Cabot Top Ten Trader Issue: September 30, 2024

Positive but not Powerful

Just looking at the headline evidence, it remains in good shape—the intermediate-term (and longer-term) trend of the indexes is up, and the same can be said for most growth measures, too, while many individual stocks continue to act well. The only “problem” (if you want to call it that) is that the action, while positive, isn’t very powerful: Some indexes that are technically trending up are still battling with resistance and haven’t made much progress for many weeks or months, and the same can be said for a lot of individual stocks, including some formerly leading areas (like chip stocks) that continue to lag. Defensive areas, too, continue to lead, which is something rarely seen in strong markets. Again, none of this is bearish, per se, but it does leave open a greater chance of near-term wobbles. Thus, we’re sticking with our current stance—leaning bullish for sure, but picking our spots and stocks carefully and not rushing into things. We’ll again leave our Market Monitor at a level 7 tonight.

This week’s list is well-rounded with a lot of different types of setups and stories. For our Top Pick, we’ll go with the strongest name: Trip.com (TCOM) is one of many Chinese names that have gone berserk after huge stimulus measures were announced—we’ll aim to buy on a short-term dip and use a looser stop.

Stock 1

Carvana (CVNA)

Why the Strength
Carvana can trade wildly, but the firm has grown up from a speculative upstart, gone through a near-bankruptcy to now become a legitimate, major player in the auto sector. The company is doing great by essentially making it relatively easy to buy cars online, something that few would have thought of doing a decade or less ago; Carvana’s site, fulfillment, guarantees (it sells no cars that have been in reported accidents, offers limited warranties and seven-day money-back guarantee after your purchase) have enticed tons of people to pull the trigger, with 101,000 retail units sold in Q2, making the company the second largest used car retailer in the U.S. and by far the fastest grower in the group. That’s part of what’s behind the stock’s resurgence, as solid top-line growth is expected for a long time to come—but equally if not more important is that, as opposed to the breakneck growth-at-all-costs strategy of a few years ago, Carvana has implemented many cost-saving measures and is running a tight stop. The result: The firm is now profitable, with $355 million of EBITDA in Q2, and an EBITDA margin of 10.4%, which the top brass believes isn’t just the biggest in the industry today, but the biggest for any public automotive retailer ever! Moreover, management sees many other avenues to continue boosting efficiencies and squeezing out costs, so that it can eventually hit the upper reaches of its long-term EBITDA margin target of 13.5%. Obviously, macro factors will have an effect here, but that could be a good thing in the quarters to come as the Fed lowers borrowing costs. All in all, if the company continues to pull the right strings, there’s no reason Carvana won’t take a lot more market share for a long time to come.

Technical Analysis
CVNA has had a big run since breaking out of a wild base in February of this year, so it’s not in the very early stages of its advance, but the stock continues to act properly, advancing in a three-steps-forward, two-steps-back type of advance, with support regularly appearing near the 50-day line. The latest dip was harsher but proved to be a shakeout, with a nice buying volume cluster pushing CVNA to new highs. We’ll set our entry range down a bit.

Weekly Chart

Daily Chart

Stock 2

Golar LNG (GLNG)

Why the Strength
Natural gas prices are on the rise from low levels after a series of extreme weather events across the U.S., but even aside from these short-term factors, the fuel is experiencing a secular demand boom thanks to the voracious energy consumption of AI data centers and the electrification of everything, prompting utilities worldwide to bring more natural gas power plants online. Golar (covered in the July 22 issue) operates marine infrastructure that turns natural gas into liquified natural gas (LNG), and vice-versa, in a process called regasification, as well as chartering LNG vessels on fixed terms to customers. The Bermuda-based firm is also a big player in floating LNGs (FLNGs), which are vessels that facilitate the liquefaction of gas and its preparation for transport after it has been extracted from sea beds, while also providing secured cash flows; it has two operational and a new FLNG unit, the Mark II, is scheduled to begin operations in 2027 with an annual liquefaction capacity of 3.5 million tons. Anglo-French oil and gas firm Perenco, which is the current charterer of a Golar’s FLNG vessel, recently acquired a 10% stake in Golar, prompting rumors of a potential takeover by Perenco—the reason for the stock’s latest show of strength (although it should be noted that a major financial institution last week said a sale likely wouldn’t be considered by Golar unless it was above $60 a share, a substantial premium to the current stock price). Meanwhile, the company’s other FLNG vessel was recently contractually entitled to receive daily payments from a BP subsidiary that will provide Golar with approximately $220 million this year and next while freeing up $500 million of liquidity. On the financial front, although Golar reported Q2 revenue of $65 million that was 17% lower from a year ago and EPS of 39 cents that was in line with estimates, the firm reported an adjusted EBITDA backlog (a key metric) of $11 billion, a nearly 60% improvement from last year’s Q2. Looking ahead, management sees the upcoming Mark II generating up to $500 million in EBITDA per year and said the company may be in a position to generate annual EBITDA of around $1.5 billion once its expansion program is completed in 2030.

Technical Analysis
GLNG broke out of a nearly two-year base in June and ran up to a multi-year peak at 36 a few weeks later, but August saw shares tumble several points and temporarily break the 50-day line. The next several weeks that followed witnessed a bottoming process, with the stock again testing the early August low in early September then turning up earlier this month. GLNG has rallied for three straight weeks and volume is picking up, with last week’s takeover rumor pushing it above resistance and to a new high. If you’re game, dips can be used to enter.

Weekly Chart

Daily Chart

Stock 3

Klaviyo (KVYO)

Why the Strength
Klaviyo is a marketing company that builds databases for businesses that help them better utilize their data to pitch to existing and potential customers. Cutting through the forest of acronyms the company tosses out to explain its business, Klaviyo basically helps clients – mostly retailers – combine customer data like email, phone numbers (for text campaigns), web forms and mobile push notifications to increase sales and lower back-end tech costs. There’s not a lot of magic to its tech stack compared to any other database firm, it’s just that businesses collect reams of data and Klaviyo spends a lot of time thinking about how they can allow them to access their data in quick, practical ways, like to personalize websites and run targeted ad campaigns. Ease of use and holding customer data under one roof is often why companies choose Klaviyo, and the offering is catching hold as business is growing fast: Last quarter, sales rose 35% to $222 million and earnings per share totaled lifted 50% to 15 cents, on a customer count of 151,000. In the current quarter, Q3, management sees sales coming in at $226 million, a rise of about 29%, and is projecting full-year revenue up 31% to $914 million. Klaviyo is seeing lots of interest from customers that involve extending the use of data to new frontiers, such as for directed ads on streaming TV for customers they can identify through other tracking markers; another opportunity is attempting to power in-store promos to certain groups of shoppers, both of which would obviously boost Klaviyo’s opportunity. It wouldn’t be tech in 2024 without management saying AI will help the business too: in Klaviyo’s case, it sees AI as simplifying the user interface and assisting in developing new applications of existing data. It’s an interesting, fresher story.

Technical Analysis
KVYO came public in September 2023 and immediately went into a prolonged post-IPO droop, falling by nearly half and repeatedly testing support in the low 20s. Q2 earnings in August, though, changed perception, with a big-volume move to multi-month highs, after a reasonable post-Labor Day retreat, shares have hit new closing weekly highs. A normal pullback would be tempting.

Weekly Chart

Daily Chart

Stock 4

Lumentum (LITE)

Why the Strength
Photonics has been described as the optical equivalent of electronics, in which photons (light particles) replace electrons for data transmission, computing and sensing, with lasers playing a critical role. This is where Lumentum enters the picture: The company makes laser-based photonic products and other technology for optical networking and commercial customers that use them for a broad array of applications ranging from precision manufacturing to biotechnology, data centers and telecom networks. Much of the firm’s focus of late has been on positioning itself to take advantage of the surging demands of the cloud and AI infrastructure buildouts, which has prompted the expansion of production lines at its manufacturing plant in Thailand. Lumentum has reported “traction” in its plan to ramp up optical transceiver production capacity over the coming year at that site (including associated laser components), which are used in high-speed data centers supporting AI applications. Lumentum is also making progress in expanding its cloud customer base and, to that end, has secured a major transceiver award from a single data center customer, with additional awards from other customers expected in the coming months. In fiscal Q4 (ended June), revenue of $308 million was 17% lower year-on-year (due to a global contraction in cloud and networking spending), while earnings of six cents a share beat estimates by four cents. However, the firm booked record orders for chips used in data center applications and saw “positive trends” in the broader networking market, including a sales improvement for telecom products due to the need for increased capacity fueled by increased bandwidth demand growth. Moreover, the firm is expanding its indium phosphide laser production capacity (which is essential for scaling data center infrastructure) over the next several quarters to keep pace with the growing demand for these laser technologies; it’s also collaborating with leading chip equipment makers to develop ultra-fast lasers for advanced semiconductor packaging. After a very tough stretch, Wall Street sees earnings turning up in a big way in the current fiscal year.

Technical Analysis
LITE hit a high water mark at 110 in early 2021 and spent the next three years in the dog house before reaching a multi-year low at 35 in late 2023. The stock’s fortunes improved after that, though not enough to attract widespread attention, with shares hitting resistance a few times near 60 and falling sharply toward 40 a couple of times, too. But LITE has changed character since the August low, with a big-volume rally on earnings, and after an early September pullback, it’s moved to yearly highs on good volume. A retreat of a point or two would be tempting.

Weekly Chart

Daily Chart

Stock 5

Shift4 Payments (FOUR)

Why the Strength
Despite the overall bull market, there are gaggles of companies whose stocks have been rangebound for months or longer but the underlying fundamental story and numbers have remained strong—and now the stocks have started to perk up. Shift4 is a name we’ve been writing about (and owning on and off) for 15 months, and the story is even better than it was when we first dove in: The firm is positioned as one of the new leaders in the payments arena (a sector that regularly launches good performers), with an all-in-one solution for all sorts of businesses—restaurants are a core business (it and Toast are big competitors for restaurants moving to cloud-based systems) and that segment is being bolstered by the firm’s revamped SkyTab point-of-sale device and back-end systems (much lower cost of ownership than the competition), with growth there remaining very solid. However, even more exciting is how Shift4’s business has diversified in recent years, with its various offerings very well suited to places with large campuses (hotels, sports arenas, resorts, theme parks, golf courses, etc.); the company has been inking tons of huge, big-name deals in these areas, and collectively they now make up one-third of payment volume (that will grow as these deals come on-line), while also making big strides in sectors like non-profits, some retail, gambling and even things like EV charging stations. There’s also an M&A component here, with the firm gobbling up smaller, bolt-on payment operations that bolster its offerings in the U.S. and overseas. As we wrote above, while there have been worries about this and that over time, the underlying business has been growing rapidly: In Q2, payment volume was up 50%, revenues less network fees lifted 41% and EBITDA rose 48%, while free cash flow remains big and growing (north of $1.65 per share in the first half of the year, larger than reported net income), with management upping its forecast for the rest of the year after the latest results. The economy (a travel bust?) would be an issue for it and every other payment operation, but the valuation here seems reasonable, and Wall Street expects 2025 to be another solid growth year. We like it.

Technical Analysis
As we wrote about a few weeks ago, FOUR has essentially been rangebound since the spring of 2023, but after a tough 39% correction in March/April of this year (partially exaggerated by a brief spike higher on takeover rumors) and a retest in August, shares look to have changed character: FOUR saw two huge-volume buying weeks after earnings, and while there was a shakeout after Labor Day, the stock held its 50-day line. And now it’s moved out to its highest closing price since 2021 on good (not amazing) volume. If you don’t own any, we’re OK picking up some shares here or (preferably) on dips.

Weekly Chart

Daily Chart

Stock 6

Southern Copper (SCCO)

Why the Strength
A dramatic series of economic stimulus measures from China’s central bank starting in July but really accelerating last week is expected to free up one trillion yuan in capital, a move that has given a huge boost to most commodities, including the copper market. Prices have risen by 18% since the measures were introduced, as copper is considered a barometer for the economy of China, the world’s largest consumer of the red metal (accounting for over 50% of its global demand). Copper’s comeback is also the main reason for the strength in Southern Copper. The Phoenix-based company is one of the world’s largest integrated copper producers, with operations in Mexico and Peru, and it owns one of the largest proven reserves for the metal with the industry’s lowest cash costs and most extended mine life. Aside from increasing demand from China, a boom in copper-intensive alternative energy technologies like electric vehicles and solar panels, plus infrastructure like power generation facilities, is expected to support an acceleration in copper extraction and refining in the coming years. Southern is planning to increase its own production profile to meet this demand by restarting a $1.4 billion copper project in Peru, the Tia Maria, which within two years is expected to produce 120,000 tons of copper annually. Higher copper prices this year have also enticed the firm to expand production, including a 15% increase in Peru in Q2, driven by growth at its Toquepala mine, which saw production jump 21% while also seeing ore grades improve. Meanwhile, overall copper sales in the quarter (which represented 76% of total revenue) increased 6%, while molybdenum (12% of revenue) improved 21%, refined silver (5% of revenue) increased 32% and zinc (4% of revenue) increased 78%. The sanguine results contributed to a 35% top-line increase in Q2, to $3.1 billion, while per-share earnings of $1.22 beat estimates by 14%. Wall Street sees huge growth this year followed by more upside in 2025, and current estimates should prove conservative if the copper rally sticks. A 2% dividend yield is a nice bonus.

Technical Analysis
SCCO broke out of a multi-month base in March and had an excellent run, but the move was relatively brief, topping out after 11 weeks as copper prices eased. The correction ended up being a sharp 30%, with the low coming in August and a mini-retest happening after Labor Day. But shares perked up from there, with two above-average volume buying weeks, and then the China stimulus brought in even more buying. We like the action and think this retreat, while it could go further, is a good time to start a position.

Weekly Chart

Daily Chart

Stock 7

Trip.com (TCOM) ★ Top Pick ★

Why the Strength
China has introduced huge stimulus efforts to prop up its weakening economy, and that’s the main driver behind the entire group’s strength of late. China’s been slow to recover from the pandemic so the government there is seeking to hold onto and accelerate economic gains that have benefitted businesses like Trip.com, the Chinese version of Expedia with a dominant market share. Chinese travel domestically is already back to pre-pandemic levels of about six billion annual business and leisure trips while international trips from China are likely to end this year back at 2019 levels, too, a significant rebound that is obviously benefitting Trip.com’s business. Foreign trips by the Chinese – the mainland as well as Taiwan and Hong Kong – are 90% of the company’s business, and Trip.com takes a commission on what’s booked through its site. Even better, many travelers book accommodations, transportation and packaged tours (i.e., not just flights), with that trio accounting for 87% of revenue. Trip.com’s scale is its competitive edge, which allows it to negotiate better pricing that keeps customers using its platform as well as offering a wider selection of hotels and packages than other travel sites. All of that should contribute to an expected 18% gain in revenue for the current year, to 52.3 billion renminbi (about $7.46 billion) with a widening profit of 24.93 renminbi per ADR ($3.40 or so). Longer term, management is expanding offerings to second- and third-tier Chinese cities, working with local tourism authorities to pitch them as “hidden gems.” Only about 13% of mainland China citizens have passports, which suggest there’s a secular demand trend that should feed business as more people seek to travel internationally. Near term, though, it’s the stimulus measures that should drive perception.

Technical Analysis
TCOM broke free from a big base earlier this year and had a solid run to the upper 50s, but the ensuing correction (capped by the market’s August plunge) took away all the gains. TCOM rebounded from there on earnings, tightened up nicely for a few weeks and has gone vertical on the stimulus measures, catapulting to new highs before today’s reversal. We’ll set our buy range down a couple of points and use a looser stop.

Weekly Chart

Daily Chart

Stock 8

United Airlines (UAL)

Why the Strength
The persistence of the travel boom continues to be one of this year’s dominant themes, as evidenced by the latest commercial airline statistics. To date, 2024 has already set—or is expected to set—numerous records for U.S. air travel, including the highest-ever six-month total (as of June) for ticket sales, record full-year revenue (which is forecast to be nearly $1 trillion!) and record anticipated passenger revenue. In addition, the full-time U.S. airline workforce is the highest it has been in over two decades. Moreover, while capacity is rising, some (including United’s CEO) think expansions from here will be challenging industry-wide, which should keep profits up. Collectively, these trends explain why United Airlines, the world’s second-largest airline by fleet size, has found its wings again and is cranking out giant results after the tumultuous Covid years. The Chicago-based flyer flew a record 44 million-plus passengers in Q2, and also set a daily record at 565,000 passengers in spite of an industry-wide seating capacity constraint due to supply chain issues. It further achieved a milestone in customer satisfaction with its United app now being the most downloaded airline app with over 89% of customers engaging digitally on day of travel. Key financial metrics were also respectable, with revenue of $15 billion increasing 6% from a year ago and per-share earnings of $4.14 beating estimates by 21 cents; additionally, the company boosted capacity by 8%. The bullish results prompted a major investment bank to place United high on its list of airline stock recommendations based on an anticipated outperformance during the fall months (a reason for the stock’s strength). Another earnings booster is the recent drop in oil prices, which should filter through to jet fuel, cutting costs in the months ahead. Earnings should remain elevated this year and are expected to rally double digits in 2025, which should lead to a ton of debt reduction (more than $2 billion in the first half of this year alone) and flexibility.

Technical Analysis
UAL has been stuck between 30 and 60 for most of the past couple of years, and technically it remains so today—but the latest rush higher has us thinking the bears may be sold out. The stock was rejected at 56 in May and began a sharp slide that ended at the market’s August low. But there was no bottom-building after that, with UAL ratcheting higher ... and higher ... and higher, rallying nine weeks in a row and briefly tagging their highest level since early 2021. We’ll look to enter on weakness.

Weekly Chart

Daily Chart

Stock 9

United Rentals (URI)

Why the Strength
Data center construction in the U.S. continues at a strong pace, with data center demand expected to increase by around 10% a year until 2030. A key player in this trend is United Rentals (covered in the July 29 issue), which is the leader in North American equipment rentals with a 15% market share and owner of a $20 billion fleet consisting of around 4,700 equipment classes used for industrial and non-residential construction. Aside from construction equipment, United also provides load banks which help data centers stress-test electrical systems and mimic the heat generated by servers even before they are installed. (These insights guide the placement of server racks for maximum efficiency and power savings.) In recent months, the company has seen multiple new projects across several industries, led by data centers, but also including utilities, healthcare, battery manufacturing and general infrastructure. This strength contributed to Q2 revenue of $3.8 billion that increased 6% year-on-year, plus earnings of $10.70 that beat estimates by 19 cents and adjusted EBITDA of $1.8 billion that rose 4% and set a quarterly record. Also accounting for the results was a healthy used equipment market that allowed United to set a second-quarter record for original operating cost, a key metric that measures the cost to replace an asset in an equipment fleet with a like asset of new condition. The firm believes used equipment demand will remain strong going forward, and it expects to generate around $1.5 billion of proceeds in this segment for 2024. Elsewhere, the specialty rentals segment—which includes power, HVAC and onsite services like portable toilets and mobile storage—saw a 27% revenue increase, which also set a Q2 record. The record results allowed the company to return nearly $1 billion to shareholders in the quarter via share repurchases (approximately 2% of shares outstanding) and dividends (currently an 0.8% yield), with another $900 million likely in the second half of this year. With the Fed turning easy to support the economy, United is one of the cyclical names that should benefit.

Technical Analysis
URI broke out last December and had a great run into March, when most stocks hit some sort of peak. Shares pulled back 19% from there before popping back to marginal new highs when the broad market perked up in July ... though the market’s August dip pulled it back down. All told, shares essentially saw three tests of their 40-week line and made no net progress for six months—but that led to the latest upmove that’s taken URI to higher highs on good (not great volume). It’s high priced, but we’re OK picking up a few shares here or on some weakness.

Weekly Chart

Daily Chart

Stock 10

Wingstop (WING)

Why the Strength
Wingstop is one of growthiest restaurant stories out there, with a goal of becoming a top 10 global restaurant brand in the years ahead. The firm’s offerings, of course, are very straightforward, mostly wings with a variety of different rubs and sauces (including the just-introduced sweet BBQ blaze), though one big menu change in recent quarters has been the addition of a fried chicken sandwich, which has proven popular while decreasing the company’s reliance on wing prices (which can be very volatile and affect the bottom line). Sales growth has been rapid and reliable for a long time, and things have actually accelerated of late with out-of-this-world comparable sales growth—up nearly 29% in Q2, nearly all from higher transactions—that’s boosting the firm’s store economics. Indeed, two years ago, Wingstop’s average revenue per store was $1.5 million, but that’s up to $2 million today and the top brass just issued a new goal of $3 million. Throw in digital enhancements (it built its own proprietary tech platform, which management thinks will dramatically boost personalization efforts; two-thirds or orders now come online) and the company is firing on all cylinders. In Q2, total revenue boomed 45% while earnings lifted 63% and EBITDA was up 51%, all boosted by a 15% rise in the restaurant count to 2,352. That sort of store growth should continue for many years, with Wingstop aiming to have at least 3,000 U.S. locations (1,988 franchised at the end of June) and 3,000 overseas (up from just 312) in the long run. From here, it’s simply a matter of execution, keeping the menu fresh and continuing to drive same-store sales growth and opening new locations—the valuation is up there, but Wingstop is a sure bet to get much, much bigger over time.

Technical Analysis
WING gapped up on earnings on November 1 and embarked on a huge, relatively smooth run, with shares finding consistent support at or near the 50-day line multiple times before the end of June brought in some selling. The stock corrected 21% from there, but flashed some tightness near the lows and held long-term support—and since then WING has moved back to its old highs before some a modest exhale. We think it’s a good setup: We’ll set our buy range up from here, looking to enter if the stock stages a clear breakout.

Weekly Chart

Daily Chart

Previously Recommended Stocks

The next Cabot Top Ten Trader issue will be published on October 7, 2024.

Copyright © 2024. All rights reserved. Copying or electronic transmission of this information without permission is a violation of copyright law. For the protection of our subscribers, copyright violations will result in immediate termination of all subscriptions without refund. Disclosures: Cabot Wealth Network exists to serve you, our readers. We derive 100% of our revenue, or close to it, from selling subscriptions to our publications. Neither Cabot Wealth Network nor our employees are compensated in any way by the companies whose stocks we recommend or providers of associated financial services. Employees of Cabot Wealth Network may own some of the stocks recommended by our advisory services. Disclaimer: Sources of information are believed to be reliable but they are not guaranteed to be complete or error-free. Recommendations, opinions or suggestions are given with the understanding that subscribers acting on information assume all risks involved. Buy/Sell Recommendations: are made in regular issues, updates, or alerts by email and on the private subscriber website. Subscribers agree to adhere to all terms and conditions which can be found on CabotWealth.com and are subject to change. Violations will result in termination of all subscriptions without refund in addition to any civil and criminal penalties available under the law.