolate and fix problems related to the AI chip design process). Earlier this year, the company announced a massive acquisition with system design and physics simulation software firm, Ansys; the deal is still pending regulatory review, and although it’s reportedly receiving resistance in China (Chinese customers worry the companies may try to bundle their offerings in a merger), Synopsis believes the deal will expand its leadership position in EDA software. (The transaction was recently approved by Ansys stockholders and is still expected to close in the first half of 2025.) Also on the AI front, Synopsis has partnered with chip giants Nvidia and Taiwan Semiconductor to help integrate Nvidia’s AI-fueled cuLitho generative AI algorithm to help speed up chip development and manufacturing. In fiscal Q2 (ended May), Synopsis posted total revenue of nearly $1.5 billion that increased 15% year over year, led by a 14% jump in design automation revenue with strength across the business and continued rapid adoption of synopsys.ai. And although EPS of $3 missed estimates by a smidge, it increased 26% from last year’s Q2. Management said the quarter was especially productive for automotive and electrification wins, with its design IP segment posting high-teens percentage growth as the IP supplier of choice for leading AI, automotive and mobile chip firms, while interface IP demand for data center applications grew at a “blistering pace.” Looking ahead, the consistent growth should continue, with 15% to 20% earnings growth for at least the next couple of years.

Technical Analysis
SNPS held up well during the big bear market and decisively broke out in May 2023; progress from there was choppy, but relatively consistent, with the stock finally meeting strong resistance after earnings in February above 600. Since then, shares fell as much as 19% (finding support near their 40-week line) before rallying back and etching a good-looking launching pad during the past 18 weeks. Given that chip stocks have come under some pressure in recent days with the market’s rotation, we’ll set our buy range up from here, looking to enter on another push higher from SNPS.

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Stock 10

Wix.com (WIX)

Why the Strength
As commerce becomes increasingly digital, the pressure for individuals and businesses to have a professional-looking online presence has never been greater. This can be an obstacle for entrepreneurs and smaller companies that lack resources to hire web designers, or for those who don’t have coding skills. Enter Wix, the cloud-based web design platform that allows amateur and professional users to easily create their own online presence for a low cost then increases cash flow by providing value-added services as customers’ businesses grow. Wix’s drag-and-drop tools have always made it easy for tech-illiterate customers to design websites, but the company recently launched a new suite of artificial intelligence tools to further streamline that process. In its Q1 conference call, management pointed out the “extremely strong usage” the firm’s AI Website Builder saw from users in the quarter, which it said has already helped launch hundreds of thousands of sites in just the last few months. The company also said its Wix Studio (a platform geared for design agencies and large businesses) continues to outperform expectations, with over one million Studio accounts since its inception last August. Revenue in Q1 came in at $420 million, up 12% year-on-year, with EPS of $1.29 beating estimates by 24%—both reasons for the stock’s strength, and which the firm largely attributes to its new suite of AI products. Wix also had free cash flow of over $100 million, which was larger than net income and miles above the year-ago $25 million, thanks to healthier levels of customer spending. The sanguine showing prompted the company to raise its full-year bookings outlook to over $1.8 billion (up 14% if realized), with bookings in the second half of 2024 expected to accelerate 16%. Wall Street expects the company’s AI initiatives will gain traction going forward and sees 20%-plus bottom-line growth for at least the next couple of years.

Technical Analysis
WIX never fell into our buy range after we wrote about it earlier this month, but we’re back at it because we see a solid resumption pattern setting up. The stock had a nice run from last November into March, where it encountered resistance near 150. That was followed by a 20% market-related pullback into April, but the correction ended last month at 120, with shares tightening up nicely prior to lifting off on the Q1 report. The action since then has been choppy but normal—we’ll set our entry range up from here, thinking a resumption of the post-earnings strength will likely lead to a nice rally.

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Previously Recommended Stocks

The next Cabot Top Ten Trader issue will be published on July 1, 2024.

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