Cabot Top Ten Trader Issue: November 6, 2023

Extremely Encouraging—Though Not Bullish (Yet)

We’ve been writing for a few weeks that many secondary indicators were near levels normally associated with the market lows, so if something actually went right in the world, the market could respond powerfully. We’re optimistic that process is now underway, as last week’s Fed meeting and so-so jobs report has Wall Street thinking the Fed is at the end of its rate hike campaign—resulting in a sharp dip in rates and a very, very encouraging pop in the indexes and nearly all stocks (breadth was nearly straight-up before today). In response we’re bumping up our Market Monitor ... but only to a level 5 at this point, as the intermediate-term trend still isn’t up (and still isn’t down for long-term interest rates) and, despite the sharp upmove, more than half of all stocks are under their 50-day lines. Long story short: We’re optimistic and are OK throwing a couple more lines in the water, but we want to see constructive action from here (tame pullbacks, more breakouts, etc.) before turning truly bullish.

This week’s list has charts in a few different places (some coming off the lows, some near new highs, etc.), but a ton of them reacted well to earnings and most should do well if the market follows through on its rally. Our Top Pick is DraftKings (DKNG), which, after many months of tedious action, appears to be ready to resume its major upmove after a great Q3 report and outlook.

Stock 1

Cameco (CCJ)

Why the Strength
Nuclear power generation is experiencing a renaissance as utilities worldwide are on track to sign more uranium contracts in 2023 than any year since 2012. However, the energy metal is in short supply and is under additional threat domestically, with the U.S. Congress recently introducing bills to ban or limit Russian uranium imports. Cameco is one of the world’s largest uranium miners and its output is used to fuel nuclear reactors, which are being widely embraced by several countries as a zero-emission energy source, and with uranium prices at a 15-year high, the company has plenty of reasons to produce more of it. In its Q3 earnings report last week, Cameco said it’s seeing “significant, positive momentum” across the nuclear energy industry thanks to the industry’s “best ever market fundamentals,” prompting the firm to raise its revenue outlook (a reason for the stock’s strength). Total sales of $575 million increased 48% from a year-ago, thanks to a two-million-pound increase in tons sold, while earnings of 32 cents a share beat estimates by an eye-catching 22 cents. Management emphasized that its pipeline is “large and growing” and will help further build out its long-term contract portfolio. Year-to-date, Cameco said that industry-wide total contracting volumes have already exceeded the volume of the last decade (currently around 144 million pounds), which it said is a strong indication that a new long-term uranium contracting upcycle is underway. The company raised full-year sales guidance to $2 billion at the midpoint, up 43% if realized, while analysts see the bottom line continuing to explode higher in the quarters to come.

Technical Analysis
CCJ topped with most commodity names in the spring of 2022 and built a long launching pad with a few false starts, but the breakout effectively came at the start of June and shares had a smooth, excellent run higher to 42 in September. The market finally got its hooks in the stock at that point, but while sharp, CCJ’s dip wasn’t abnormal, and after hanging around the 50-day line for a month, the stock took off after earnings last week. We’re OK buying some on this post-report dip.

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Stock 2

Comfort Systems (FIX)

Why the Strength
Comfort Systems is a leading provider of commercial and industrial building systems—including heating, ventilation and air conditioning (HVAC), plumbing, electrical and fire protection—fabricating and installing a wide variety of such systems across several market sectors. In Q3, Comfort achieved revenue of nearly $1.4 billion (up 23% year-on-year), while the firm earned $2.74 a share, beating estimates by 61 cents and accounting for much of the stock’s latest strength; a 54% EBITDA boom and free cash flow of over $400 million in the first nine months surging 200% from a year ago (totaling north of $11 per share) were also catalysts. Sales were higher across all segments, particularly in its modular fabricating business for electrical and HVAC, while the firm’s mechanical and electrical operations performed “incredibly well.” The top brass emphasized that demand was “unprecedented” across several of its industrial sectors in the quarter, with data, microchip and battery sales showing strong trends, while other areas like food, pharma and healthcare are expected to provide additional opportunities in the long run (thanks to an aging population). The company also just announced the acquisition of pipe and mechanical provider Decco, which management expects to contribute annualized revenue of around $60 million (2% of last year’s sales) at margins that are consistent with its overall business. Looking ahead, Comfort’s total backlog of $4.3 billion increased 27% million in Q3 and its pipeline of future work is trending towards data centers, life science, food and other manufacturing operations such as chip and battery plants—all solid growth industries. For 2024, analysts see mid-teens earnings growth, though given recent trends, that should prove too low.

Technical Analysis
FIX has been trending mostly higher for the past 15 months, albeit with some corrections and consolidations along the way. Things got a bit too good to be true into mid-September, and the market’s weakness finally had a say, dragging the stock down in nearly a straight line to its 40-week line near 152. But earnings has brought the buyers back, with a pattern we saw a lot last week—not just a gap higher but many days of big-volume follow-through, as well. We’ll set our entry range down a few points, but we think the path of least resistance is up.

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Stock 3

DoorDash (DASH)

Why the Strength
There are a lot of moving pieces here and a few risks, too, but DoorDash is attractive for a one simple reason: It’s the leader in a sector that’s still in the relatively early stages of growth, and thus, should get much, much bigger over time. Throw in the fact that profitability (on an EBITDA basis) continues to accelerate every quarter, and big investors are believers—in Q3, total orders grew 24% (north of $16.7 billion), leading to a 27% gain in revenue, and while accounting earnings are in the red, EBITDA is surging, totaling $344 million in Q3, up from $279, $204 and $117 million the prior three quarters. Perhaps more encouraging, though, are many of the user tidbits revealed in the conference call: Users are still growing at double-digit rates; recent new users are sticking around better than all but the January 2020 (pandemic) cohort; and every cohort going back a few years has seen their ordering pace increase over time. And then there is the long-term potential, with the top brass saying that, even among restaurants, its market share is south of 10%—and then there are delivery markets outside of restaurants, which are huge (arleady a multi-billion-dollar business is in terms of annual orders for the company; more than 100,000 non-restaurants on the firm’s marketplace), and DoorDash is leading the way, scoring nearly half of new users in these new cohorts (grocery, alcohol, drugs)! Obviously, there is still competition out there and various macroeconomic headwinds, but DoorDash has plowed through many uncertainties in recent years, so institutions (more than 1,000 funds own shares) appear confident bigger and better things are ahead.

Technical Analysis
DASH bottomed last October, built a very nice, tight base into April and broke out in May, leading to a super-smooth, accelerating uptrend to the market peak in July. The correction after that was rough and, frankly, didn’t show amazing relative strength, with the stock hitting lower lows over time just like the indexes. That said, it successfully tested its 40-week line two weeks ago, and the big earnings gap (Thursday) and upside follow-through (Friday) is good to see. Today was sloppy, but we’re OK snagging some shares here or on further weakness with a stop under 80.

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Stock 4

DraftKings (DKNG) ★ Top Pick ★

Why the Strength
DraftKings is the top dog in the online gambling and online casino markets, where legalization has become the norm in recent years as states are eager for more revenue—the firm says it has a whopping 33% gross revenue share in both industries, and better yet, that share is increasing, up three percentage points each of the past two quarters. Of course, some still think of the sector as the wild west, but as is often the case, a bunch of competitors have been whittled down after the initial land grab phase a couple of years ago, and that’s led to less customer churn even with tamer marketing and promotional expenses, which results in increased cash flow even as growth remains rapid. The Q3 report and early Q4 outlook last week was fantastic: Not only did sales (up 57%) soar and top expectations thanks to a continued leap in active users (up 40%) and revenue per user (up 14%), but those results came despite some worse-than-expected gaming results. Moreover, the bottom line continues to improve—the top brass expects a $105 million EBITDA loss this year (up from prior expectations of a $210 million loss), and for next year, it now sees $400 million of positive EBITDA, which is well above estimates and should prove conservative. Near term, the ESPN/Penn National offering is set to launch soon and DraftKings also has an Analyst Day on November 14, where it will reveal some longer-term guidance, both potential stock-moving events. But every quarter that goes by reinforces the view that (a) the online sports betting and casino sector has transitioned to a lower cost, higher profitability phase, and (b) DraftKings is the top dog, not just holding but expanding its market share. We like it.

Technical Analysis
DKNG broke out in May from a big bottoming formation and ran up nicely to a high near 34 after Q2 earnings—but then the Penn/ESPN tie-up and the market correction pulled shares sharply lower, to nearly 25 within three weeks. Still, that low held during the next couple of months even during the market’s maelstrom (much stronger than the lower lows seen in the indexes), and last week’s Q3 report brought the stock back to its old high. We’re OK buying a little here or (preferably) on dips, but use a loose stop given the stock’s volatility and the still-tricky market.

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Stock 5

Garmin (GRMN)

Why the Strength
Garmin is an established name in the fixed-mount navigation and communication equipment industry. Its GPS-enabled offerings help car drivers, as well as boat and plane pilots, reach their destinations by mapping out the best possible routes. In recent years, the company has expanded its product lineup—with an increasing focus on wearable devices—to include personal fitness trackers and an array of GPS smartwatches, as well as automotive dash cams and handheld GPS devices for hikers. Garmin’s outdoor products segment (so-called adventure watches, golf devices and pet trackers) is its most profitable one, accounting for around half of total sales, with the fitness segment (cycling products, fitness accessories and blood pressure monitors) coming in second and accounting for approximately 25% of revenue. (Other segments include aviation, automotive and marine.) But the main theme here is smartwatches, which Garmin offers in all but one of its segments, and which are experiencing a massive secular growth trend with global sales of around $45 billion annually (the company estimates it has a 4% share of this market, leaving plenty of runway for future upside). To be fair, this isn’t a rapid-growth business—revenue in Q3 of $1.3 billion increased 12% from a year ago and was led by strong demand for wearables in the fitness segment, which saw a 26% sales increase, while per-share earnings of $1.41 increased 14% and beat estimates by 13 cents, all with a hefty profit margin (21% after tax). Along with more new fitness wearables, Garmin’s strategic focus going forward is to expand recurring revenues via subscription products, including a topographical map service for its premium watches, as well as a golf app. Wall Street sees 6% top-line growth for 2024, ramping up to 10%-ish annual growth in the following three years. A 2.5% dividend yield is an added attraction.

Technical Analysis
GRMN took a rocket ride during the pandemic years, then the bears came to call later that year and the stock entered a free fall that took shares below 80. The stock rallied gradually for the next few months into the 105 to 110 area in June before flatlining for the next few months. There was a shakeout two weeks ago below the 40-week line, but the earnings reaction has been huge, with GRMN showing a decisive move to new highs. If you want in, aim for dips of a couple of points.

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Stock 6

Martin Marietta (MLM)

Why the Strength
North Carolina-based Martin Marietta is a top provider of construction aggregates (crushed stone, sand, gravel and the like), as well as downstream products including mixed concrete, asphalt and paving services—making it one of the most direct plays on the construction sector of the economy. Despite a volatile environment, the company reported “robust” multiyear demand for its aggregate products from U.S.-based infrastructure projects in Q3, which was further bolstered by attractive commercial demand, particularly in key Sun Belt states. Revenue in the quarter increased 10% year-on-year, to $2 billion, led by a 25% increase in concrete sales, with per-share earnings of $6.98 beating estimates by 15% and EBITDA (usually a better profitability measure for the firm) up a strong 32%. Martin Marietta said its quarterly and year-to-date performance paves the way for continued near-term and long-term outperformance, driven by increased investment in large infrastructure and manufacturing projects across the nation, with further acceleration expected as inflation moderates and “restrictive” monetary policy eases. (Management added that this trend should also counterbalance the slowdown in private light residential and nonresidential construction due to tightening credit conditions.) Additionally, the company closed the sale of a cement plant in California in the quarter, which it said improves the balance sheet and will allow the firm to redeploy the proceeds into pure-play aggregate acquisitions. Going forward, Martin Marietta expects aggregates shipments will be flat in 2024, but anticipates low double-digit pricing gains will help goose cash flow. After a tough 2022, Martin Marietta looks to be in the midst of another multi-year growth phase.

Technical Analysis
MLM fell with everything else in early 2022 and then spent many months bottoming out before a May breakout led to a run back toward its old 2021 peaks. However, shares ran out of gas in June and, after topping out for a bit, slid to the 400 level at the end of September. A quick shakeout below that level came two weeks ago, but now MLM is headed up again, thanks first to the Q3 report and also to the market’s improvement. The 450 area could be resistance, but we’re OK nabbing some shares here with a stop near 400.

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Stock 7

Palantir Technologies (PLTR)

Why the Strength
AI could quickly power a lot for growth for Palantir Technologies, a tech firm that specializes in custom operation systems that handle large batches of data for enterprise customers. In the third quarter, which was reported last Thursday, AI helped Palantir beats consensus expectations for both sales and income; the business generated $558 million in revenue (up 17%) and $0.07 earnings per share, both slightly higher than expected. The trend behind the beat suggests an improving outlook for the business, with management saying its Artificial Intelligence Platform (AIP) is gaining traction with customers and appears to be shortening the sales cycle. That’s significant, since most (about 60%) of Palantir’s customers are governmental agencies, which tend to be deliberate in inking new deals. AIP is a system that allows the operation of large natural language processing systems, such as ChatGPT, Google’s BERT or some proprietary offering, within a closed enterprise to train solely on privately held data. Since it’s closed, AIP doesn’t leak information out or get corrupted by false information from the Internet. Designing a closed system for private organizations – many of which have their own expensive hardware and software to coordinate with – isn’t simple, but Palantir says the sales pitch has a lot of tailwinds from its AIP “bootcamps.” In those, Palantir builds a pilot on customer data in just five days, compared to as long as three months in their traditional pilot programs. The core business here is fine, but the stock is strong as many think the AI angle will accelerate growth (Q4 guidance came in slightly above expectations, and even that is likely conservative). There’s also chit-chat about the stock being including into the S&P 500, which could provide a shorter-term bump if it happens.

Technical Analysis
PLTR ran up sharply on the initial AI wave this spring but eventually gave up the intermediate-term ghost with everything else after that. It wasn’t pretty, but the stock did hold its August lows unlike the market and most stocks, and there was even a good-volume push higher in early October before PLTR was again dragged back down. But last week’s earnings reaction was clearly bullish, with two straight days of heavy-volume buying. There is resistance up here, but we’re OK starting a position here or (preferably) on dips, albeit with a liberal loss limit.

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Stock 8

Pinterest (PINS)

Why the Strength
Pinterest is a visually driven social media platform, in which users (called Pinners) find, post and share visual images, called pins. The fundamental driver of any social media businesses is its user base, which for Pinterest continues to show solid growth trends. In the latest quarter, reported last week, the company reported global monthly average users of 482 million (most are international, with “only” 96 million in the U.S.), up 37 million from a year ago and well ahead of expectations. That expansion reflected itself in better-than-expected financials, too, with sales handily coming in over consensus at $763 million and earnings per share at $0.28 (vs. 21 cent expectations). To date, it’s been advertising that generates money for Pinterest, but the company has been mostly unsophisticated about it so far (think display ads on a page), which in turn has contributed to mundane revenuer-per-user figures, especially outside North America ($6.46 here, but sub-$1 everywhere else). However, the upside is that there’s a lot of white space for the business to pursue more sophisticated ad options, and as management explores those options, it has been seeing good traction on a “Shop the Look” program. There, popular pins are linked to where users can buy all or some of the fashion or room décor pinners are excited about. Making the site more buying-friendly is a key priority for management, which is building in functionality for more direct links to retailers on images users post; in the latest quarter, management says such links done in conjunction with advertisers has doubled conversion rates. A move to using AI to surface more interesting content for browsers appears to be adding value as well. For the fourth quarter, Pinterest guided to revenue growth of about 12%, continuing the recent (slight) acceleration trend, while earnings are expected to surge 76% and come in higher than even the boom pandemic times.

Technical Analysis
PINS was crushed during the bear market and, while it did rally off its 2022 lows, shares found resistance in the 28 to 31 area multiple times this year, effectively building a long bottoming base. But the stock saw some interesting big-volume buying in late September, and of course last week’s earnings reaction was great, with many days of heavy accumulation, resulting in the second-largest volume week of the past three years. To be fair, PINS is still toying with that old resistance area, but we’re not expecting a major retreat—you can buy some here or on dips of a buck or so.

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Stock 9

Toll Brothers (TOL)

Why the Strength
Despite a multi-decade high in mortgage rates and a corresponding decline in homes sales, housing prices in the U.S. keep rising thanks to a shortage of homes for sale and a still-resilient job market. Serving as an obstacle for many prospective buyers is that, according to Redfin, someone would need an income of nearly $115,000 to afford the median-priced U.S. home, a figure that’s up 16% from a year ago and much more than 2020/2021. That explains why high-end real estate (with high-end buyers) is outperforming and further explains why leading luxury home and apartment builder Toll Brothers (covered in the September 5 issue) is benefiting from the current industry dynamics. To that end, the company just announced the formation of a new joint venture with Canyon Partners Real Estate to develop a 400-unit luxury multifamily rental community in the red-hot Phoenix metropolitan market (one of America’s top home sales locations) and has already secured a $78 million construction loan for the project. Toll Brothers is seeing a notable improvement in demand from earlier in the year as wealthier buyers have entered the market after being sidelined last year, with the number of signed contracts in Q3 increasing 77% (up 30% in dollars) compared to a year ago when interest rates were much lower. And while the firm acknowledged that rising rates are obviously a challenge for the industry, it said they also help keep re-sell inventory at historically low levels while creating a “tailwind” for well-capitalized luxury home builders like Toll Brothers, which builds at lower costs and is better positioned to take advantage of spec building (40% of Q3 orders) and buying down mortgage rates. (Despite the spec building, the firm has an industry-low cancellation rate of just 3.2%.) Looking ahead, analysts think the firm’s bottom line will remain elevated at least through next year.

Technical Analysis
We wanted to buy TOL on strength in early September, but shares never could break out, so we didn’t take the trade—thankfully, as shares ended up skidding below 70 and meeting up with their 40-week line. Still, after the big spring/summer advance, the correction wasn’t abnormal at all, and it’s hard to ignore the three straight days of strong buying as interest rates have fallen off. We think the turn has probably come, but near-term, we also expect some bobbing and weaving—if you want in, aim to grab shares on dips of a point or two.

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Stock 10

Wingstop (WING)

Why the Strength
There are many potentially good cookie-cutter stories out there (retail or restaurant operations that can grow mainly by opening up hundreds of new stores over time), but expanding rapidly while keeping the bottom line headed up isn’t the easiest task (go look at Sweetgreen (SG) and Dutch Bros (BROS) for examples). Wingstop, though, has mastered it, and that’s why—despite some intermediate-term hiccups that pop up now and again—this long-term growth story remains intact. The stock is gaining strength today because the Q3 report confirmed just that: Sales rose 26% and EBITDA was up 37% thanks in part to another big leap in the number of locations to 2,099 (up 10.6%; the long-term goal here is 6,000 locations, half of which should be overseas). Importantly, domestic same-store sales growth clocked in at 15.3% with 16% expected in Q4 (both way above estimates), and while that figure will slow in 2024 against tougher comparisons, Wall Street sees solid mid-single-digit growth in that metric next year and the top brass thinks average sales per location (now $1.75 million) is on its way to $2 million down the road. Costs are expected to rise next year as wing prices have lifted, but impressively, boneless product sales are now 44% of the mix (up from the low-30% range in prior years), which diversifies things and keeps the cost side of the ledger from swinging around too violently. From here, it’s a matter of keeping productivity rising (there’s some new tech coming that should help on that front) and continuing to boost the store count, with 10% total and 20%-plus international store growth likely for many years to come. It’s not cheap, but Wingstop has a rare, persistent growth story that should have a long way to play out.

Technical Analysis
WING rallied all the way back to new all-time highs this spring, but that ended up being a peak, with shares slowly sliding for a couple of months—and then really diving before and after Q2 earnings in July. All told, the retreat was a sharp 33%, but WING bottomed in early September (well ahead of the recent low) and began to repair the damage even as the market caved in—and the bullish earnings reaction of late bodes well. Like many names, the stock is back into an area of resistance, so if you want in, aim to grab a few shares on weakness.

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Previously Recommended Stocks

The next Cabot Top Ten Trader issue will be published on November 13, 2023.