Cabot Top Ten Trader Issue: November 11, 2024

An Eruption of Buying—Especially in Leaders

There were a few pre-election wobbles in the market, with the intermediate-term trend of the major indexes turning neutral and a few earnings-related blowups popping up—but last week’s action looks decisive, with many major indexes that had been capped below their summertime peaks bursting to new highs, while leading stocks went bananas, including many out-of-this-world moves on earnings. Now, to be fair, we’re still seeing some earnings duds and there’s another huge collection of reports this week, and when it comes to the winners, the action is very hot and heavy, which raises the risk of some sort of near-term rug pull, be it a rotation or a shakeout (possibly if Treasury rates move up from here). Thus, it’s important to keep your feet on the ground, to consider partial profits in names that have gone vertical and to hunt for reasonable entry points—but overall, there’s no question the evidence is bullish and the buyers are in control. We’re moving our Market Monitor back to a level 8 and could go higher if the buying pressures remain intense.

This week’s list is has something for everyone, with a couple of cyclical names sprinkled in among a batch of strong growth titles. Our Top Pick is Insulet (PODD), a leader in insulin pumps that’s showing great growth and a solid breakout from a very tight area last week.

Stock 1

Coherent (COHR)

Why the Strength
The AI boom continues to broaden into different nooks and crannies, and there’s no doubt that networkers have definitely come into favor, with the infrastructure needed to move all the data (from AI and other applications) around at rapid speeds increasingly in demand. Coherent actually had its hands in many different cookie jars, including doing a good business in lasers and materials for a variety of areas, including some growth-ier end markets (fiber lasers for OLED and battery welding, as well as EV battery processing). But the stock is strong today because of its networking offerings—while the product line can make you cross-eyed, suffice it to say that its transceivers (including a 1.6 terabit datacom transceiver that should ramp in 2025), optical circuit switches and more play right into the AI and overall data center mega-trends and are making up a larger share of the business. Indeed, the firm’s communications segment is now 57% of the total business and grew 68% from a year ago, thanks mostly to datacom demand (though telecom was also up 17% from a year ago). Importantly, Coherent is no small fry, having one of the broadest datacom product lines available, which seems to be a big selling point when it comes to making the sale. To be fair, the current quarter guidance wasn’t amazing, but most are thinking that’s (a) due to the non-communications part of the business, and (b) the top brass is likely lowballing the outlook, including for margins and earnings (the 74 cents per share in Q3 topped by 13 cents). Whatever the exact figures, Wall Street sees big earnings growth ahead for many quarters, with this fiscal year (ending next June) likely to reach $3 per share or higher and much greater levels are likely beyond that. It’s not the bluest chip out there, but we think Coherent quacks like a leader of the newly resurgent networking sector.

Technical Analysis
COHR broke out from a base in June that looked promising, but the market’s summer tumble ruined that attempt. But the snapback from the summer plunge was very encouraging and the breakout in September stuck, with shares motoring above the century mark before easing lower into the 10-week line ahead of earnings. Last week’s earnings reaction did show some initial wobbles, but at day’s end, COHR blasted back to new price and RP peaks on heavy volume. Today did bring a good-sized wobble, but it looks normal in the scheme of things—we’re OK entering around here.

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Stock 2

Consol Energy (CEIX)

Why the Strength
Growth in coal demand was expected to flatten out in 2024 and 2025 as the U.S. and others shift to cleaner forms of energy production. But those expectations are now in question in the wake of last week’s U.S. presidential election. According to industry analysts, Donald Trump’s victory could extend the life of domestic coal-producing plants for years if he implements plans to overturn the Biden administration’s environmental rules for coal, which bodes well for Consol Energy. The Pennsylvania-based company is a producer and exporter of high-BTU bituminous thermal and metallurgical (met) coal that owns and operates some of the most productive longwall mining operations in the U.S., as well as one of the Eastern seaboard’s largest export terminals. (Longwall mining involves cutting a long “wall” of coal in a single slice and loading it onto a conveyor belt.) Last week, Consol released mixed results for Q3, including a 23% year-on-year decline in coal revenue of $440 million and a 4% increase in earnings of $3.22 a share which beat estimates by six cents. Other metrics were also mixed, including adjusted EBITDA of $180 million (down 1%) and free cash flow of $122 million (up 2%), which the company partly attributed to a planned annual maintenance shutdown and a longwall move, plus “abnormally long lead times” on the supply chain front. Besides a potentially easier regulatory environment, the stock has turned strong because it looks like Consol’s big earnings are likely to persist: Consol is still spinning off tons of free cash flow (more than $4 per share in Q3 alone), so the valuation here is cheap, and management sees a big opportunity with its proposed acquisition of Arch Coal, which will give it more of a foothold in fast-growing Asian markets and allow the combined company to export more than 67% of its production overseas (the merger is expected to close by the end of next year’s Q1). Looking ahead, Wall Street sees the already-elevated bottom line lifting nicely next year, with cash flow doing the same—and likely with bigger dividends and share buybacks once the merger goes through.

Technical Analysis
CEIX more than doubled last year before hitting a wall at around 110 in October, and that resistance level held for more than a year—shares pulled back as much 34% at one point but generally tightened up in recent months before beginning to perk up in September. But the big liftoff came last week, with a rush of post-election and post-earnings buying catapulting CEIX to new highs. We like the breakout and are OK grabbing some shares here or on modest weakness.

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Stock 3

Corcept Therapeutics (CORT)

Why the Strength
Hypercortisolism, also known as Cushing syndrome, is an endocrine disorder that occurs when the body has too much cortisol—a steroid hormone that facilitates healing for injuries or illness. It’s a rare disease that afflicts around 50 out of one million people each year, but it can be serious if left untreated, with surgery being the most common option. This is where Corcept enters the picture: The company is a commercial-stage developer of drugs for the treatment of severe metabolic, psychiatric and oncologic disorders, with a particular focus on the development of drugs for disorders that are associated with cortisol when surgery isn’t an option. In its recent Q3 earnings report, Corcept announced favorable trial results for two of its drugs, Dazucorilant and Relacorilant, the latter of which is being studied as a treatment for both Cushing’s and ovarian cancer; the bullish data from two Phase III studies should clear the path for Relacorilant’s new drug application for treating Cushing, which Corcept plans to submit by year-end. Additionally, Corcept announced that a Phase IV Catalyst trial for the drug Korlym to study patients with Cushing syndrome and difficult-to-treat diabetes (the largest study ever conducted to establish the prevalence of hypercortisolism in this patient population) will conclude in Q4, as will trials in patients with ovarian cancer and ALS, with successful results expected to “transform the company.” Korlym, which is currently approved for treating hyperglycemia in adult patients with Cushing, is Corcept’s top-selling drug, and management said that business is “thriving.” The drug accounted for most of the firm’s $183 million in Q3 revenue (up 48% year-on-year), with earnings of 41 cents a share beating estimates by 13 cents—both reasons for the stock’s strength. The top brass also increased full-year revenue guidance to around $690 million (up 43% if realized and 5% above the consensus estimate). Looking ahead, analysts see 20% to 30% top-line growth in each of the next several years while earnings lift at a faster clip. It’s a solid small-cap medical story, though trial data and FDA approvals add some event risk down the road.

Technical Analysis
CORT stayed under the radar during most of the last few years, spending the years 2021 through 2023 grinding out a lateral base between 15 and 35. But the last few months have witnessed the stock’s coming out party, as after a series of tightening consolidations, it exploded out of the trading range in September. There was a sharp intraday shakeout to the 50-day line after earnings, but CORT immediately surged afterwards, racing up to the 60 area. We advise aiming to enter on some sort of exhale.

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Stock 4

Dayforce (DAY)

Why the Strength
Dayforce (used to be known as Ceridian) is a human resources (HR) cloud software specialist that provides a unified “people platform” that combines payroll, HR, benefits, talent and workforce management in a single space. The company’s excellent Q3 results turned heads on Wall Street and positioned the company to finish 2024 on the upswing as enterprises worldwide increasingly adopt the all-in-one Dayforce platform to streamline workplace relations. Revenue of $440 million increased 17% from the year-ago Q3, while EPS of 47 cents beat estimates by a nickel and adjusted EBITDA of $126 million jumped 18%. Other metrics were equally solid, including a customer count of 6,730 on the Dayforce platform which grew 6% and, more importantly, recurring revenue per customer that increased 15%. On that last figure, sales to the existing customer base continue to be a major growth driver, with add-on sales accounting for about 37% of total bookings in Q3, with additional “solid growth” across the company’s Talent Intelligence suite (a suite of AI-powered tools that help organizations improve their talent acquisition and management). The company’s Dayforce Wallet (a payroll solution that allows employees to access their earned wages on demand) remained another sales leader, with revenue on track to more than double this year. More recently, a major Wall Street bank named Dayforce as a likely beneficiary of the incoming U.S. presidential administration, which the bank believes will create “a likely backdrop of lower corporate taxes” that would be “broadly positive” for high-tax-paying software companies like Dayforce, while an expected deregulatory agenda could also spur more companies to invest in technology and software. Management was sanguine about the Q4 outlook, emphasizing that the pipeline remains strong thanks to key growth drivers, including the move of the Dayforce platform upmarket to target and win larger customers globally. For 2025, the firm expects revenue to grow 15% while Wall Street sees the bottom line expanding north of 20%.

Technical Analysis
DAY peaked out in early 2023 at 80 and, after a 30% correction, spent several months meandering sideways before running out of energy and collapsing to 48 in July of this year. But instead of spending several more months bottoming out, the stock completely changed character, turning up in August and September before blasting back up to long-term resistance on excellent volume following the recent earnings report. We’ll set our buy range down a bit, but the huge cluster of big-volume days tells us not to expect a major dip.

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Stock 5

Emcor (EME)

Why the Strength
Powerful growth in high-tech manufacturing and communications infrastructure, along with notable increases within institutional and health care facility building demand, are driving growth for Emcor (covered in the September 23 issue). The Connecticut-based firm is an engineering and specialty contractor focused on electrical and mechanical construction along with building, industrial and facilities services. The company capped off a bullish third quarter with a 15% year-on-year revenue increase, to $3.7 billion, with earnings of $5.80 a share beating estimates by 16%. The sanguine results were led by a 25% increase in U.S. Mechanical Construction revenue, thanks to “broad-based growth” in the majority of the markets in which Emcor operates. The company’s domestic construction segments generated revenues of $2.5 billion that increased 24%, led by growth across each of its service lines, including projects and retrofits, repair service, building automation and controls and service maintenance. Meanwhile, Emcor reported a 13% increase in remaining performance obligations (RPOs, a key metric) to $10 billion, which is a company record and a sign the future project pipeline remains in good shape heading into 2025. Emcor believes it’s in the early innings of the overall data center building boom, particularly with the addition of AI, and management said the firm has “successfully positioned” itself in more data center key geographies to serve customers better—a key part of its growth plan. Additionally, Emcor said the reshoring and near-shoring trends continue to provide opportunity in both the traditional manufacturing and industrial sectors, as well as in high-tech manufacturing (where the firm has significant RPOs in semiconductor, pharma, biotech, life sciences and the EV value chains). Wall Street expects high-single-digit growth across the top and bottom lines for both 2025 and 2026, though the firm has been trashing estimates—Wall Street’s 2025 outlook is currently for north of $22 per share, up $4 to $5 per share from earlier this year, so next year’s numbers are likely low.

Technical Analysis
We took profits in our previous purchase in EME last month after a decent rally, and indeed, shares chopped around after that before a quick dip to test the 50-day line ahead of earnings. But we’re impressed by the recent action, which included a good-volume bounce off support and, of course, last week’s earnings-induced pop to new highs above 500 on a string of good-volume days, extending the breakout seen in September. Like most stocks, we’re thinking dips are possible near term, so we’ll set our entry range down a bit.

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Stock 6

Expedia (EXPE)

Why the Strength
Expedia needs no introduction, as its collection of online properties—including its namesake site as well as Hotels.com, VRBO, Hotwire, Orbitz, Trivago, Travelocity and many others—are where tens of millions of people go to book their hotels, flights, vacation packages and more, both in the U.S. and overseas. Frankly, business has been solid but not spectacular for a while now, with big earnings, margins, EBITDA and cash flow (which has supported a big share buyback program), but bookings have been just OK, which seemed to hold investor perception back. The Q3 report, though, seemed to hint the underlying business is accelerating, especially among the business sector, where things have been slow for years. In the quarter, revenues were up just 5% on a currency-neutral basis and earnings lifted 13%, but hotel bookings grew 10% (including a 15% gain on Expedia’s namesake property), with business bookings up a big 19% and VRBO returning to growth after a few slow quarters. All of that prompted management to up their guidance (Q4 bookings up in the 7% range overall), with revenue growth likely to tick higher from here—Wall Street sees the top line slowly accelerating into the upper single digits in 2025. Another big part of the story is the aggressive share buyback program: Free cash flow in the first nine months of the year totaled $17 per share (well ahead of reported earnings), the share count was down about 8% from a year ago in Q3, and the top brass expect more buybacks from here given the relatively low valuation and expectations of faster growth. It’s not a true-blue growth stock, but Expedia is a highly profitable outfit and it seems like investor perception is turning up as the travel sector remains buoyant.

Technical Analysis
EXPE got off its duff in strong fashion late last year (three weeks of big buying volume), but it stalled out near the start of 2024 and then got walloped on earnings in February. What came after was a long, listless correction and consolidation, with support appearing in August and with shares re-approaching their old highs in recent weeks. And now, after a period of tight trading, EXPE has bolted to new price highs on good volume. Like a lot of names, we’ll aim to enter on weakness, though we’re not expecting a huge decline.

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Stock 7

Insulet (PODD) ★ Top Pick ★

Why the Strength
Insulet’s insulin delivery system, Omnipod 5, continues to be a big hit, driving rapid growth and turning investor perception up. The device is a wearable, tubeless, virtually painless delivery system for people with Type 1 and Type 2 diabetes. Rolled out in 2022, the device has been a big leap forward in insulin delivery, in part because its automated software system learns how to personalize treatment schedules early on in its use, eliminating a lot of back and forth between patients and doctors to tweak wearable injectors. It’s also controlled by a patient’s smartphone, so there’s no need to plug in to get the data from the device. In the Q3 earnings report released last week, Insulet said Omnipod sales grew 26% and demand was especially strong in Europe, where it is now the top pump for diabetes. Revenues topped consensus expectations by 5% at $544 million, putting the company on track to top $2 billion in annual revenue for the first time, a rise of about 20% from 2023. Earnings per share also bested forecasts (90 cents per share vs. 78 cents expected), and while management doesn’t guide for earnings per share, it says operating margins are widening across the business, which obviously bodes well. Most see Omnipod as grabbing four to five percentage points of market share annually with Type 1 diabetes patients (many of whom still don’t use any type of pump), while Type 2 is seen as a source of longer-term growth that’s still developing; interestingly, for Type 2 autoimmune disorders, Omnipod is the first and so far only insulin player with approval, with additional tailwinds also coming as existing users upgrade earlier models to Omnipod 5. Management isn’t providing guidance for 2025 until February (when Q4 results are released), but Wall Street sees growth of another 20% on tap, projecting 2025 sales will be over $2.4 billion with EPS nearing $4. It’s a solid growth story.

Technical Analysis
PODD fell off a cliff in the middle of last year, nosediving as low as 126 even though business was sound. After rallying back into year-end, shares went on to build an eight-month launching pad, with a breakout coming in September … but PODD wasn’t quite ready to get going so the stock went on to tighten up on low volume beautifully last month. Last week brought the breakout, with some upside follow-through today—we’re OK starting a position here or on near-term wobbles.

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Stock 8

TG Therapeutics (TGTX)

Why the Strength
TG Therapeutics is in its second year of sales of its first commercially available drug, Briumvi, which is for patients with relapsing forms of multiple sclerosis. Sales exceeded consensus expectations in the most recent quarter by a couple of million dollars, leading the business to tally $84 million total revenue in Q3. (It was down big from a year ago solely because of a one-time payment in last year’s Q3.) Management bumped up its full-year sales sights to a top end of $305 million, up from a $260 million outlook at the start of 2024. Importantly, TG has an “enhanced” version of Briumvi in Phase III Trials, which focuses on expanding the drug to a related but distinct market—the difference is that the approved Briumvi focuses on the loss of the CD19 antigen, while the trials are focusing on the loss of the CD20 antigen, which for various reasons is a market that could be roughly four times as large. Even better, recent data shows that target patients should be able to be safely shifted to Briumvi from existing treatments. The company is also working on a Briumvi version that can be injected under the skin at home, rather than administered by IV drip at a medical facility, which is the current method. The business has another drug termed IND starting Phase I trials for treating progressive multiple sclerosis not addressed by other treatments. TG also struck a deal to license a B-cell therapy from Precision Bioscience this year, giving it rights to all non-cancer applications, which management thinks should have great potential with autoimmune diseases that are in pre-clinical work right now. Still, for the foreseeable future, it’s the success of Briumvi that will drive results and the stock—and that should be a good thing, with Wall Street looking for sales to boom by 64% next year while earnings take off on the upside, reaching nearly $1 per share in 2025. Stepping back, medical and biotech stocks haven’t been big leaders of late, but now some are perking up and TG Therapeutic’s could be a small-cap leader.

Technical Analysis
TGTX is still growing up (348 funds own shares, up from 318 nine months ago), which means the stock’s moves can be extreme—and that’s what we saw last year, when the stock imploded, followed by a very choppy but sharp recovery this year. Even so, the recent action has been more controlled: Shares pushed to new highs in August and September, and while TGTX did stall out after that, the multi-week consolidation was reasonable (max 20% correction), and following a post-earnings shakeout, the stock is out to new price and RP peaks. We’ll aim to enter on some weakness following the recent rush higher.

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Stock 9

Toast (TOST)

Why the Strength
Toast has always had a solid growth story, and now it seems investor perception has finally turned up after a great Q3 report that showed much larger margin expansion to go along with the rapid, reliable growth outlook. Starting from the top, the company is one of the leading new-age payment and back-end software providers to restaurants both in the U.S. and overseas, which is a gigantic market that consists of 875,000 locations in the U.S. and another 230,000 in Canada, Britain and Ireland, as well as 220,000 food and beverage retailers like convenience stores that it’s beginning to target. Obviously, order processing (online, drive-thru, in-person) is a core solution, but Toast’s offering goes way beyond that, helping clients with payroll processing, email and text marketing and reservations, managing tips and invoices, employee scheduling and building apps, which has made it a hit: In Q3, the firm adding another 7,000 locations to its client base, which is now around 127,000, up 28% from a year ago; it’s more than doubled its U.S. market share in the past three years but is still only at 14% penetration. Meanwhile, revenues lifted 26%, annualized recurring revenue was up 28% and gross payments volume lifted 24%, and importantly, there’s real bottom-line leverage showing up, with EBITDA of $113 million crushing estimates. (Indeed, the top brass hiked its 2024 EBITDA guidance; went from $295 million to $357 million after the report!) And there should be more of that to come—at its Investor Day in May, the firm indicated it thinks EBITDA can reach 30%-plus of its recurring revenue streams in a couple of years (this year should be around 26%) and north of 40% in the long term, which points to sustained, huge earnings and cash flow growth for many years. From here, it’s simply a matter of making the right moves, as Toast is crushing its legacy competitors (though it does have some new-age peers), and if it does get a bunch of traction in new areas (overseas locations, convenience stores, etc.), the upside will be huge.

Technical Analysis
TOST technically bottomed back in 2022, but the stock has essentially been carving out a huge bottoming area since then, with resistance repeatedly showing up in the 28 area and with some wild declines appearing here and there. This year, though, has been more controlled, with shares holding north of their 40-week line, and the stock’s character started to change in mid-September, as shares picked up steam, nosed above resistance last month and decisively moving to multi-year highs after earnings last week. If you want in, aim for a pullback of a buck or two and use a looser stop.

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Stock 10

Vulcan Materials (VMC)

Why the Strength
The ongoing infrastructure spending boom is expected to benefit from an estimated $3 trillion in nationwide expenditures for road, bridge and dam repairs—all of which will require massive quantities of asphalt and concrete. Vulcan is the nation’s largest provider of construction aggregates such as crushed stone, sand and gravel and is a major producer of asphalt and ready-mixed concrete, making it one of the most direct plays on the building boom going on in the U.S. Its customers include builders of highways, walkways, airports and railroads, as well as residential and commercial developers, so the addressable market is massive in view of the infrastructure-related demand. While the Q3 report showed another quarter of shrinkage, the outlook was bright, telling investors a new growth wave for the company should start right quick. Revenue of $2 billion declined 9% from a year ago, while per-share earnings of $2.22 were nine cents below the consensus. However, Vulcan’s aggregates cash gross profit per ton increased 10% and has grown by double digits for eight consecutive quarters, giving the firm an industry-leading position in this metric. Moreover, the company just announced the acquisition of Wake Stone, a leading pure-play aggregates producer, which Vulcan said will expand its reach in high-growth geographies in the Carolinas, as well as extend Vulcan’s quality hard rock reserves by 60 years. By segment, Asphalt outperformed with a 12% profit boost thanks to rising prices and shipments, while Concrete underperformed, largely due to a goodwill write-off for the company’s concrete assets in Northern California. Vulcan also noted the overall pricing environment across all its products remained “positive” across its geographical footprint, with freight-adjusted selling prices up 10%. Going forward, management said the falling interest rate environment will benefit its project planning and design pipeline, and it intends to pursue additional acquisition opportunities to drive long-term shareholder growth. Wall Street sees earnings turning up in Q4 and lifting 26% in 2025, which will probably prove conservative.

Technical Analysis
VMC had a promising start this year, climbing from 225 to 275 in the first three months. But the stock went into limbo starting in April, eventually correcting about 20% and slipping below its 40-week line in August as the market pulled in sharply. The rebuilding process from there started slowly, but VMC picked up steam late last month, with a gap back to its highs after the Q3 report and then a push to new peaks after the election last week. If you want in, we’re OK starting a position here or (preferably) on weakness.

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Previously Recommended Stocks

The next Cabot Top Ten Trader issue will be published on November 18, 2024.

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