Cabot Top Ten Trader Issue: May 20, 2024

Quick note: Because next Monday is Memorial Day, our next issue of Top Ten will be published Tuesday after the close, May 28.

Continuing to Improve

The market’s good-looking rebound continued last week, with big-cap indexes notching new highs and most other indexes close to doing so. Granted, a lot of what we’ve written in the past two weeks still holds when it comes to individual stocks, with some things battling with resistance from their prior highs in February/March and with many growth names set to report earnings during the next couple of weeks (including Nvidia’s report this Wednesday). Throw in the fact that sentiment has definitely gotten a bit bubbly/complacent again and you want to pick your stocks and entry points carefully. Still, we don’t want to lose sight of the forest from the trees—right now the intermediate-term (and longer-term) trends are up for the market’s major indexes and most leading and potential leading stocks, with very little selling pressure out there. We’ll keep our Market Monitor at a level 8 but could hike it further if more stocks lift off on earnings in the near future.

This week’s list has a lot of enticing names, with some showing power and others set up nicely to break out if the bulls remain in control. Our Top Pick is On Holding (ONON), which is wild and woolly but appears to be finally getting going after a long, tedious consolidation.

Stock 1

Coupang (CPNG)

Why the Strength
Coupang can be thought of as the Amazon.com of Korea. It sells everything from books to groceries, handles its own logistics and even offers its own video streaming service. And like Amazon, Coupang is fast-growing: In Q1, revenue rose 28% on a currency-neutral basis to $7.1 billion as every segment of its customers spent more on the platform. Growth would have been about 10 points higher but for the drag of Farfetch, a luxury goods retailer Coupang bought for $500 million in January, but Coupang says Farfetch will be break-even and self-supporting by year-end. Still, the purchase meant net income in Q1 was a penny weaker than consensus, at $0.05 per share. But there’s lots of reasons to be optimistic on Coupang—growth has been especially strong in its recently introduced fresh groceries service; orders by midnight are delivered by 7 a.m. the next day and management says its prices for vegetables and fish are cheaper because it buys directly from producers. The company also expanded its restaurant delivery business, Eats, offering free delivery and a discount for its WOW members (its version of Amazon Prime). The biggest hopes surround Coupang’s 2022 move into Taiwan, its first international market. It sells under the brand Rocket and so far only has single-digit market share, but management believes its integrated divisions will allow it to replicate its Korean success. All these new efforts do mean the company will see an uptick in costs, which has investors expecting pressure on net income–consensus is for $0.13 per share for 2024, which would be down from $0.26 last year. But it’s a long-term play, as once customers use Coupang they’re hooked—a 37% hike in its membership fee earlier this quarter had no drag on sales, and analysts see the bottom line surging in 2025.

Technical Analysis
CPNG bottomed out for well over a year, hacking around between 12 and 22 (ballpark), with its last test of support coming in early February. But the action since then has been great, highlighted by the April breakout after the membership fee hike. Since then, CPNG has gyrated somewhat but has respected its 25-day line even after getting dinged a bit on earnings. We’re OK entering here with a stop under the 50-day line.

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Stock 2

Dutch Bros (BROS)

Why the Strength
If you like cookie-cutter stories (like we do), then you’ll like Dutch Bros., which has all the makings of an up-and-coming player in the fast-service beverage slice of the restaurant industry. The firm is usually known as a coffee shop, but it’s really different than Starbucks or Dunkin’—most revenues come from cold or frozen beverages (like its own energy drink) and it’s been able to bolster business of late with new offerings like boba and a protein coffee (the protein comes from a high-protein milk). Then there is the operations side of things: The stores are drive-through heavy and even feature runners who go out and take your order—and, if your drink is ready before you get to the window, there’s a separate “escape” lane you can use where the runner will deliver the drink to your car. It’s been very popular in the southern U.S. and is proving to be a hit everywhere, which has management expanding like mad—the firm has 867 shops today, up a huge 22% from a year ago, with plans on opening 160 or so this year (another 20%-ish expansion) and eventually having at least 4,000 across the country, backed up by solid (though not amazing) newbuild economics (30% cash return in year 2). That said, the post-pandemic period was rough due to both sales (boom early in the pandemic but same-store sales rose just 0.6% and 1.5% the past two years) and costs (labor and other costs moved up meaningfully), but those issues have been fixed: In Q1, same-store sales lifted more than 10%, while restaurant-level margins rose five percentage points, allowing earnings (nine cents per share crushed estimates of one cent) and EBITDA (more than doubled to $54 million) to kite higher. Wall Street sees more of the same ahead, with 26% top line growth this year and north of 20% next year while earnings push ahead. It’s a good story.

Technical Analysis
BROS hit a high of 81 in late 2021 after coming public and proceeded to steadily bump downhill from there, hitting as low as 18 in May 2022 but then repeatedly testing the 23 to 27 area for the next year and a half—including tests of that area this year in February and May. But now we’re thinking a turn has come, with the hugely bullish earnings reaction (second heaviest volume week since the IPO, many big-volume buying days) telling us big investors are starting to accumulate. If you want in, aim to enter on a bit more weakness.

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Stock 3

Fabrinet (FN)

Why the Strength
Increasing use of artificial intelligence applications in data centers has resulted in booming demand for Thailand-based Fabrinet’s optical communication products, as the firm’s offerings are necessary for transmitting data at a rate fast enough to satisfy the complex demands of AI. Indeed, there’s a growing consensus among semiconductor industry experts that AI has increased the need in data centers for optical interconnects—which deploy fiber optic cabling to transmit signals from one part of an integrated circuit to another using light—and which Fabrinet specializes in. The company is also a leading provider of complex optical communication components, modules and subsystems, industrial lasers and sensors to original equipment manufacturers (OEM). Data center interconnect products drove solid financial results in fiscal Q3 (ended March), which featured revenue of $732 million that rose 10% year-on-year, along with earnings of $2.39 that lifted 23% and easily surpassed estimates. The results were also driven by record datacom revenue from continued demand for high-data-rate products (including 800 gig technology for AI applications), while, after several quarters of declines, telecom revenue saw sequential growth in Q3, led by data center interconnects, while industrial laser revenue remained stable. Looking ahead to fiscal Q4, Fabrinet said it’s well positioned to end an “outstanding” fiscal year on a “high note with another strong performance,” which it anticipated will be led by continued strength in datacom and sequential growth in automotive sales. The company further expects total Q4 sales to be unchanged from Q3, but up 12% from a year ago, while EPS is forecast to be 20% higher.

Technical Analysis
FN blasted off from a seven-month base last August at 140 and had a good run through January, though it wasn’t without some wild action along the way. The top in February saw a huge post-earnings wobble that eventually gave way to a deep 30% decline—but following a shakeout south of the 40-week line, we’re impressed with recovery that included many days of above-average volume buying, egged on by the recent quarterly report. There’s some resistance up here, so we’ll aim to enter on a near-term retreat.

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Stock 4

Garmin (GRMN)

Why the Strength
GPS technology specialist Garmin is widely known for its offerings that help car drivers, as well as boat and plane pilots, reach their destinations by mapping out the best possible routes. However, as the navigation technology field has become a lot more crowded in recent years, the company has branched out into other areas, including fitness and so-called adventure watches (worn on big hikes and other outdoor activities; they feature solar charging, rugged designs and, of course, advanced navigation), golf devices and even pet trackers. Fitness wearables have been a key growth catalyst for Garmin, as a growing number of Americans are interested in tracking their health and fitness results, with it being one of its fastest-growing segments. All told, business is strong and getting stronger, with both sales and earnings growth accelerating and topping estimates: In Q1, the top line lifted a very solid 20% year over year, led by wearables, which accounted for $343 million of sales, a new record and up 40% from last year, helped by the recent launch of the firm’s Forerunner 165 GPS running watch. The company’s outdoor segment was another big contributor in the quarter, with revenue of $366 million increasing 11%, thanks to strong demand for tracking, mapping and weather forecasting wearables. Elsewhere, marine sales increased 17% while the acquisition of JL Audio helped the auto OEM area segment surge 58%. Meanwhile, margins continue to crank ahead, with earnings of $1.42 per share obliterating expectations by 40% and growing much faster than revenue. Looking ahead, management didn’t hike guidance, though that was mostly because Q1 is the firm’s slowest quarter so it didn’t want to get ahead of itself. Even so, given the history of earnings beats, it’s a very good bet Wall Street’s current outlook (mid/high single-digit earnings growth this year and next) is conservative. A healthy divided (1.8% yield) is an added attraction.

Technical Analysis
GRMN sleepwalked through most of 2023, making little headway while confined to a narrow 15-point range. But the bulls finally came through in early November, with earnings blasting the stock out of its lethargy and pushing it up 25 points in the final weeks of last year. The last two earnings reports also brought in the buyers after multi-week dips, including the recent May 1 gap, which sent shares to their highest levels since late 2021—and there’s been absolutely no selling since, as the stock trades very calmly. We’re OK starting a position here or (preferably) on weakness.

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Stock 5

Itron (ITRI)

Why the Strength
Itron is the world leader in utility meters – water, gas, electricity – and stands to benefit from a push toward automated meters that results in more energy- and water-use efficiency. The company has more than 8,000 utility customers worldwide and is focused on selling them two types of products, automated meter reading and advanced metering infrastructure. With both, the pitch is lower labor costs (a utility truck driving past a house can read Itron’s meters) while also gaining greater data insights into the grid. The latter is important because of the evolution of the grid from a hub-and-spoke arrangement (a power plant sends out electricity), to one where customer solar panels, wind turbines and even EVs feed power back into the grid in addition to creating more variability in when energy gets used. Itron says its automation equipment helps advance the cause of de-carbonization of the energy grid while providing cost savings at the same time; utility clients see 30% savings in energy in areas like street lighting with its automated tools, for example. The result is what seems to be a sleepy, utility-like business is actually a source of growth: Revenue last quarter rose 22% from a year ago to $603 million with net income of $1.24 per share, blowing away expectations for 84 cents. In the current Q2, management says sales will rise 11% to around $600 million with EPS around $0.95 (up 46% from a year ago), but most see that as conservative. Looking further out, Itron entered this quarter with a huge a $4.5 billion order backlog, so there’s little doubt business should be good for many quarters to come. It’s a solid and unique story.

Technical Analysis
ITRI started to get going a year ago, but the market pulled it down in the summer and fall; all told, shares based out from August of 2023 through February of this year. The Q4 report changed the stock’s character, with a big breakout on those numbers, and after a tight, quiet rest for a few weeks as the 10-week line caught up, the recent Q1 numbers caused another spike. We’ll set our buy range down a bit, looking to get in on a normal exhale.

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Stock 6

Neurocrine Biosciences (NBIX)

Why the Strength
Major depression is one of America’s most common illnesses, afflicting nearly 10% of all adults and 15% of children ages 12 to 17. Not surprisingly, the antidepressant drug market is expected to have a long growth runway ahead of it in the coming years—a market Neurocrine has increasingly turned its attention to. The company develops breakthrough treatments for patients with rare and under-addressed diseases with a focus on neurological, endocrine and psychiatric disorders. But its latest development is a drug known as NBI-845, which treats patients with major depressive disorder (MDD) who have not benefited from treatment with at least one antidepressant during their current episode of depression. Last month, positive Phase II results in partnership with Takeda Pharmaceutical reached its main goals in adults with MDD (one dose showed an improvement over the placebo, while the other dose indicated a trend toward improvement on days 28 and 56), which provides big upside potential if it’s eventually approved. But Neurocrine is no development-stage outfit: Sales and earnings have been kiting higher thanks to Ingrezza, which treats both tardive dyskinesia and chorea due to Huntington’s Disease, and from which the company expects to earn over $2 billion in product sales this year. What’s more, the FDA just approved a granulated version of Ingrezza for patients with difficulty swallowing. Meanwhile, the firm’s Phase III drug candidate Crinecerfont—for treating adults with the genetic disorder congenital adrenal hyperplasia (CAH)—was recently granted a breakthrough therapy designation from the FDA, and a commercial launch of the drug is expected next year. In Q1, Neurocrine saw revenue of $515 million increase 23% from a year ago, and while EPS of $1.20 missed estimates by nine cents, it was miles above the year-ago per-share loss. Going forward, analysts see upper-teens percent sales growth in each of the next three years while earnings grow at a faster clip.

Technical Analysis
NBIX ended a six-month slide last June after a brief dip below 90, turning up immediately afterward. The stock wasn’t crazy powerful but it was persistent, motoring straight up to 120 in September, and after a three-month rest, up to 143 in late January. That was a top, but NBIX never really gave up much ground—it’s spent the last three-plus months in a tight range while testing resistance several times without managing to break free. We like some of the recent volume patterns, however, so we’ll set our buy range up from here, thinking a decisive breakout above 145 is buyable.

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Stock 7

On Holding (ONON) ★ Top Pick ★

Why the Strength
The big attraction with On Holding is that it has the potential to be the next Nike or Under Armour: The firm is known for its high-performance (but also comfy) running shoes that are gaining in popularity among casual wearers, regular joggers as well as top runners and marathoners (the winner of the past two Boston Marathons wore Ons; the company is going to unveil new technology used by that runner at this year’s Olympics); the shoes have a softer landing and springier liftoff, which helps performance, and it doesn’t hurt that innovation in athletic footwear has been hard to find in the sector, opening the door for a better mousetrap. The firm’s footwear tends to be higher end, selling north of $100, which of course helps pre-tax margins (north of 25% in Q1, though it varies), and while there’s plenty of opportunity in the running area alone, a big part of the story here is about how far the firm can extend its reach. In footwear, the firm’s tennis (it designed a couple of pairs with Rodger Federer) and training offerings are catching on quick, and it’s also moving into apparel (sales here up 25% in Q1) and accessories (up 43%), which are small but obviously growing nicely. Being a Swiss firm, the numbers can be affected by currency movements, which was the case in Q1, but the currency-neutral figures were excellent (up 29%) and had management reiterating its near-term (30% currency-neutral sales growth this year, EBITDA margins north of 16%) and long-term (sales rising at a 25%-plus annual rate through 2026, with EBITDA margins north of 18% by then) guidance. It should be noted that On is expecting to ramp marketing around the Olympics (could affect profits), and of course competition is always a factor, but if the top brass continues to pull the right levers, On should get much bigger over time.

Technical Analysis
ONON came public near the last bull market top and got whacked, but it looked ready to be a new leader in March 2023 after a monstrous earnings gap. But it was not to be—instead, after a bit more upside, shares became choppy and sloppy for the next year, with resistance just above 35 and support in the mid-20s. However, the March 2024 wash-and-rinse earnings reaction (second biggest weekly volume ever) was a bullish clue, and after a few more weeks of consolidation, last week’s Q1 reaction appears to have changed the stock’s character. You can start small here or on dips, though be prepared for volatility.

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Stock 8

Royal Caribbean (RCL)

Why the Strength
Royal Caribbean needs no introduction, as it’s one of the largest cruise ship operators out there, with a fleet of 65 ships under a variety of brand names (including Royal and Celebrity) traveling to more than 1,000 destinations. The company has been one of the big beneficiaries of the travel boom, and when it comes to the stock, the story here is that the initial “cabin fever” rebound that took hold as people emerged from their pandemic hibernation has turned into a boom that’s lasting longer than most anticipated, with demand outstripping supply (despite the industry working to expand to meet demand) and leading to “higher for longer” sales and earnings growth. In Q1, the headline numbers (sales up 29%, earnings of $1.77 per share up from a loss) were great, but just as impressive is what’s going on under the hood, with record booking numbers (including record numbers of new cruisers or new-to-Royal cruisers; prices for future bookings are up too) and cost controls (up just 5.5% projected this year) leading to ridiculous margins (31% EBITDA margins in Q1 as all of the revenue increase flowed to the bottom line!), while all of this is happening with a solid 8% projected increase in capacity this year as the firm will have two ships hitting the water. A couple of years ago, many thought double-digit earnings may happen by 2026, but the top brass now sees nearly $11 per share this year with greater figures coming in 2025. Of course, this is still a cyclical operation, so any major economic weakness would crimp things, but the next few quarters should continue to see excellent (and likely estimate-beating) results.

Technical Analysis
After shares nosed to multi-year highs last summer, RCL had a big downturn in the months that followed as economic concerns were everywhere. But the recovery from there was terrific, with the stock running higher in a straight line into year-end. This year, though, has been choppy, with a couple months of sideways-to-down action to start 2024, and after a modest move up, another base-building effort in recent weeks. That said, after a nice snapback on earnings in late April, shares traded very tightly near their highs—and then moved to new highs today. We’ll set our buy range up above round number resistance of 150.

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Stock 9

Teradyne (TER)

Why the Strength
After a lackluster last couple of years, the global smartphone sector is widely expected to recover in 2024 on the back of increasing demand for AI smartphones. (Indeed, worldwide smartphone shipments increased 8% year-on-year in the first quarter, while prices have been steadily been rising in recent months.) But an improving smartphone market is just one of many factors providing potential upside to Teradyne going forward. The Boston-based company designs and manufactures automated test equipment for some of the world’s biggest electronics firms across multiple industries, including semiconductors, storage and defense/aerospace, as well as producing industrial collaborative robots and autonomous mobile robots. Key smartphone customers like Qualcomm are expected to drive much of the growth for Teradyne’s memory test market, which is projected to increase sales 10% this year. Indeed, while total revenue of $600 million was 3% lower in Q1, earnings of 51 cents beat estimates by 55% (the reason for the stock’s strength). The performance was largely thanks to notable strength in the memory segment, with over 40% of memory shipments in the quarter driven by AI applications, while robotics shipments met sales forecasts for the third consecutive quarter and contributed to the results. Even so, the stock is strong today because of what’s to come: Teradyne said it expects strength in memory and computing to drive stronger-than-expected results through the first half of 2024, while new products, new applications and global distribution channel improvements should fuel robotics business expansion through the balance of the year. Indeed, the firm’s top-selling UR20 collaborative robot is widely expected by analysts to make significant contributions to renewed growth in this segment; it also just announced a new AI-powered solution to pick up and deliver pallets even in complex factory environments. Analysts see the streak of shrinking sales and earnings ending soon, with a steady acceleration in growth for many quarters after that.

Technical Analysis
TER isn’t a typical Top Ten-type stock, but we like the big-picture setup and recent power here. Shares imploded during the bear market, falling about 60% from high to low, and it’s spent most of the past year and a half in a trading range. But after one last shakeout with the market in April, TER blasted off on earnings (heaviest weekly volume since January 2022) and has continued to surge ever since. We’ll set our buy range down a bit given the recent run and today’s gap, but we’re not expecting a huge retreat.

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Stock 10

Wheaton Precious Metals (WPM)

Why the Strength
Gold just broke out to a lifetime high above $2,400 an ounce on the back of strong demand from some of the world’s largest central banks and gold-backed ETFs, with much of the buying coming from China. Meanwhile, persistent geopolitical tensions in Israel and Ukraine continue to bolster gold’s safe-haven appeal among individual investors worried about a potential financial market shakeup. Especially well positioned in this environment of rising metals prices are streaming companies that don’t produce the metals, but provide financing for the firms that do the actual mining in exchange for a percentage of future production. Vancouver-based Wheaton is one of the world’s largest precious metals streamers, inking agreements with 18 operating mines and 27 development-stage projects to purchase all or a portion of their gold, silver or cobalt production for an upfront payment. The effectiveness of Wheaton’s business model in leveraging soaring metals prices was on full display in Q1, a quarter in which the firm posted revenue of almost $300 million that jumped 38% from a year ago, $219 in operating cash flow that increased 62%, plus per-share earnings of 36 cents that beat estimates by 18%. The company also “produced” (via its deals) a total of 160,000 gold equivalent ounces in Q1 (up 19%), mainly due to higher production and higher ore grades at two of its streams in Peru, and margins remained out of this world (55% pre-tax!). Wheaton further expanded its streaming portfolio during the quarter with a purchase agreement with an established multi-metals mine in the Yukon and a smelter royalty agreement with a mining project in Idaho. Looking ahead, management estimated total attributable production of up to 620,000 gold equivalent ounces for 2024, unchanged from last year, but forecast peer-leading production growth of 40% by 2028 based on “significant milestones” recently achieved in several of its development projects. Wall Street sees earnings lifting double digits this year and next, while cash flow should grow even faster.

Technical Analysis
WPM met resistance in the low 50s a few times during the past couple of years, each one leading to a severe retreat, with the latest of those retrenchments occurring into February, when the stock fell into the upper 30s. But the change in character happened soon after, with WPM recapturing its moving averages in March, tagging new highs in April and continuing higher this month even after some brief earnings-related wobbles. Aim to enter on dips toward the 25-day line, a trend line the stock has respected for a couple of months.

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Previously Recommended Stocks

The next Cabot Top Ten Trader issue will be published on May 28, 2024.

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