Cabot Top Ten Trader Issue: October 21, 2024

Same Story

It remains pretty much the same story out there as we’ve seen for at least three weeks, if not longer, with three main points. First, when it comes to the top-down evidence, it’s solid, with the intermediate-term trend of most everything pointed up … though more than a few indexes (including the Nasdaq itself) are still battling with resistance at their prior, spring- or summertime highs. Second, looking at things from a bottoms-up (stock by stock) perspective, the evidence is extremely encouraging, as there are not just tons of strong stocks, but many fresher breakouts have emerged in the past month or so, which usually bodes well. And third is more of a heads up, as near-term sentiment is very elevated and earnings season for most leading titles is ramping up, so some tricky trading (volatility, especially among extended stocks) is possible. Thus, we’re staying flexible, but given the overall positive vibes, are leaving our Market Monitor at a level 8.

This week’s list actually has many big-cap titles but there’s plenty for everyone. Our Top Pick is Blackstone (BX), which appears to have finally left behind a multi-year consolidation after its Q3 report. Ideally you can get in on modest weakness if the market dips.

Stock 1

Blackstone (BX) ★ Top Pick ★

Why the Strength
Some investment ideas are complicated and require some detailed reasoning, but that’s not really the case with Bull Market stocks right now—after years of iffy real estate acticity and relatively narrow equity market advances, an easier money environment and (ideally) increasing big-picture sentiment (which to us looks mid-range today) should lead to a new leg up in asset prices and inflows. Blackstone is the biggest alternative asset manager out there, and while business has been slowly increasing after the bear market, there are hopes things will soon accelerate. Indeed, the stock is strong today because Q3 showed more than a few signs of that: While fee-related and distributable earnings both grew just mid single digits, total assets of $1.11 trillion were up 10%, while fee-generating assets of $821 billion rose 12% (both slight accelerations from recent quarters). Moreover, inflows picked up to $40 billion in the quarter and the top brass has actually been hiking their purchases in real estate (including commercial RE) over the past year (all told, it invested $54 billlion among everything in the quarter, the most money it put to work in over two years), aiming to buy low. At the same time the firm is reportedly looking to list some of its largest investments for sale as it likes the timing of letting some assets go (which is likely to boost distributable income). Throw in a solid shareholder return program (the Q3 variable dividend was 86 cents per share, and they also bought back a small amount of shares, too) and there are many encouraging data points. The real prize, though, is if the Fed continues to ease and assets of all sorts surge—if so, the firm’s asset base (not just in real estate but credit and private equity) could surge further while fee-related earnings continue their climb. As always, a sharp market drop or a change in the monetary outlook would change things, but right now it’s a good bet Blackstone’s environment will improve nicely in the months ahead.

Technical Analysis
BX showed a few signs of really getting going in the past year, but the the strong move into last December ran into a wall (when Fed rate cut expectations faded), the spike this July (with the broad market) was halted by the market and then the rally in September (when the Fed finally did cut rates) led to an immediate retest of the breakout point. But last week looks decisive, with BX zooming to new highs on big volume. We’ll set our buy range down a bit, though we’re not expecting a major retreat.

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Stock 2

Delta Air Lines (DAL)

Why the Strength
The airline industry is rounding out what has been a stellar 2024—according to the International Air Transport Association, net profits for the global airline industry are expected to improve in 2024 by 11% from a year ago, while total travelers are expected to reach a record high of five billion. Meanwhile, the domestic flight industry is coming off one of the strongest summers ever, as air travel demand broke several records in the U.S. during the latest travel season, and the fact that oil (fuel) prices have been on the skids of late only adds to the earnings power of the industry. Business has been particularly brisk for Delta, the nation’s largest passenger airliner by revenue and market share. The company is seeing “an improving industry backdrop and strong demand for travel,” which positions it for a strong finish for the year. More recently, it reported top- and bottom-line misses for Q3, with revenue that was up a smidge from a year ago and earnings of $1.50 a share that was 2% below consensus and down 26% from a year ago. However, the stock is strong because earnings remain elevated and it’s looking like results will actually improve from here: The company expects to grow Q4 earnings at least 30% over last year’s Q4, with pre-tax income of $1.4 billion which, if realized, would mark one of the best fourth quarters in its history. Management also highlighted the firm’s double-digit operating margins and year-to-date free cash flow of nearly $3 billion, and it said year-to-date profitability should represent 50% of the industry’s total profits with a double-digit return on invested capital that’s more than twice the industry average. Encouragingly, the business travel sector—which remained stuck in a recession a year ago—has improved nicely, driven by the return of corporate demand and in-person business interactions. Looking ahead, the top brass sees earnings growth and margin expansion trends continuing in 2025, while Wall Street expects earnings to jump 20% for the full year, lifting over $7 per share. It’s obviously cyclical, but the earnings power here remains huge.

Technical Analysis
DAL has been very volatile the past couple of years, with shares alternating between a strong month or two or three and deep corrections afterwards. After rallying in the first half of 2023, it hit a peak at 50 last July, then rode the rollercoaster down to 30 in late October. The next extended rally took the stock to a higher peak at 53 followed by another deep—but less severe—decline to a higher low at 37 in August. But it’s in Top Ten today because the last leg higher looks like the real deal, with DAL moving to four-year highs as volume picks up while industry peers act well. Dips of a couple of points would be tempting.

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Stock 3

Intuitive Surgical (ISRG)

Why the Strength
Intuitive Surgical is the leader in the robotic surgery field, allowing surgeons to achieve a wider range of motion than the human hand through thin robotic arms on its da Vinci platform, which can be used in a variety of procedures (over seven million procedures so far). Last week, the company captured investors’ attention after announcing excellent Q3 results led by a 17% year-on-year increase in revenue of $2 billion, plus per-share earnings of $1.84 that beat estimates by 20 cents. The latest quarter’s strength was highlighted by the placement of 379 da Vinci systems, a 21% increase in placements (drivign a 15% gain in the total installed base to 9,539), which included 110 of the latest da Vinci 5 multi-port (i.e. multiple incision) systems that was launched in March (daVinci 5 is currently in a limited launch phase, with plans to scale up production and launch more broadly in mid-2025—a future catalyst). Intuitive also announced that in October it obtained regulatory clearance for the da Vinci 5 for use in several kinds of surgical procedures in South Korea. The company’s other major product, the robot-assisted bronchoscopy Ion platform used to perform minimally invasive lung biopsies, had an installed base of 736 as of Q3, with physicians completing more than 150,000 lung biopsies with the Ion since its launch in 2019. (Intuitive sees a big opportunity for Ion in China, where it has just began placing the systems.) Meanwhile, the firm’s single-port da Vinci SP system grew its installed base to 243 with compound annual growth of 55% over the last five years and 67,000 total procedures completed to-date (with most installations outside the U.S.). Wall Street expects the bottom line to grow 20% this year and sees steady 15%-ish growth in each of the next few years.

Technical Analysis
ISRG broke out from a shallow base in May following earnings, with shares gliding up to nearly 500 before running into resistance in August. But the selling from there wasn’t intense—in fact, the stock spent two months consolidating tightly between 465 and 495 (ballpark). Last week’s earnings catapulted shares out of the base and into new high territory on very strong volume. We’re OK taking a swing at it here or on a little retrenchment with a stop near the recent lows.

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Stock 4

Morgan Stanley (MS)

Why the Strength
Thanks to sizzling capital markets, easier monetary policy from policy makers and a comeback in large M&A deals, investment banks have put in a strong performance in 2024—a remarkable turnaround from the headwinds they faced in prior years. Morgan Stanley is the world’s third-largest investment bank, mainly providing financial services to corporations and governments, but also offering advisory, investment management and brokerage services to individual customers. Last week, Morgan Stanley reported head-turning revenue of $15.4 billion that increased 17% from a year ago, along with per-share earnings of $1.88 that beat estimates by 18% (the reason for the stock’s latest strength), supported by “strong” activity in institutional securities, equity and fixed income markets. Morgan Stanley’s expense ratio (a key metric) was also supportive, which the firm attributed to its disciplined expense management and scale. Another highlight of the quarter was the Investment Management segment (mutual funds, ETFs and alternative investments), which saw revenue increase 9%, driven by higher asset management fees and higher average assets under management, which now total $1.6 trillion. The firm’s broader Asset Management business (including real estate and private equity) saw revenue rise 18%, to $4.3 billion, thanks to higher fee-based flows and “robust” markets. Other parts of the business contributed to the rosy results, including Equity revenue of $3 billion that jumped 20% thanks to outperformance in the Americas and Asia regions (and more recently, to China’s announced stimulus), plus transactional revenue that increased 10%. On the Fixed Income front, revenue of $2 billion was unchanged, with strength in interest rates largely offset by weaker results in commodities. Management noted that pipelines were “healthy and diverse” and believes the firm is in the early stages of a multi-year capital markets recovery, with corporate activity gaining momentum and transaction demand “steadily materializing” both domestically and abroad. It’s a classic big-cap Bull Market stock, and the 3.1% dividend yield is an added attraction.

Technical Analysis
MS had a nice initial rally with the market last November, but the upmove got choppy as the calendar flipped—shares eventually made it back to resistance near the century mark in May, but, again, the sellers never really let the stock get going, with each probe above 100 leading to renewed selling; as of early September, the stock was basically flat for the year. But now MS is up and running, with last week’s earnings report causing a melt-up of sorts—and, by the way, has pushed the stock to all-time highs after three-plus years of base-building. We’re OK buying some here or on a bit of a shakeout.

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Stock 5

Qifu Technology (QFIN)

Why the Strength
Qifu is a leading fintech in China, operating as the brand 360 Jietiao, matching consumers with financial institutions. Qifu conducts credit evaluation and advance risk assessment of borrowers, matching with lenders and providing post-loan services such as the tech platform for servicing loans. The sheer size of the Chinese market makes a fintech appealing, and the recent decision of the central government to flood the market with an undisclosed amount (but very likely huge sums) of stimulus funds to kick start its economy probably means more loans flowing to the consumers and small businesses that are the heart of Qifu’s business. The company has been performing well in a tough environment, increasing revenue 6% in Q2 to RMB 4.167 billion (about $590 million) and widening earnings per diluted ADS by 32% to RMB 9.16, or $1.26. The gains came with management restraining marketing spending and rolling out new technology upgrades to improve the customer experience and lower costs, such as an AI-powered system to collect information from recorded customer calls; when its fully deployed, Qifu expects the systems to handle 100,000 calls a day. Management was already seeing tentative signs of an improving market, seeing net income rising as much as 40% to RMB 1.65 billion (230 million) in the current quarter, before any talk of government stimulus hit the market. Trading could be volatile however: A short-seller, Grizzly Research, issued a report in late September saying the company overstated profits, which management firmly denied, saying the short seller was “completely wrong” because of key differences in U.S. accounting compared to China standards. Traders chose to believe Qifu, rallying shares nearly 33% after the statement. (We’d note that 463 funds own shares, so this isn’t a fly-by-night operation.)

Technical Analysis
QFIN broke out powerfully in August after earnings, and after a brief dip to the 25-day line in September, had another solid move up into early October. What’s caught our eye in recent weeks is that, while many China stocks have had a big exhale, QFIN has barely hesitated, briefly tagging new highs last Friday and looking like it wants to go higher. It’s not for the rent money, but a dip of a couple of points as the 25-day line catches up would be tempting.

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Stock 6

Rubrik (RBRK)

Why the Strength
Rubrik is a data security company focusing on managing an enterprise’s information for defense against cyberattacks as well as for business continuity and data recovery purposes. The company is fairly new – it was formed 11 years ago and just went public in April – and its newness is something management says gives it a competitive edge. Existing data protection services are built off of legacy systems designed for the occasional instances of data loss from human error and natural disaster, not for handling the incessant threat of cyberattacks, they say. The sales pitch works, with the company projecting it will reach $1 billion annual revenue run rate by year’s end. For its second quarter 2025, ended July, the business exceeded expectations across the board, producing revenue of $205 million and a loss per share of 40 cents, while subscription annualized recurring revenue was $919 million thanks primarily to a 50% increase in client subscriptions in Q2. Much of the appeal for large customers comes from Rubrik’s speedy ability to get customer operations up and running from a failure or attack, something that comes from the software design and the cloud distributed nature of Rubrik’s operations; few are focusing on this, and despite increased cybersecurity efforts, hacks are more frequent than ever, which means many are focusing not just on prevention but resiliency. The recent CrowdStrike failure, in which many companies were hobbled by an outage at that security provider, validated Rubrik’s operations, given how quickly its clients were able to recover compared to others. In the current quarter, management says sales will come in around $218 million up about 32%, with a loss per share of $0.40. Data security is a huge market, with Rubrik saying its target market consist of 60,000 business, of which it is in about 10% today. It’s new but we like this story.

Technical Analysis
RBRK came public at 32 in April, and spent its first five months in a range between 29 and 37. But now the buying pressures are picking up, with shares rallying on a nice four-day volume cluster earlier this month, testing the 40 area that marked the stock’s first-day high. Of course, as a recent new issue, RBRK is going to be volatile, but if you’re willing to use a loose-ish stop, we’re OK nibbling here or (preferably) on a little weakness.

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Stock 7

Samsara (IOT)

Why the Strength
Samsara is the pioneer of what it dubs the Connected Operations Cloud, a platform that dramatically boosts efficiencies and delivers cost savings for firms that have large amounts of physical assets—think state Departments of Transportation, trucking firms, delivery outfits, waste management operations, construction operators, even airlines with lots of ground vehicles—by creating a single system of record that tells clients how all these pieces are being utilized. Baiscally, thanks to a massive hoard of data points (more than 10 trillion data points and growing), Samsara’s offering does everything from predictive maintainance to finding better routes for drivers (less idling and wasted fuel) to safety training and tracking (lower insurance premiums, fewer accidents) to standardized incident reports and even to tax optimization (depending what localities assets were located in). All three core areas—equipment monitoring, telematics, video-based safety—are growing north of 30% per year, and a new product seems to be a hit; called asset tags, they’re small, Bluetooth, industrial-grade devices that can go on any piece of small equipment (think a took box or a power washer, etc.) to collect data on location, how it’s being utilized and much more. One of the least respected parts of the story is that, because of the real cost savings here (usually many times the subscription amount), Samsara sells into the operations budget (not the tech budget), which is much more stable and grows over time. The one downside here is valuation, which admittedly is in nosebleed territory (north of 20x revenue!), but there’s no question that this company is getting much bigger in the years ahead.

Technical Analysis
IOT has been the poster child of stop-start action during the past year, with the end result being that the stock made one point (from 31 to 32) of net progress from June 2023 to early August of this year. But the Q2 report later in August looks to have finally changed the stock’s character, with three straight big-volume up weeks sending the stock (and, importantly, the relative performance line) to new highs. Now shares have chopped slightly higher for a month as the 25-day line offers support. If you’re not yet in we’re OK starting small here.

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Stock 8

SharkNinja (SN)

Why the Strength
SharkNinja (covered in the August 12 issue) designs and sells cleaning, cooking and food preparation appliances for home and outdoor use. The Shark brand of products is known for its upright and cordless vacuum cleaners, while Ninja specializes in kitchen appliances that consistently rank as Amazon’s top-selling brand. The company’s footprint continues to grow by leaps and bounds thanks to a strategy that leans heavily on constant innovation; its in-house design team consists of nearly 1,000 engineers worldwide that help create new products with an industry-beating turnaround time. Indeed, the firm is constantly assessing the market’s need for a new product, then quickly addresses it by designing and building a new appliance, typically beating their competitors to the punch. Another big growth strategy is its goal of redefining convenience and efficiency in households, which involves expanding its brands into adjacent categories (it has lately released a new line of frozen drink makers, fans and coolers, while entering three additional subcategories this year)—allowing it to capture significant market share while increasing margins, too. International expansion also important here, and SharkNinja’s overseas growth was highlighted in Q2, as that area grew a big 46% with emerging markets like Germany and France delivering triple-digit growth. The company also upped its share in new and existing product categories overseas and said it “continues to expand its global footprint.” Wall Street likes what it sees with the company; in recent weeks some high-profile Wall Street banks have upgraded their outlook on the company (reasons for the stock’s latest show of strength) while sponsorship continues to increase (456 funds own shares, up from 206 nine months ago). When SharkNinja reports Q3 results on October 31 (pre-market), analysts expect top- and bottom-line growth of 24% and 17%, respectively.

Technical Analysis
SN had a smooth ride between February and May, but the dynamic changed in June when volatility entered the picture and the stock fell under the 50-day line while establishing support at 70. However, the big earnings gap in August kicked off a fresh upturn, with shares kiting higher above their 25-day line to the 110 area two weeks ago before a little rest since then. Our thought is to nibble on a pre-earnings dip.

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Stock 9

Taiwan Semi (TSM)

Why the Strength
Robust AI demand has Taiwan Semiconductor positioned to get a lot bigger on the back of AI expansion. Already, the company has seen the benefits, reporting excellent earnings for its third quarter ended September. Revenue was up 34% year-over-year in local currency to 760 billion Taiwan dollars (TWD), about $23.74 billion, while earnings per ADS jumped 64% to TWD 61.62 ($1.97), handily beating expectations as demand for TSM’s sophisticated three- and five-nanometer semiconductor products commanded much of the company’s capacity. Even though it has a huge business across the chip spectrum, AI processors account for 15% of the company’s sales volume and AI demand is seen tripling over 2023 by year-end. The company is building three new fabrication plants in Arizona, spurred by incentives from the 2021 CHIPs Act to revive domestic production. Taiwan Semi’s first plant started four-nanometer wafer production in April with the plant getting fully up to speed in 2025. The other two plants will come online in 2028 and 2030. There is some slight concern that election-year rhetoric of curtailing chip exports will handcuff Taiwan Semi’s U.S.-produced sales, but North America already accounts for two-thirds of sales, with allies including Japan and the E.U. accounting for about 12% more. China, likely the target of export restrictions, is 12% of revenue, so this shouldn’t be a game changing issue. As generative AI becomes integrated into more products, TSM should have plenty demand to soak up production: Apple, NVIDIA and Intel are three major customers. Management raised guidance for the rest of the year, and Wall Street sees U.S. dollar based earnings catapulting higher 31% this year but nearly 30% next year, and even that could prove conservative.

Technical Analysis
TSM broke out in January of this year and had a great run into early July (interrupted only by a whoosh lower with the market in April) before the July/August market maelstrom pulled shares down sharply to their 40-week line. However, the stock was one of the more resilient in chip land, bouncing back nicely right away and, after an early September shakeout, showing real strength—TSM rose five weeks in a row and then gapped to new highs after earnings last Thursday. Some near-term shaking and baking is possible, but we’re OK taking a position around here.

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Stock 10

Travelers (TRV)

Why the Strength
We never thought we’d have a huge insurance firm like Travelers (the nation’s second-largest writer of commercial property casualty insurance and the sixth-largest writer of U.S. personal insurance through independent agents) in Top Ten, but the environment is excellent for its business and the numbers and stock look outstanding. Rising demand for life and health insurance products, fueled by demographic shifts and increasing health awareness, are driving individuals to seek more comprehensive insurance coverage. This trend, coupled with rising premiums (the fastest growth since 2006!), is the big reason why Travelers looks great. Last week’s Q3 earnings release underscored the strength of Traveler’s underwriting income, including revenue of nearly $11 billion that grew by 10% year-on-year, plus earnings of $5.24 that beat expectations by a whopping 43%. Higher net investment income and net favorable prior year reserve development contributed to core income that nearly tripled to over $1.2 billion—another big reason for the latest strength. (These results were in spite of a 10% jump in catastrophe insurance losses, more than half of which related to Hurricane Helene.) Other parts of the business were just as strong, including underwriting income of $1.5 billion that increased 73%, driven by record net earned premiums of $11 billion and an underlying combined ratio that improved to an “excellent” 86%. On the capital management front, Travelers generated its strongest ever level of quarterly operating cash flows at nearly $4 billion, while the Personal Insurance segment grew net written premiums by 7%, driven by “strong” renewal prices in both auto and home policies. Looking ahead, the top brass expressed confidence in the business outlook in 2025 and sees growth driven by continued premium increases, higher investment income (especially from private equity investments) and strong customer retention trends. Clearly, this isn’t a triple-digit growth stock, but the huge Q3 upside surprise implies more of that to come, while a 1.8% dividend yield and cheap valuation (14x earnings) helps the cause.

Technical Analysis
TRV actually has shown the ability to make solid moves, with the November through March period being one example where the stock kited higher. Shares did enter into a long base-building effort after that, with support near the 40-week line in July and August before moving to marginal new highs in September. The pre-earnings pullback to the 50-day line was normal, and now TRV has staged a big earnings gap that bodes well. Near-term, we’ll try to enter on an exhale following the recent strength.

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Previously Recommended Stocks

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

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