Cabot Top Ten Trader Issue: September 9, 2024

Back at Key Intermediate-Term Levels

The overriding question coming into last week was whether, after the V-bottom and strong rally for much of August, the market could keep going or would it fall back into a longer bottom-building process. After last week, it’s looking like stocks need more time to set up, as big investors returned from the long weekend and sold stocks basically every day, “led” on the downside by the Nasdaq and the formerly leading chip stocks, though most other indexes fell below their 50-day lines, too. Of course, today saw a bounce, but it looks like a lot of areas are at key intermediate-term levels—a strong-volume rally with fresh breakouts among potential leaders would be very bullish, hinting that last week was more of a shakeout. But until we see that, we have to assume the market correction that began in mid-July is still ongoing, leading to tricky trading at best, and some blowups at worst. Long story short, we continue to play things relatively cautiously, sticking with small positions and a chunk of cash on the sideline as we wait for more stocks to emerge on the upside. We’ll leave our Market Monitor at a level 6.

This week’s list has a lot of familiar names that are (or are close to) offering decent entry points. Our Top Pick is Freshpet (FRPT), a consistent grower with a big story that’s trying to emerge from a three-plus-month rest.

Stock 1

ADMA Biologics (ADMA)

Why the Strength
ADMA Biologics is a pharmaceutical company that researches, develops and commercializes its own plasma-based treatments for various infectious diseases. ADMA has three FDA-approved drugs on the market, of which Asceniv is the most successful. Asceniv is for patients with PI – short for primary humoral immunodeficiency – and there probably 30,000 people in the U.S. who can benefit from the treatment. Those people generally are ones who haven’t had success with other PI treatments and who likely would need to take Asceniv for the rest of their lives (business-wise anyway, that’s obviously a good thing); ADMA says it has penetrated only about 3% of the target market, which obviously leaves a lot of room for growth. In the latest quarter, reported in early August, Asceniv contributed a little more than half of the company’s $107 million in revenue, which jumped 78% year-over-year. ADMA’s other treatments on the market are Nabi-HB, which protects against Hepatitis-B, and Bivigam, which is used for the treatment of PI in certain situations. Bivigam is ADMA’s second most important product, which it acquired in 2017 from the original manufacturer after the FDA pulled the drug from the market after finding the original maker had dangerous deficiencies in manufacturing. Asceniv probably cannibalizes most of Bivigam’s market over the long-term, but the PI market is seen as under-treated and growing. For 2024, ADMA says it should hit $400 million in revenue, which would be a rise of 55%, followed by an increase to $445 million in 2025, which is likely to prove conservative as recent results have been trashing estimates. Encouragingly, the bottom line here is already well into the black and Wall Street sees big expansion for many quarters to come (earnings of 13 cents per share in Q2 beat by five cents). It’s an interesting, niche-y, small-cap medical play.

Technical Analysis
ADMA has been on a huge, huge run in recent months, so there’s definitely risk of a bigger pothole—but the action of late tells us that the buyers are still overwhelming the sellers. Shares plunged to nearly 10 (down from a high of 14) during the market’s August meltdown, but then came humongous-volume buying on and after the quarterly report, driving the stock up to 18.5. The recent pullback to the 25-day line was tidy, and today’s pop on index addition news (to the S&P 600 Small Cap) was a plus. Even so, we’ll set our buy range down from here, aiming to enter on weakness and using a loose leash.

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Stock 2

Boot Barn (BOOT)

Why the Strength
Boot Barn is the leading national retailer of western-style clothing and blue collar work wear, which is a growing industry all over the U.S., and the firm itself has been making moves (especially into exclusive brands, which bring with them better margins and lead to less price competition; these brands now make up nearly 40% of revenue) that brighten the long-term picture. The problem, though, was that short-term effects were outweighing those long-term plusses—business here went wild during the pandemic (same-store sales up 54% in 2021!!), and the long, slow process of things coming back to Earth kept sales and earnings in check. Now, though, it looks like those after-effects are wearing off, allowing big investors to focus on what should be years of healthy growth to come: In the July quarter, sales rose 10% (fastest growth rate in five quarters) while earnings nudged higher and same-store sales rose 1.4% (up from a 2.9% shrinkage a year ago; same-store sales were off more than 6% last year as a whole), all well ahead of expectations, leading the top brass to hike expectations for the year by a good amount. Underlying the growth story here is a fantastic cookie-cutter plan and economics: Boot Barn had 400 locations at the end of last fiscal year (January), but should have 460 at the end of this fiscal year, with 15% annual growth beyond that for many years (the target is 900 stores, though the top brass thinks that’s very conservative), and the new store economics is one of the best in the industry, with a payback on new openings of just 18 months or so. While Boot Barn isn’t going to grow at 50% rates, Wall Street sees sales and earnings gradually accelerating in the quarters to come, with 15% to 20% growth likely down the road.

Technical Analysis
As business went wild during the pandemic, BOOT rallied from a pre-2020-crash high of 48 to a summit of 135 in late 2021—before the bust phase saw the stock decline back to 50 in 2022 and trade around the 70 level near the start of this year. Still, the action has been solid in recent months, with BOOT rallying back to its highs in June before plenty of volatile action that saw shares dip as much as 19%--but the August earnings report was well received, and shares are holding near their highs despite the market’s latest softness. If you want in, we’re OK with a small buy here and a tight stop.

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Stock 3

DoorDash (DASH)

Why the Strength
DoorDash is the largest food delivery platform in the U.S. with a market share of around two thirds—well ahead of its nearest competitor Uber Eats (near one-quarter market share). Its focus is on customers who want quality food delivered to their home or office, and it also partners with restaurants that lack food delivery and pickup options or adequate dine-in space, effectively giving them another option to make a sale. Just as important, DoorDash has lately expanded into other areas outside of restaurants, including delivery of items from alcohol, grocery and convenience stores, made possible by a vast and growing network of drivers (it attracted more drivers than ever last year even as overall nationwide home food delivery sales shrank). A big reason for the company’s market share strides is its logistics efficiency, which hinges on its sophisticated algorithm-based dispatch platform that factors in real-time traffic patterns, restaurant preparation times and driver availability to maximize the number of deliveries per hour. DoorDash also uses demand modeling to predict when and where drivers will be needed the most, allowing them to further improve delivery times. Those efforts continued to pay off in Q2, with DoorDash delivering more sales to more merchants than ever before and outperforming across several key metrics. Revenue increased 23% year-on-year, to $2.6 billion, driven by a 19% increase in total orders (to 635 million). Net revenue margin (revenues as a percent of total gross value ordered) increased to 13.3% (from 13%) and, while earnings remain in the red, adjusted EBITDA (a more accurate profit measure for the company) increased 54% to $430 million, topping expectations. The sanguine results prompted a major Wall Street institution to list DoorDash as one of its top picks, which it based on the firm’s impressive scale reaching around 5% of total consumer spending on restaurants. The company’s subsection-based DashPass, which offers unlimited deliveries and free delivery on orders over $15 (think of it as the company’s Amazon Prime) saw its subscriber count and order frequency hit all-time highs. Looking ahead, Wall Street sees earnings moving into the black this quarter and surging from here as revenues lift in the high-teens/low-20% range for many quarters to come.

Technical Analysis
DASH turned up early last year and was off to the races, making a series of higher highs before running into strong resistance earlier this spring. A multi-month pullback followed, with shares finally finding support just below the 40-week line, and, interestingly, seeing two weeks of big-volume buying after earnings despite the market early-August meltdown. The rest of the past three weeks on light volume looks normal to us—though we’ll set our entry range up from here, looking to add shares on a show of clear strength.

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Stock 4

Freshpet (FRPT) ★ Top Pick ★

Why the Strength
In a world that’s full of AI, semiconductor and software stories, Freshpet offers a straightforward growth idea that’s just as attractive as (and should prove far more durable than) any out there. The company is positioned as the King of Fresh Dog Food (it has a 96% share of fresh/frozen pet food, the vast majority of which goes to dogs), with natural ingredients (its offerings are higher in protein and need to be refridgerated) that’s been shown to keep the Fido’s and Pumpkin’s of the world healthier (more energy, healthier coats, etc.) and even living longer, too. Freshpet’s products are obviously higher priced, but that’s part of the attraction, leading to solid margins and making it more economically resistant (its higher-end consumer base is unlikely to switch pet foods after using it for a while, especially given the huminzation of pets); combined with the fact that Freshpet has just a fraction of the overall dog food market (3%!) and a business that’s hard to replicate (supply chain, manufacturing capacity, more than 27,000 stores selling the product, etc.), it’s not hard to see why the firm is set to get much bigger over time. Of course, it’s still up to management to execute—and they did make some snafus in recent years, with costs getting out of control during and after the pandemic—but things have been back on track for many quarters, with a new manufacturing facility gradually coming on-line and consistent sales, cash flow and EBITDA growth. In Q2, sales were up 28% (the 24^th straight quarter of at least 25% top-line growth!), driven by a 25% gain in household penetration (12.8 million), while EBITDA totaled $35 million, up 390% and making up 14.9% of sales (up a whopping 10 percentage points from a year ago)—causing management to boost its 2024 outlook (26% sales growth, more than $140 million in EBITDA) and stick by some ambitious 2027 targets (23% annual sales growth 2025-2027, 18% EBITDA margins). We like it.

Technical Analysis
FRPT changed character last November with most growth stocks, gapping up on earnings and enjoying a solid run (helped by a couple more bullish earnings reactions) until the end of May. The past three months, though, have seen base-building—shares pulled back as much as 19% at the early-August low, though that to some huge-volume support after the quarterly report. And FRPT has actually inched out to new price and relative performance (RP) highs since then, though we wouldn’t call that any real breakout at this point. All in all, it’s a good setup—we’ll set our buy range up from here, aiming to enter on a clear sign of power with a stop around 130.

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Stock 5

Lennar (LEN)

Why the Strength
A nationwide shortage of homes for sale, combined with strong pent-up demand and expectations for falling mortgage rates ahead, has pushed homebuilding stocks into the limelight this summer, with demand for new homes starting to pick up. Lennar is the nation’s second-largest home construction company (behind D.R. Horton) in terms of the number of homes sold. The Miami-based builder’s home-selling volume has been on a tear in recent years; it sold over 73,000 homes last year, up 10% from 2022 and 300% higher from 10 years earlier. Although the firm’s Homebuilding segment accounts for most of its revenue, the company also does business in Financial Services and Multifamily, with the activities of the latter two segments being a key factor behind the solid growth rate in recent years. On that score, it has been part of Lennar’s recent policy to intentionally reduce its gross profit margin (from the high 20s to the low 20s) by offering financial incentives to homebuyers, including assistance with closing costs and mortgage rate buy-downs, which in turn has further stimulated demand. Also accounting for Lennar’s sector leadership is that while smaller homebuilders have cut back on new home construction due to the persistence of high mortgage rates, Lennar has been expanding its footprint across several key geographical regions of the U.S, allowing it to take market share from competitors. All of that has worked in its favor despite the industry’s headwinds: In Q2, revenue of $8.8 billion increased 9% from a year ago, thanks to a 15% increase in deliveries, while earnings of $3.38 topped estimates by 15 cents. Even better, the key forward-looking metric of new orders (up 19% in units and nearly 13% in value) is a sign that business should pick up into next fiscal year (which begins December 1). Indeed, analysts see a flat-ish next couple of quarters followed by an earnings acceleration in 2025, helped along by a solid share buyback program (share count down 4% from a year ago) and a pristine balance sheet (more cash than debt).

Technical Analysis
LEN was off to a good start at the beginning of this year, hitting a record peak at 172 in early April, but then the sellers put up a fight, leading to a three-month correction that took shares lower by 17%. However, by early July the stock found support above 140 (right near the 200-day line) and immediately turned the corner, shooting up to new highs by month’s end, regrouping to the 25-day line during the early-August market maelstrom and then hitting moving to higher highs in August. The recent dip with the market has been tame, setting up a solid risk/reward entry around here.

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Stock 6

Roblox (RBLX)

Why the Strength
Roblox is a popular (especially among younger players) online game platform and game creation system that allows users to program and play games created by themselves or other users. Its platform includes Roblox Client (an app allowing users to explore 3D digital worlds), Roblox Studio (a toolset allowing developers to build and publish 3D experiences and other content) and Roblox Cloud (services and infrastructure that power human co-experience platforms). Most of the video games offered on Roblox are free to play, requiring no payment. However, many of the “best” (i.e. highest-demand) games are pay-to-play, with the company allowing content creators to charge between 25 and 1,000 “Robux” (virtual currency, with 25 Robux being equal to 99 cents) for users to play their games. Moreover, the company recently opened up a video advertising platform to all marketers, which allows Roblox to monetize its free-to-play games; under the new system, players will now see video ads running on virtual billboards and other screens within the platform’s virtual realms, featuring content from brands such as e.l.f. Beauty, Walmart and Warner Bros. The idea is that advertisers should be able to reach more of Roblox’s hoard of Gen Z customers, which comprise over half of the company’s nearly 80 million active daily users and which constitutes Roblox’s top-spending demographic. (The firm’s emphasis on Gen Z customers is part of a bigger ad sales push to compete with traditional digital advertisers like Meta Platforms and Google.) After a slowdown in 2022, Roblox has seen things pick up nicely in recent quarters: In Q2, Roblox reported bookings (defined as revenue plus the change in deferred revenue and other adjustments) of $955 million, up 22% from a year ago, as revenues lifted 31%. Average daily active users (DAU) were up 21%, while bookings per DAU were $12 (up 1%). For 2024, the firm expects bookings to increase 20%, to $4.2 billion, and while earnings are in the red, free cash flow should come in around $520 million, up from last year’s $138 million and totaling around 80 cents per share.

Technical Analysis
RBLX hit a highwater mark at 140 in late 2021, crashed to 22 in 2022 and then rallied back to 54 later that year. In the two years since, the stock has been stuck in that same very wide range, with resistance showing up just below 50 and support in the mid 20s. However, lately, we’ve seen more constructive action—RBLX hit a much higher low after earnings in May, barely wiggled during the July/August selloff and, lately, has tightened up beautifully just shy of resistance despite a tricky market. If you’re game, we advise starting a position on strength.

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Stock 7

Ryan Specialty Holdings (RYAN)

Why the Strength
Ryan is a wholesale provider of specialty products and solutions for insurance brokers, agents and carriers in the U.S., Canada, Europe and Singapore. The company’s focus on specialty insurance products are typically designed for specific cases or for covering high-risk situations that may not be covered by traditional insurance providers—because Ryan has a large network of carriers to pull from, it’s able to quickly assemble complex insurance packages tailored to highly specific needs for businesses of all sizes across a large number of industries. A big reason for the company’s growth in recent years is its M&A strategy, as it’s been rolling up numerous high-quality specialty outfits in areas of insurance including wholesale, delegated authority and employee benefits. Late last year, Ryan completed the acquisition of AccuRisk, a medical stop loss managing underwriter that is expected to add $25 million in annual revenue and strengthen Ryan’s employee benefits distribution and underwriting platform. Ryan also acquired national wholesale insurance broker Socius Insurance Services last year, which is expected to contribute around $40 million in annual revenue. Additionally, last month the firm added U.S. Assure to its portfolio, a program focused exclusively on builder’s risk insurance, which provides Ryan with exposure to the construction market. And earlier this month, Ryan said it will acquire the assets of the European managing general agent, Geo Underwriting Europe, including a portfolio consisting mainly of specialized mid-sized companies and global large corporates across the European Union. (There are more buyouts in the pipeline, too.) On the financial front, Ryan reported Q2 revenue of $695 million that rose 19% from a year ago, with earnings of 58 cents that were in-line with estimates. Looking ahead, the company said it intends to pursue growth and deliver shareholder returns through executing on its M&A strategy. Analysts see the bottom line growing ~30% in Q3 and in each of the next two quarters, with a 21% gain in 2025. It’s an interesting story.

Technical Analysis
RYAN went public in July 2021 and rallied 80% over the next 12 months before running out of steam at 46; after that, the stock spent the next 18 months etching out a huge launching pad. The lengthy consolidation started to pay off in February when it broke out to a new high on earnings, though shares retested their highs a few weeks later. But RYAN has since been in in a solid uptrend, including a nice earnings-induced pop in early August and a grudging pullback since then. We like the setup, but prefer to enter on a show of strength with a tight stop under the 50-day line.

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Stock 8

Samsara (IOT)

Why the Strength
Samsara might have the best growth story that most investors have never heard of, with a cloud software offering that is addressing a gigantic opportunity, provides real, meaningful savings to huge companies and is still very early in its growth phase. The firm’s platform is targeted at any entity that has tons of physical assets—think trucking, construction, airlines (including ground crew vehicles), waste management, delivery and even departments of transportation among the states—helping them to dramatically boost efficiencies thanks to telematics for equipment (its recently introduced industrial grade Bluetooth tags are off to a strong start), safety training, predictive maintenance, connected forms and workflows (automatically assign forms and approvals, etc.) and more; all of it is driven by what is now more than 10 trillion (!) data points of its clients assets and operations. Interestingly, whereas most software firms sell to the technology budget (which can be volatile), Samsara’s proven savings mean it’s usually part of the (much more resilient) operations budget; at day’s end, the firm is really selling a system of record for physical operations, which is one reason why business continues to crank ahead: In the July quarter, sales rose 37%, annualized recurring revenue was up 36% and earnings and free cash flow were in the black. All of its segments (video-based safety, telematics, equipment monitoring) are growing at 30%-plus clips thanks to its current and new clients get bigger (2,133 customers pay at least $100k a year, up 28% from a year ago) and as business broadens out (87% of new recurring revenue booked was from non-transportation verticals, while 16% was overseas). To be fair, the valuation here is huge (market cap is about 10x recurring revenue), but we have little doubt buoyant growth will be seen for years to come.

Technical Analysis
From August 2023 until early August of this year, IOT made no net progress (was at 32 in each month) but saw numerous sharp corrections (34%, 19%, 27% and 36%) and rallies back as well, gyrating in a big range with lots of false breakouts and breakdowns. Now the stock is making another run at it: Shares hit a much higher low during August’s wipeout than was seen in June, paving the way for a low-volume rally to resistance near 42. And now, after a dip with the market, IOT has popped to new price and (importantly) relative performance highs after earnings. We love the action, but aren’t going to chase it here—if you want in, aim for a small position on dips.

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Stock 9

Trade Desk (TTD)

Why the Strength
On any given day, Americans typically spend three hours listening to audio content (including music and podcasts), as well as downloading countless hours of video content from various media sites. Since much of this digital content is monetized with advertising, it provides an opportunity for digital ad tech platforms like Trade Desk (covered in the June 10 issue). The California-based company is the largest aggregator of connected TV advertising impressions across every major content provider, allowing advertisers to buy ad space across various platforms while helping them quantify the value of each ad and make real-time adjustments. More specifically, Trade Desk estimates its total market potential at a massive $900 billion, which has been augmented by the ongoing revolution in streaming TV advertising (more are offering ad-supported, lower-priced tiers), where advertisers can target their audiences based on authenticated logged-in users. Trade Desk has spent the last few years pursuing this opportunity through a number of initiatives, including Unified ID 2.0 (or UID2), which allows advertisers to personalize ads by combining first-party and third-party customer data, but without compromising privacy. Several big-name enterprises, including HP, have recently used UID2 to drive double-digit reductions in cost per unique household reach with much greater precision and frequency management, thanks in part to the embrace of UID2 by most major streaming providers. Even more recently, Trade Desk has unveiled an AI as a co-pilot feature to its platform, “enabling advertisers to maximize the potential of their first-party data.” Combined with what management sees as huge potential in audio-related ads (especially as leading firms like Spotify allow for more automated, programmatic buying) and the firm’s excellent long-term growth trend should continue: Revenues have been growing consistently at over 20% annually, with the latest quarter showing no signs of a slowdown, as the top line lifted 26%, earnings rose 39% and EBTIDA lifted 34%, with analysts see solid (but slightly slower) growth ahead. It remains an emerging blue chip-type story.

Technical Analysis
TTD rode a wave of buying interest steadily higher in the first seven months of 2023 before it came to a halt at 90. It spent the rest of the year chopping lower, eventually attracting interest from buyers again around 60 after the calendar flipped. Except for a brief shakeout with the market in late July, the stock has spent most of this year on the ascent with shares recently exceeding the century mark for the first time since 2021 before pulling in on very low volume. We’ll set our buy range up from here, nabbing some shares on a move toward new highs.

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Stock 10

Vaxcyte (PCVX)

Why the Strength
Last week Vaxcyte delivered stunning results from a Phase I/II study of its Vax-31 treatment that suggests the company may have a future blockbuster on its hands in the treatment of pneumococcal diseases. Right now, the standard of care for invasive diseases like pneumococcal pneumonia, meningitis and certain blood infections is a drug called Prevnar-20, manufactured by Wyeth Pharmaceuticals. The Vaxcyte study showed that at middle and high doses Vax-31 matched or exceeded Prevnar’s effectiveness—in fact, on average, the trial showed it to be 25% more effective. Even more exciting for investors is that Vax-31 showed superiority to Prevnar in 13 of the 20 of the examined serotypes (varieties of the targeted microorganism) and efficacy against all 20, which was unexpectedly strong due to the technicalities of how Vax-31 attacks its target. Pneumococcal disease is an $8 billion market, and the results have Wall Street thinking Vaxcyte could be the dominant treatment on the market in a few years since the results show Vax-31 treats 95% of the pneumococcal diseases circulating the U.S. population and 98% of those in Europe. To be fair, Vaxcyte is still development stage—commercial sales are a while off, with the company planning the required Phase III studies for 2025 and 2026. The recent trial data also means the company will idle its advancement on a similar drug, Vax-24, which is further along in trials, to focus its time and money on Vax-31 development. Even so, the big picture is that this end-market needs new treatments: Prevnar keeps needing to be reformulated to counteract evolving resistance in the population and the Centers for Disease Control has been considering recommending universal vaccination for adults, which would double the market, all of which promises investor interest in Vaxcyte should remain high. The company has no revenue, but sits in strong liquidity position with about $1.9 billion cash with quarterly R&D and administrative expenses that run about $100 million a quarter. It’s an interesting speculation.

Technical Analysis
While it’s had a few dips and dead periods as you’d expect from a development-stage biotech, PCVX has made good progress during the past couple of years, finding support at its 40-week line repeatedly before running to higher highs. The latest peak was near 88 in July before the quick, sharp August shakeout, but last week’s trial data sent PCVX soaring to nearly 120 on giant trade before a little hestiation. It’s obviously not for the rent money, but biotechs can occasionally counter-trend a challenging market environment—if you want in, keep it small and aim for weakness.

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Previously Recommended Stocks

The next Cabot Top Ten Trader issue will be published on September 16, 2024.

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