Cabot Top Ten Trader Issue: September 3, 2024

Still OK, but More Proving to Do

Last week had a few potential potholes for the market’s nascent rally, including some influential big-cap earnings releases and an inflation report before the long weekend—but despite some selling that popped up here and there, the market and fresh leaders handled themselves well. Stepping back, we’re definitely encouraged by the market’s snapback and the numerous upside moves in individual, growth-oriented stocks during the past month; we think the odds favor the next major, sustained move is up. That said, a lot of stocks have set up (but not broken out), old leaders (chip names in particular) look suspect and it’s a fact that defensive areas continue to ramp higher, which is a sign that big investors are hunting for some safety. Again, we’re encouraged overall, but continue to think going slow makes sense, especially now that some selling pressures are beginning to emerge, stickign with mostly small positions and keeping some cash on the sideline. We’ll keep our Market Monitor at a level 6 today.

This week’s list is a bit of a hodgepodge, with some recent earnings winners, some fresh names and a few stodgier types. Our Top Pick is Rocket Cos. (RKT), which is basically a cyclical (mortgage lending) company that should be lean and mean after the multi-year dry period—meaning its earnings power should be big as rates head lower.

Stock 1

Argenx (ARGX)

Why the Strength
Argenx’s claim to fame is its drug Vyvgart, which was approved for a rare autoimmune disease that causes weakness in many muscles (dubbed generalized myasthenia gravis, or gMG for short) in late 2021 in the U.S. and Europe in mid 2022; while it’s not the only gMG player, Vyvgart has been a huge hit, going from zero in revenue back then to $870 million or so in the first half of this year! There’s plenty of upside for the gMG indication (the company sees 60,000 potential patients, up from 17,000 at launch), especially as some label expansions are possible, which is great—but big investors over the past couple of years have really looking for whether Vyvgart could become a “pipeline in a product,” with tons of different indications in the autoimmune space; there were a couple of uninspiring trial results that held the stock back last year, but a few recent events have turned the tide. First, Vyvgart got approval in March for ITP (wher eantibodies destroy platelets) in Japan despite so-so trial results released last year, which boosted hopes for approvals elsewhere; it received broad FDA approval for CIDP (a disease that damages nerves), which looks to be a big deal; and Argenx itself turned a solid profit in Q2 and expects more of the same going ahead, with a booming bottom line going forward. All told, the company is targeting treating 50,000 patients by 2030 (up about five-fold from today) and to have drugs on the market with 10 combined indications (mostly from Vyvgart, though Argenx has another drug in the pipeline right now with big potential)—some analysts think Vyvgart could have north of $10 billion of revenue within eight to 10 years. Obviously, there will still be some event risk here with various trial results being released in the months and years ahead, but it looks like Argenx has an enviable combination of strong sales and earnings growth as well as pipeline upside for many years. We like it.

Technical Analysis
Outside of a big upside fakeout in July of last year, ARGX was essentially dead money from early 2021 through April of this year. But then shaers perked up five weeks in a row, and the CIDP approval in June created a nice gap up—followed by even more big-volume buying after earnings; all told, shares were up 12 weeks in a row, eight of which coming on above-average volume. Now we see a very controlled, low-volume dip for three weeks as the moving averages catch up. We’re OK grabbing some shares around here.

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Stock 2

Best Buy (BBY)

Why the Strength
After years of declining storefront sales, consumer electronics retailer Best Buy’s comeback continues, thanks to a focus on digital sales combined with a new artificial intelligence strategy for customer support. The company is soon expected to launch a generative AI assistant, the result of a partnership with Google Cloud and Accenture, that will handle customer inquires on Best Buy’s web site and app. The new AI tool will “help customers troubleshoot problems, change delivery scheduling and manage subscriptions and memberships,” while making it easier for Best Buy’s service agents to assist customers. It’s further expected the tool will summarize conversations and use data from calls to make better customer recommendations while reducing average engagement times—all of which boosts efficiencies and margins (earnings have outpaced sales the past three quarters). An even bigger potential profit booster for Best Buy is the advent of AI-driven PCs, many of which are sold by the company—this summer, the first systems featuring AMD’s hotly anticipated Ryzen AI chips were launched (including the top-selling Ryzen 7000 series processors for gaming, video content creation and software development). Meanwhile, Windows laptops featuring Qualcomm’s new Arm-based, AI-infused processors (including Microsoft Surface Pro Copilot+ PC) were also just made available at Best Buy and are expected to be big sellers going forward. And with the global PC market in recovery mode after the decline of the last few years—Q2 shipments increased 3.5% year-on-year, marking the third consecutive quarter of growth—Best Buy has a huge potential tailwind if AI-infused PCs galvanize a big upgrade cycle; indeed, a major Wall Street bank just upgraded shares of Best Buy as the PC replacement cycle “gains steam.” On the financial front, while revenue of $9.3 billion dipped by 3% in fiscal Q2 (ended August), earnings of $1.34 a share beat estimates by 18 cents and margins also topped expectations—reasons for the stock’s strength and prompting management to raise the fiscal 2025 (ending next January) profit outlook. Analysts see earnings flat for this year, then growing 10% in fiscal 2026 (likely conservative) and accelerating from there. A 3.8% dividend yield is an added enticement.

Technical Analysis
BBY crashed from a late 2021 apex around 140 to a low at 60 the following October (down 60%) … and then the stock spent the next 18 months establishing a base within a wide range. However, the action following earnings in late May was a big step forward, and after a double-bottom base with the market, the breakout last week to its highest level since early 2022 seems decisive. It’s not a typical Top Ten stock, but we think higher prices are in store.

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Stock 3

Box (BOX)

Why the Strength
Box has long been a solid company, with slow-but-steady growth and big margins (30% pre-tax) thanks to its cloud-based collaboration, workflow automation and content management platform, and now it’s looking like investor perception is turning up for a couple of reasons. One is the industry as a whole—software spending slowed significantly in the last couple of years, but 2024 is expected to be a turning point—but a bigger factor is the firm’s own results, with last week’s earnings report causing a rush of buying after the firm raised its sales guidance for the second half of its fiscal year thanks to increased adoption of its premium cloud content management and file sharing product. The fiscal Q2 (ended July) results featured top- and bottom-line beats, with revenue of $270 million increasing 3% from a year ago and earnings of 44 cents a share jumping 22% and exceeding estimates by four cents. The quarter was marked by “accelerated” growth across several key metrics, including record gross margin, operating margin and EPS, prompting a major investment firm to raise its price target and outlook for Box (another reason for the strength). Other metrics improved during the quarter, including billings, which grew far faster than revenues at 10%, and remaining performance obligations (RPO, which include longer-term contracts), which increased 12% (again, faster than revenues), plus free cash flow of $33 million that soared 59%. Key to the firm’s longer-term growth strategy are a couple of recent acquisitions of AI-related companies, Crooze and Alphamoon, with the former acquisition being integral for Box’s ability to handle critical, content-centric business processes for enterprises of all sizes, while the latter acquisition will be big for Box’s intelligent document processing capabilities and address the long-standing challenges of metadata creation at scale, empowering its customers with “unprecedented new automation capabilities.” All in all, after a modest slowdown, Wall Street sees the top line picking up a little steam going forward, while management guided for full-year earnings growth of 14%, with share buybacks (share count down 2.3% from a year ago) helping the cause.

Technical Analysis
BOX has been moving sideways for years, with resistance seen first in 2022 in the low to mid 30s that ended up capping the stock a few times. But after getting off its knees in March, the stock spent the last few months building a classic, calm and shallow cup-shaped base, and last week’s big move (second largest week of volume since 2021) looks like a turning point as business should accelerate from here. There’s still that old overhead to contend with, so we’ll aim to enter on modest weakness.

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Stock 4

Clear Secure (YOU)

Why the Strength
Clear Secure has always had an idea that makes a lot of sense, and investor perception has recently turned on a dime as big investors see solid growth and big free cash flow ahead. The firm’s core offering can be seen at 58 airports (160 lanes) in the U.S.: Using biometrics, the firm’s stations allow for quick ID verification, letting paying members (Clear Plus members; about $200 per year plus $119 for additional family members) skip the TSA identification lines and move right into the security lines—though the firm also has a deal to sign-up people for TSA PreCheck at 46 airports (you can save money on a Clear/PreCheck bundle), which of course makes the entire get-to-your-plane process much easier. Interestingly, Clear has added more benefits as time has gone on that make your travel day easier, from expedited passport services to advanced shipping of items (for a fee) to a “scout” service where someone can go get anything you a client has accidentally left behind at the airport or in a lounge. The company also has its ID systems up in many stadiums, too, and you can use those for free if you’re signed up (Clear Verified). Like we wrote above, the idea makes sense, and tons of people are signing up: In Q2, the firm had just over seven million paying (Clear Plus) members (up nearly 300,000 from the prior quarter) that are using the offerings a ton (14 million uses in Q2 alone) and are generally sticking around (89% dollar retention rate); Clear also has millions more free users, with the potential to expand far beyond airports. Importantly, the growth numbers here are solid, and the free cash flow is big (over $1 per share in the first half of the year), leading to share buybacks (3.2 million shares in Q2, and then another four million from partner Delta so far in Q3) and a 1.3% dividend. It’s not going to double in a month, but Clear is an interesting story that should see mid-teens revenue growth for a long time to come.

Technical Analysis
YOU has essentially been in a sideways-to -down trend for the past couple of years—shares hit a finaly nadir near 15 last fall but despite some rally attempts, were still hanging around 16in April and 18 in early August. But this is one of many smaller growth titles that reacted superbly to earnings after the market’s mini-crash: YOU soared on five times average volume and has moved basically straight up since then, reaching its highest levels since early 2023. We think the next pullback should offer a solid entry point.

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Stock 5

GE Verona (GEV)

Why the Strength
GE Verona is the electricity business of the old General Electric, created when the GE split into three separate firms in April. Verona produces natural gas turbines for power plants, wind turbines and electrification equipment and software for applications including power storage and grid management. Though it’s a newly independent company, the GE split was pretty clean financially, which means we have good comparable results going back many years. In recent years the business has been largely flat, though sales are huge, with about $33 billion in annual revenue. Much of that slowdown in growth stems from the effect of higher interest rates dampening the wind power market (higher interest rates mean costlier wind farm financing, which obviously crimped construction). Still, electrification, which is also largely powered by the de-carbonization of the energy industry, is growing nicely, seen rising about mid-teens this year. Moreover, lower interest rates should start to perk wind business back up, and that’s where the long-term growth lays, as wind is the second-cheapest type of power plant to build, after solar, for GE Verona’s utility customer base. Gas turbines remain a solid business, too, as new technologies make for more efficient power plants, and also fit the niche of provided backup capacity on peak power days. The split from GE allows investors a chance to hop on a more pure-play energy investment, and Wall Street seems to be taking to it, with shares up nicely since the spin-off. The fact that about 30% of the world’s electrical capacity uses Verona products in some manner bodes well for long-term strength, as does the company’s ridiculous $118 billion order backlog. Most enticing is the long-term margin and free cash flow outlook—Verona recently upped its free cash flow view to $1.5 billion this year (basically what it thought it would collect in 2025 as of a few months ago), with the tally likely to increase steadily at 15%-plus rates for many years to come.

Technical Analysis
Solar stocks remain iffy, but GEV continues to be a magnet for institutional money. Shares started trading in April at 115 and ran up to the 180 area in May before chopping around for many weeks—including a decent-sized shakeout last month when the market went over the falls. But GEV quickly moved back to marginal new highs, and after one more mini-shakeout, pushed to new highs last week. Today was a bit sloppy as sellers showed up near round-number resistance at 200, so we’ll set our buy range up from here, looking to enter on a resumption of the recent breakout.

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Stock 6

On Holding (ONON)

Why the Strength
Nike has been struggling during the past couple of years but it’s still projected to have nearly $50 billion in revenue during the next four quarters; Swiss-based On Holding might have $6 billion over that same time frame, and in a nutshell, that’s the big idea here—that, if On pulls the right levers, it can become the next big thing in athletic footwear, apparel and more. The firm is best known for its running shoes, which actually do have an innovation edge (softer landing and spring-ier push off) that many top runners use (the winner of the past two Boston Marathons, for instance), which is the key behind the popularity, though it’s sneakers have also become popular among upper middle class buyers just as something comfortable and lightweight to wear around. On has since branched out with tennis shoes (partnership with Rodger Federer, though his operation retains some of the branding rights), off-road running and more, all of which are gaining in popularity, and like Nike and others, it’s also moving into apparel and accessories, too, both of which are seeing solid uptake. Currency volatility can affect top-line results here and there, and in this industry, business can go sideways if tastes change, but the underlying operation has been on a solid growth path for a while and all signs point to it staying that way: In Q2, basically every area of its business did well, from geography (sales up 85% in Asia, but also 22% in Europe and 26% in Americas) to sales channel (both direct-to-consumer and wholesale were up 29% to 30%) to product line (shoes up 28%, accessories up 26% and apparel up a big 67%, which we find a very encouraging signpost that the brand’s strength is spreading), and all of that was despite some hiccups in the transitioning/expansion of a manufacturing facility in the U.S. A lot will come down to management, but so far the execution has been excellent, and the overall upside here is very big.

Technical Analysis
After a big earnings gap in March of 2023, ONON looked ready to move—but, as with so many growth titles, it didn’t follow through, leading to another whole year of base building. Still, March of 2024 began a series of positive clues, with a big support week on huge volume, followed by a big-volume breakout in May and—after being yanked down by the market—a series of big-volume buying weeks that have pushed the stock to new weekly closing highs. If you want in, we’re OK buying some here or on dips of a point or two.

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Stock 7

Rocket Cos. (RKT) ★ Top Pick ★

Why the Strength
Rocket (covered in the August 19 issue) is a Detroit-based fintech that offers a suite of services ranging from mortgage, real estate and personal financial transactions. The company’s flagship business, Rocket Mortgage, has provided over $1.6 trillion in home loans since 1985 (including through its recently introduced Rocket Mortgage App), and its expansion into complementary industries like real estate services and personal lending seeks to “reinvent and enhance” the client experience by leveraging the AI-driven Rocket Logic platform by expediting loan processing, handling client interactions and streamline various tasks traditionally performed by human agents. In recent months, U.S. lenders have become decidedly more “credit cautious,” which is exacerbating a home affordability crisis; U.S. housing affordability remains at historic lows thanks to persistently high mortgage rates and rising home prices (this spring, home purchase applications fell to their lowest levels in over three decades). However, this stock has turned strong as green shoots are starting to appear that could change this dynamic going forward: Mortgage rates have been on the skids, down not just 1.4 percentage points from their 2023 highs but falling nearly half a point just in the past month (thanks in part to the early-August market and currency panic). When you combine that with what is surely massive pent-up demand (especially among first-time and first-time move-up buyers) and a Fed that’s almost surely starting an easing campaign this month, Wall Street is thinking a turn in Rocket’s business is coming. Indeed, the company says it’s already reaping the benefits of these green shoots, with the addition of 67,000 new clients and around $21 billion in unpaid principal balance among new mortgage servicing rights (MSR) portfolios it recently acquired. Rocket said the loans in these newly acquired MSRs have a higher average interest rate compared to previous portfolios, and opening up a range of products and services for these new clients. Wall Street sees earnings catapulting into next year, and given how profitable the firm has been in the past ($4.11 per share in 2020, $2.26 in 2021) even these estimates could prove conservative.

Technical Analysis
RKT never entered our recommended buy range last month, but following the recent dip, we’re seeing what we think is a solid entry opportunity—there are never any guarantees, but the first pullback after a breakout and persistent advance is usually a higher-odds entry. Of course, RKT is likely to get pushed and pulled on the rate outlook (last week’s pickup in 10-year yields likely had something to do with the stock’s retreat, while today’s dip helped), but with the trend of rates down, that should be a positive thifactorng over time. We’re OK entering here or on dips with a stop near the 50-day line.

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Stock 8

TransUnion (TRU)

Why the Strength
TransUnion is one of three major credit reported agencies in the U.S. (alongside Experian and Equifax), offering total credit measures and protection all in one place, including credit scores, credit reports and credit alerts. Of significance, it’s the undisputed leader in credit reporting, commanding a 66% market share, standing far ahead of its competitors. Accounting for most of the recent growth, however, is emerging market opportunities: TransUnion has seen notable expansion lately in countries like India, which is up by more than 30% year-on-year, along with double-digit growth in Canada, Asia Pacific, Latin America and Africa, helping to offset headwinds in its domestic markets. Indeed, emerging markets were the star performers in the recently released Q2 earnings report, which featured an 8% increase in total revenue, to just over $1 billion, and per-share earnings of 99 cents that grew 15% and beat estimates by two cents, while adjusted EBITDA of $377 million increased 11% (all reasons for the latest show of strength). Encouragingly, despite headwinds from macroeconomic and geopolitical uncertainties, the firm’s U.S. markets grew 6% due to mortgage and broad-based emerging verticals strength, with lending conditions “largely consistent with the prior quarter.” Meanwhile, the firm’s technology transformation strategy continues to drive growth, with the AI-enabled OneTru platform helping customers manage, analyze and use data and insights, while allowing TransUnion to expand further beyond credit and risk into marketing and fraud mitigation use cases. The company said inflation slowed in the quarter after a modest tick-up at the start of the year, and with expectations for the Fed to start lowering interest rates, it noted that consumer delinquencies have begun to stabilize for credit cards and personal loans. It’s not a lightning-fast grower, but top brass raised 2024 guidance and expects to deliver sales and earnings growth of 8% and 15%, respectively, with and easier money environment likely to goose demand for its offerings as well.

Technical Analysis
TRU crashed into last fall (as low as 45 and down 70% from all-time highs), but quickly regained lost ground on hopes for Fed rate cuts, with shares running back to resistance in the 80 area by March. That led to another consolidation, but this one was calm (down “only” 19% from high to low) and led to a breakout attempt in July ... though that proved to be a false start, as the market’s weakness in early August yanked TRU lower. But that was just a shakeout, and the stock has been kiting to multi-year highs of late. With round number resistance at 100 dead ahead, we’ll aim to enter on mild weakness.

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Stock 9

Ultragenyx Pharm (RARE)

Why the Strength
Ultragenyx specializes in medicines for (as its name suggests) ultra-rare, debilitating genetic diseases. The company has a diverse drug candidate portfolio with the potential to address diseases for which the unmet medical need is high and the biology for treatment is clear. And this isn’t just development-stage stuff: The firm’s commercial portfolio includes Crysvita (for treating a rare genetic bone development disorder), Mepsevii (for the inherited condition known as Sly syndrome), Dojolvi (for adult patients with long-chain fatty acid oxidation disorder) and Evkeeza (for a rare condition resulting in extremely high cholesterol levels), which collectively are growing nicely. Meanwhile, the pipeline includes several Phase III biologic and gene therapies for addressing various diseases, ranging from glycogen storage disease to a common urea cycle disorder known as Ornithine transcarbamylase (OTC) deficiency. In Q2, a strong financial performance was driven by revenue growth across the company’s commercial therapies, thanks to increasing global demand (particularly in the U.S. and Latin America), prompting Ultragenyx to raise guidance for the remainder of 2024. Total sales of $147 million increased 36% from a year ago, led by strong Crysvita sales, while the per-share loss of $1.52 narrowed by 73 cents while beating estimates by 8%. During the quarter, Ultragenyx reported positive data from its Phase II study in a treatment for Angelman syndrome, plus Phase III studies in osteogenesis imperfecta (a bone fracture disorder) and glycogen storage disease type 1a (GSDIa). Management said the firm is in an “excellent position” to achieve additional key milestones in the second half of the year—including filing for accelerated approval for UX111 in Sanfilippo syndrome type A (an enzyme deficiency that can cause progressive brain damage) late this year or early next year—with the firm being at an “incredible inflection point” due to two licensing application filings expected in the next 12-to-18 months, along with “meaningful revenue growth” of around 25% for 2024 and something near 20% in 2025. Analysts, meanwhile, see profitability by 2027.

Technical Analysis
RARE hit 34 in late 2022 and has basically spent the time since then etching a huge bottoming formation in the range of 32 to 55. The latest dip (starting in March) seemed likely to head to the low of that range, but despite some sloppy trading in June, shares found support at 37 and began marching higher. The Q2 report in early August brought in more buying, and RARE has continued to advance persistently since then, moving to 25-month highs two weeks ago. If you want in, aim for dips to 54 or a bit below.

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Stock 10

Virtu Financial (VIRT)

Why the Strength
Virtu Financial is the modern-day version of the old time Wall Street broker: They provide trading execution on behalf of mutual funds and ETF providers, make markets for stocks and other products for institutional traders and sell a raft of technological products around trading and portfolio management. The technology side of the business is important, since both customers and Virtu itself see benefits from better technology by managing the thinner margins in trading as commissions continue to fall. The intermediary business also is somewhat market neutral, since volatility benefits Virtu by increasing trading volumes and generating opportunities to profit from the securities it holds as part of its market making offerings. That said, the flip side to that is Virtu tends to get burned in down periods by making markets for customers in sub-$1 stocks, and management has asked the stock exchanges to kick out low-priced issuers more aggressively. Interestingly, though the S&P has been less volatile in 2024 compared to 2023, Virtu is making more money each trading day this year than last, something management attributes to the efficiencies created by its technology. The firm also is seeing benefits from market making in the new cryptocurrency spot ETFs (etherium funds started trading in late July) and related options; while they’ve dropped since coming public, volatility there remains high and volumes are off to a decent start. In the current quarter, analysts see revenue coming in near $353 million with earnings of about 70 cents per share, both up nicely from a year ago. For the full year, Wall Street sees sales hitting $1.455 billion, reversing the down year of 2023 which saw $1.2 billion revenue. EPS should come in at $3.05. Supporting shares has been a multi-year share buyback program (the stock trades at 13x trailing earnings) that’s seen Virtu’s share count fall 7% from a year ago, with more buybacks coming. It’s a solid Bull Market stock.

Technical Analysis
VIRT didn’t bottom out from its bear phase until February of this year, but since then, the action has been excellent—shares marched nearly straight up to the 25 area in June before slumping for a few weeks, but the Q2 report in mid July saw the stock erupt. Perhaps more impressively, VIRT didn’t blink during the market’s late July/early August meltdown, and while shares haven’t taken off of late, they remain perched near their peak. If you want in, we’re OK grabbing some shares here or preferably on dips of a few dimes.

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Previously Recommended Stocks

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

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