Cabot Top Ten Trader Issue: November 25, 2024

Note: Heads up as our schedule for Top Ten is garbled this week and next. First, we’re going to try to shoot out a quick Movers and Shakers update on Wednesday since our offices will be closed on Friday; and next Monday is one of our two scheduled weeks off of the year (though we’ll send out a full M&S update on Friday as usual). We’ll be around if you have any questions, of course, but if we don’t hear from you, have a great Thanksgiving!

Leaders Continue to Lead

The top-down action since the election has been volatile and somewhat disjointed due to crosscurrents, but the trends have remained up and it was good to see many indexes rebound last week, including some indexes that re-affirmed their breakouts. That said, the meat of the evidence has been centered on individual stocks during the past few months, and that remains true today, with leading titles (especially on the growth side of the equation) posting stunning gains, with relatively few potholes to this point (though today did see some clear churning). To be clear, the action remains very hot and heavy, with near-term sentiment elevated and many stocks extended to the upside, all of which is a reason to pick your spots on the buy side (ideally aiming for powerful, but fresher, leadership) and to consider partial profits on some names that have gone wild. Still, when looking at rubber-meets-the-road evidence, it’s obvious that most leading stocks and indexes are trending up and big investors are still focused on the buy side—we’ll keep our Market Monitor at a level 8.

This week’s list has something for everyone, with names from a variety of sectors and themes showing strength. Our Top Pick is Wix.com (WIX), which after trying to get going a couple of times this year, looks like it’s finally changing character with a powerful breakout last week.

Stock 1

Alaska Air (ALK)

Why the Strength
Alaska Air Group is America’s fifth-largest airliner by number of daily flights, and it’s the hands-down leader among airlines that cater to passengers looking for a lower-cost, no-frills flight. The company, which operates two primary carriers—Alaska Airlines and Horizon Air—is also known for its innovative customer practices, as it was the first North American airliner to sell tickets online and allow fliers to check in and print boarding passes through the Internet. Alaska Air flies to over 120 destinations, including North America, Belize and Costa Rica, and its recent acquisition of Hawaiian Airlines has expanded that list to allow passengers access to both domestic and international destinations. (A major investment bank described the merger as a “formidable West Coast franchise” with the potential for “industry-leading profitability and a more competitive advantage” now that competitor Southwest Airlines has reduced flights to Hawaii.) The latest quarterly report was a reason for the stock’s latest show of strength, but so was the aftermath of the U.S. presidential election, which Wall Street believes will favor the airline group on the likelihood that the Trump administration will embrace a more favorable policy toward industry mergers (a big part of Alaska Air’s growth strategy) and pursue energy-friendly policies (keeping fuel prices down). The firm’s post-2020 financial momentum continues to build as evidenced by a stellar Q3 report, which featured record revenue of $3.1 billion that increased 8% from a year ago, with earnings of $2.25 a share jumping 23% and beating estimates by three cents. Another highlight was the company’s pre-tax margin of 13%, which led industry peers for the second consecutive quarter. Additionally, management said that the strong revenue trends are continuing into Q4, with strong advanced bookings for both the Alaska and Hawaiian networks, with the latter franchise expected to result in “substantial synergies amidst a strong demand environment and constructive industry backdrop.” Analysts see the bottom line ramping from here, with 2025 showing a 36% gain.

Technical Analysis
ALK peaked at 74 in early 2021 and entered a multi-year bear market, bottoming last November above 30. It struggled to gain traction for several months after that, sagging back toward last year’s low when the market fell apart this summer, but a character change followed in early August: Shares picked up then, accelerated in September and have been in a very persistent uptrend since, ripping to new 16-month highs. A bit of weakness from here would be tempting.

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Stock 2

Crescent Energy (CRGY)

Why the Strength
Last week’s escalation of the ongoing war between Russia and Ukraine has helped oil (somewhat) and especially natural gas prices to firm up, as natural gas exports from Russia (the world’s second-largest gas exporter) could be compromised by the conflict’s intensification. Houston-based Crescent is an independent explorer and producer of oil, natural gas and liquids with a portfolio of key proven basins across the lower 48 states, and with a big footprint in the highly productive Eagle Ford Shale formation (Texas) and Uinta (Utah) Basin. In July, the company announced a merger with SilverBow Resources, a Texas-based oil and gas producer; the combined companies are expected to create the second-largest operator in the Eagle Ford shale, with a broader portfolio of around 250,000 barrels of oil equivalent per day of long-life production and a deep, high-quality inventory that, in Crescent’s words, supports “compelling returns through cycles.” Earlier this month, management indicated that the integration of SilverBow has already exceeded Crescent’s initial expectations, including the realization of approximately $65 million of annualized synergies within just a few months of closing. Earnings were another reason for the stock’s latest show of strength, with Q3 revenue of $745 million increasing 16% from a year ago and per-share earnings of 39 cents up 11%, driven by “meaningful” uplift in well productivity on both an oil and total volume basis. (Free cash flow looked great at around 70 cents per share and much larger than earnings.) The company also emphasized that it’s continuing to build momentum at Eagle Ford, thanks to improved capital costs and increased well performance, resulting in a dramatic step change in well productivity versus the prior operator. Meanwhile in the Uinta, the company reported solid results from its ongoing development program (which is largely focused on the proven Uteland Butte formation). Crescent was also just added to the S&P SmallCap 600 index, which was a catalyst for the rally. Looking ahead, the company said it has a large pipeline of M&A opportunities to drive future expansion, while Wall Street expects 22%-ish top-line growth this year and next. A 3.1% dividend yield is an added bonus.

Technical Analysis
CRGY came public in December 2021 at 15, and after an initial rally to 19.5, it experienced the typical post-IPO droop, bottoming out last summer just under 10. While there was a bounce from there, what mostly followed was a boring, sideways range, with support near 10 and resistance in the 14 area. But the stock completely changed character in early October when crude oil bounced and, after one more modest pullback before the election, has taken off to new highs since. We’ll set our buy range down a few dimes.

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Stock 3

Deere (DE)

Why the Strength
Deere is the world’s largest agricultural equipment maker and also a top producer of vehicles used in the construction, forestry and turf care industries. But beyond the company’s traditional equipment business, it’s also a leader in pairing cutting-edge artificial intelligence (AI) and other data science developments to drive a booming “digital agriculture” business. This segment of the company allows farmers to pay a monthly or annual fee to access historical, predictive farm-related data to help them determine with precision how and when to plant fields, apply fertilizer and pesticides and manage their crops. Moreover, Deere integrates AI into its equipment to help boost efficiency and cost savings for the users (for instance, its latest crop sprayers reduce herbicide usage by up to 60% by only spraying where needed). With all that said, Deere released relatively poor results for its fiscal Q4 (ended October) which featured a 28% year-on-year revenue decline, to $11.1 billion, while earnings of $4.55 fell 45% (though they did beat by a big 68 cents). The lower sales were a result of sluggish demand for farm equipment due to higher interest rates and a “challenging” macro environment. However, with central banks now embracing a looser policy (which should help support demand by lowering financing costs for farmers), and with ag market fundamentals improving while the used farm equipment market stabilizes, many analysts believe the cycle is close to bottoming, so Deere will see better sales and earnings trends in the years ahead. Additionally, Deere has taken efforts to better manage its equipment production, which is beginning to bear fruit as its inventory-to-sales ratio for large tractors was at a decade-low of 10% in Q4. And while the overall market for farm equipment is expected to be soft in 2025, demand for Deere’s row crop tractors is projected to be especially robust, with the company’s order books already filled through the middle of next year’s second quarter, while order books for its newest tractor, the high-horsepower 9RX, is full through next year’s Q4. Going forward, earnings are expected to halt their decline sometime next year and improve at a mid-teens growth rate in fiscal 2026, and the way these turnarounds go, that will likely prove conservative.

Technical Analysis
DE isn’t a typical Top Ten stock, and in recent years, it’s been stuck in neutral with its largely forgotten ag sector peers. But after a nice rebound in August and September and a tight rest period, last week’s earnings reaction saw one of the largest one-day gains in years on solid volume, with follow-through on Friday and again today, which suggests perception is turning up. We’re OK taking a swing at DE here or on modest dips, with a tight percentage stop in the 410 area.

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Stock 4

Flutter Entertainment (FLUT)

Why the Strength
The online sports betting sector went from very niche a few years ago to the mainstream today, yet there remains huge upside potential going ahead, especially in the U.S., as even states that have been up and running for a few years are still showing huge growth while newer markets are growing rapidly and, of course, new legalization efforts are underway in many areas. That, in a nutshell, is the story behind Flutter, which owns FanDuel (the #1 online sports betting play and one of the top iGaming providers) in the U.S. and many other brands (BetFair, etc.) overseas. While the international operation is profitable and growing, the U.S. market is the big driver: In Q3, Flutter’s sales lifted 27% overall, but U.S. revenue boomed 51% as the number of monthly players lifted 28% (the pace of new customer acquisitions rose 10% from the prior year, with payback in just 18 months)—and, as mentioned above, business is strong even in more mature locations, with states that Flutter launched in before 2022 seeing active customers rise 23% and revenues soar 46%, a strong sign that there’s plenty of untapped upside all across the country. Internationally, business was up a very respectable 15%, which, when combined with FanDuel’s results, led to a big earnings beat and continued EBITDA upside (2024 as a whole should see that metric up 35%). Even better is that, after years of huge spending to gain customers, Flutter has turned the corner and should have plenty of extra capital, a lot of which will head into share buybacks—the firm will likely be buying back $5 billion or so during the next three to four years, with an initial $350 million tranche likely by the end of March. While Q4 could show some iffy results as there’s been a string of customer-friendly betting results, that’s going to happen occassinally—Wall Street is focused on the underlying growth trends, which look rapid and reliable.

Technical Analysis
FLUT etched a big, nice-looking launching pad from way back in the spring of 2023 into August of this year, when a nice gap up on earnings changed the stock’s character. Shares then tried to break out from there (up eight weeks in a row), but some tax-related uncertainty pulled them lower—however, the selling never got out of hand, with FLUT forming a fresh, tidy 14% consolidation. And now the stock has broken out on the upside thanks to earnings, with some nice follow-through last week. We’re OK entering here or (preferably) on dips.

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Stock 5

Freshpet (FRPT)

Why the Strength
If we told most investors we found a company that had 25 straight quarters of 25%-plus revenue growth, most would probably think we’re talking about some up-and-coming software outfit or revolutionary new drug firm. But instead, we’re talking about Freshpet, which has been leading the fresh pet food (almost all of its sales are dog food) movement for years; customers (especially those in good financial shape) are willing to shell out a few extra bucks so that Pumpkin and Whiskers can (according to studies) live longer, healthier lives. (The company calls this the “humanization of pets” movement.) After a couple of years when costs got out of control, the firm has been firing on all cylinders, with the top and bottom lines surging—in Q3, sales rose 26% (all of which was from volume, not pricing, which is very impressive) and EBITDA boomed 88% (EBITDA margin 17.2% vs 11.6% a year ago), with some margin metrics already ahead of the firms’ longer-term 2027 targets. Moreover, penetration continues to grow (its offerings can be found in nearly 28,000 locations, 22% of which have its wares in more than one refrigerator), as does the customer count—12.9 million households are buyers (up 17% from a year ago), with most business driven by the five million most frequent users, and while Freshpet dominates the fresh/frozen dog food channel (96% dollar share), it believes it has just 3.2% of the $37 billion annual market. Helping the cause is a continued ramp of a new production facility that the firm thinks will allow it to grow its top line to $1.8 billion by 2027, which itself could prove conservative. From here, it’s simply a matter of staying on the ball—if it does, the rapid, reliable growth story should play out for a long time to come.

Technical Analysis
FRPT bottomed in November 2023 and broke out in March of this year, but while it’s made good progress since then, it’s definitely been a three-steps-forward, two-steps-back situation, with lots of shakeouts and dead periods along the way. The most recent sideways phase lasted from June through October, where the stock made no net progress despite some downs and ups during the time. But FRPT gapped up nicely on earnings at the start of November and has marked time since then. Like many stocks, today saw a downside reversal, but we’re OK entering here or on dips with a stop in the low 140s.

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Stock 6

Howmet Aerospace (HWM)

Why the Strength
Healthy air traffic growth and a multi-year shortage of aircraft are major tailwinds for the global commercial air travel industry, in turn providing a rosy outlook for Howmet. The company is a leading provider of engineered metal products—mainly aluminum and titanium—used in aerospace, defense and commercial transportation applications, as well as fastening systems, bearings and forged aluminum wheels for heavy trucks. As recently highlighted by management, the under-production of aircraft in recent years has resulted in a “very large” order backlog which, combined with the significant need for additional engine spare parts, has created a long runway of growth opportunities. As a result, the company expects above-trend growth in commercial aerospace to continue into 2025, particularly in its defense aerospace and industrial end markets, with the (currently soft) commercial transportation market expected to perk up in the second half of next year. In Q3, Howmet saw its revenue of $1.8 billion increase 11% from a year ago, with per-share earnings of 71 cents beating estimates by 9% while free cash flow of $162 million was a third-quarter record. By segment, Commercial Aerospace revenue was up 17%, Defense Aerospace was up 15%, driven by fighter programs and fighter engine spares demand, Industrial grew a robust 17%, driven by oil and gas demand, while Commercial Transportation revenue was 12% lower, led by a slowdown in Europe. Looking at next year, Howmet expects vibrant passenger air travel and freight demand to serve as growth catalysts, with record backlogs of new orders for aircraft production looking “very healthy” and likely to lead to higher growth for several years compared to historic levels (and supported by projected future passenger growth of around 5% per year). Longer term, Howmet also sees big demand for its blades used in industrial gas turbines on the back of a projected worldwide electricity production increase. For 2025, the firm sees revenue growth of around 8%, with Wall Street expecting earnings to rise 19% (both likely conservative).

Technical Analysis
After last fall’s correction, HWM took flight in November and established a persistent uptrend with the 50-day line serving as support during pullbacks. The stock clearly isn’t in the first inning of its overall move, but after the Q3 report, it still looks to have gas left in the tank—HWM gapped up nicely on the numbers earlier this month and has continued to nudge higher, hitting new price and relative performance peaks before an exhale today. We’re OK with a buy here or (preferably) on dips with a stop near the 50-day line.

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Stock 7

Kyndryl Holdings (KD)

Why the Strength
As companies across multiple industries increasingly adopt generative artificial intelligence (GenAI), consultancy and IT infrastructure service providers are critical to the implementation and integration process. This is where Kyndryl (the result of a 2021 spinoff of IBM’s infrastructure services business) comes in, as the New York-based firm is the world’s largest IT infrastructure provider and fifth-largest IT consulting provider. It designs, builds and manages mission-critical technology systems that the world depends on every day, with capabilities in artificial intelligence as well as data and analytics. (More than 60% of the world’s managed mainframes are run by Kyndryl, and it counts most Fortune 100 companies as customers, with a 95% client retention rate and most averaging a 10-year relationship with the firm.) While the numbers are a bit funky given the spinoff, fiscal Q2 (ended September) saw Kyndryl’s revenue of $3.8 billion off 7% year-on-year while earnings of a penny beat estimates by four cents, but investors focused on the significant strength in the Consult segment. In recent years, Consult revenue (19% of annual sales) has been consistently growing by double digits on a yearly basis, and that segment delivered double-digit growth in Q2 (up 23%) as well as over the last 12 months, with Consult signings increasing 81% in the quarter. Total signings in Q2, in fact, were a record $5.6 billion, up 132% (and up 33% on a 12-month basis), which is a big sign of future growth. The sanguine results prompted the company to announce a $300 million stock buyback (4% of shares outstanding and a reason for the stock’s strength). Further out, Kyndryl guided for earnings of at least $1.2 billion for fiscal 2028, which would be up many-fold from current levels, and sees the company entering a “new era of profitable growth” driven by ongoing GenAI and cloud migration trends, technology skill shortages and cybersecurity risks as enterprises modernize hybrid estates. Wall Street sees the bottom line booming over the next several years.

Technical Analysis
KD was spun off in 2021 and, after going down the chute in the bear market, has been making its way back during the past couple of years, albeit with some long, deep-ish corrections along the way. The latest of those consolidations began in May and took 25% off the stock, but KD found repeated support near the 40-week line and now shares have changed character, first on earnings and then after its long-term outlook was released last week. We’ll look to enter on modest weakness.

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Stock 8

Natera (NTRA)

Why the Strength
Natera scored another massive beat of Wall Street expectations with earnings last week, the second straight quarter of beating revenue and earnings consensus by more than 20%. For the third quarter, Natera rang up $440 million in sales, miles ahead of the $361 million expected, and posted a net loss of $0.26, when a loss of $0.59 was predicted. The results reinforce the reality that Natera’s business of using cell-free DNA (cfDNA) fragments in the bloodstream to screen for diseases is booming – revenue was up 64% from Q3 2023. Especially strong has been Signatera, its blood test for colorectal and breast cancers. About 140,000 Signatera tests were ordered in the quarter, up nearly 40,000 from a year ago, momentum management says is coming from years of real-world data that shows the usefulness of the test for improving patient outcomes. It’s the first time that Signatera has generated more revenue than what has been the company’s hallmark test, Panorama, which surveils fetus health and has gained huge market share because it is a safer, far less invasive way of testing for fetus abnormalities – a draw of the mother’s blood as opposed to a needle inserted into the amniotic fluid. That Signatera is larger doesn’t mean Panroama is weakening, in fact, far from it. Strength in both products has Natera executives saying the company will post sales of just over $1.6 billion this year, up about 50% on the year and nearly $300 million higher than guided at the start of 2024. Using cfDNA fragments in the blood as disease predictors continues to bear fruit for the company too. Medicare just announced coverage of Signatera as a test for ovarian cancer, while clinical trials suggest another product Prospera, used now to assess suitability for kidney transplants, is effective for evaluating other organ and multi-organ transplants. Wall Street sees sales growth slowing markedly next year, but few believe that given the size of the recent beats.

Technical Analysis
NTRA initially got going in November 2023 and decisively changed character in late February, so time-wise, it’s definitely getting extended. That said, we also put weight on the latest action, and after some ups and downs from August through Halloween (no net progress during that time), NTRA picked up steam and then gapped up sharply on earnings, with higher highs ensuing after a quick shakeout. We’re not chasing it here, but further retrenchment should provide an opportunity.

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Stock 9

Samsara (IOT)

Why the Strength
Samsara has a valuation that can cause a few nosebleeds, but the story here remains pristine, with the company effectively becoming the go-to platform provider for any firm or organization with large amounts of physical assets—the Salesforce or ServiceNow of that industry, in essence. As we’ve written before, the platform provides clients (everyone from construction outfits to trucking firms to state departments of transportation to waste management operators and much more) with big, real, and usually quick cost savings (due to fewer accidents, lower insurance premiums, predictive maintenance, better utilization, less idling, etc.) thanks to its telematics and video-based safety collection of offerings (both of which have more than $500 million of annualized recurring revenue) as well as its newer equipment monitoring segment ($150 million of ARR); the cost savings are so big that the firm usually sells into the more stable, growing operations budget of its clients instead of the often-volatile tech budget. As the firm’s symbol suggests, a lot of its success is derived from its mind-boggling hoard of 10 trillion data points that can’t be matched by the competition. The results have been excellent, with revenues rising well over 30% every quarter while earnings are in the black and free cash flow is surging even as business gets to be a good size ($1.26 billion in ARR last quarter). And there should be a lot more where that came from, with Samsara thinking it has just 5% to 6% of its potential client base, and even within those that are already signed up, it thinks its ARR could rise more than five-fold if all of its customers adopted its entire product line (not going to happen, but indicates the size of the cross-sell potential)—and that says nothing about newer products, like its Bluetooth Asset Tag that can be attached to nearly any piece of equipment (even a toolbox!), that were released a few months ago to huge demand. The next update comes December 5, when the Q3 report is released.

Technical Analysis
IOT was very hard to handle for more than a year (from mid-2023 to late summer of this year), as any rally it saw during that time was eventually given back. However, after a rough-looking decline into June of this year, shares turned up, showing relative strength during the August meltdown and then enjoying three straight big-volume buying weeks after earnings in September. IOT did chop around after that, testing its 50-day line a couple of times, but the recent push higher looks like the start of another leg up. We’re OK starting a position here or on dips of a couple of points.

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Stock 10

Wix.com (WIX) ★ Top Pick ★

Why the Strength
Wix makes it simple to get a website up and running through its cloud-based homepage template system that comes with value-added features including e-commerce payments capabilities as well as many others. Originally formed in the 2000s as a way to get a basic webpage done for cheap, Wix has evolved into more of a full-service provider of things like email marketing programs and development tools for professional designers who build more sophisticated websites for mid-sized and larger enterprises. The emergence of AI tools fits in nicely with Wix’s aim to help DIYers and small design studios; more than 50% of new users are using Wix’s AI-assisted site 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 estimate-beating sales and profits in the third quarter, reported last week. Sales were up 13% to $445 million, helped by good momentum in its Studio business, directed at web-building professionals. Earnings per share were $1.50, six cents better than consensus and up a strong 26% as margins expanded. Management inched up its guidance for full-year revenue to $1.76 billion, a 13% rise over 2023, with an improved gross margin over last year that should translate into more net income. Longer term, Wix expects its emphasis of recent years on website building studios to be the main growth driver, but foresees a time when AI tools will bring the business back around to its early day’s emphasis of being a provider of choice for individuals looking to start their own websites. Management isn’t providing guidance for 2025 just yet, but Wall Street sees 15% to 20% growth, which is likely conservative.

Technical Analysis
WIX had a great rally into March of this year and, after a dip with the market, gapped up strongly on Q1 results—but that was the top for a while, with the stock effectively going sideways for six months while longer-term moving averages caught up. Like so many stocks, the action has changed of late, with last week’s quarterly report bringing a big breakout. It’s extended, but if the breakout is for real there shouldn’t be a huge retreat; we’re OK starting a position here or dips of a few points.

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Previously Recommended Stocks

The next Cabot Top Ten Trader issue will be published on December 9, 2024.

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