February 22, 2022

Stocks remain under pressure as a mixture of geopolitical threats and inflation concerns weigh on the market’s growth-oriented segments. Meanwhile, as the major indexes test their January lows, we remain on the lookout for signs of bottoming and constructive setups—particularly in the tech sector. For now, though, we advise caution as this is still very much a stock picker’s market.

This week’s list includes a nice mix of key industries that are benefiting from current economic trends, including a few that have had excellent earnings reactions. Our Top Pick is a stock that should get a boost from a potential increase in travel and vacation demand in the coming months.

Market Overview

A Nervous Market
Ukraine-Russia tensions continue to mount, keeping investors’ nerves on edge while contributing to an abnormally volatile market environment. There are, of course, other reasons behind the market’s weak backdrop, though we’re not particularly concerned about them at the moment. What we’re focused on instead is how well the major indexes hold up as they test their January lows. We’re also watching the new lows (which are still quite elevated) and the number of stocks in relation to their key 200-day lines. Most importantly, the main trends of the indexes remain down, which means a defensive stance is still recommended as we wait for more constructive action among growth-oriented stocks in particular. Our Market Monitor will remain at a level 4 as we keep most of our portfolio on the sideline.

Despite the general weakness, there have been a decent number of stocks across several industries that have shown some worthwhile relative strength. We’re also still seeing some setups in areas of the market that are inflation-sensitive, as well as in industries that should benefit from economic reopening. One such play is Expedia (EXPE), which just posted a big bottom-line beat and is this week’s Top Pick.

Stock Picks & Previously Recommended Stocks

Stock 1

Chubb Ltd. (CB)

Why the Strength

While companies across the spectrum are worried about the impact of upcoming interest rate hikes on their businesses, one firm that isn’t sweating is Chubb. The world’s largest publicly traded property and casualty (P&C) insurance company serves consumers and companies of all sizes and is expected to benefit from the Fed’s stated intent to raise its benchmark rate and shrink its balance sheet this year. In fact, Chubb said every 100 basis-point increase should produce an additional $1.2 billion(!) of investment income for the company. Chubb finished 2021 with record quarterly earnings and underwriting results, which contributed to one of the best years in the firm’s history. Total revenue in Q4 rose 11% from the year-ago quarter, to $9.3 billion, and earnings-per-share of $3.81 surprised the consensus by a mouth-watering 53 cents, thanks to double-digit commercial premium growth and strong underwriting margin expansion. Core operating income per share for Q4 was a record (up 20%), with full-year net and core operating earnings also setting records. Further record results in the quarter included P&C underwriting income of $1.3 billion, a 31% improvement. Chubb’s commercial business grew nearly 18% for the full year and increased by almost one-third (over $5 billion of net premium) from 2019. Looking ahead, Chubb expects greater revenue and earnings from its acquisition of Cigna’s Asia business, as well as from its increased ownership of Chinese insurer Huatai Group (when approved by regulators). Chubb’s management believes the firm will also benefit from the current “period of strong wealth creation” and anticipates solid margin improvement in 2022.

Technical Analysis

CB has outperformed most of its financial sector peers in the last year, with few setbacks along the way. The started 2021 at 150, rising to just under 180 by March before peaking and quickly pulling back to 155. A 20-week lateral range followed before the stock broke out to higher highs in August. Since then, shares have chugged higher in a zig-zag fashion, briefly kissing the 40-week line in early December but keeping the trend of higher highs and lows intact. We’re OK nabbing some here.

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Stock 2

Expedia Group (EXPE) ★ Top Pick

Why the Strength

Travel continues to be a reopening story as both leisure and business travelers start hitting the road. While recovery gains have already been good for online travel agencies like Expedia, there appear to be long legs for consumer and convention travel to expand into next year, with consensus EPS expected to be $7.68, which would be Expedia’s highest-ever mark. And while Expedia’s Q4 revenue of $2.3 billion was 17% below the pre-pandemic 2019 quarter, management says consumers have been setting aside fears more quickly with each passing quarter. Wall Street, meanwhile, has been encouraged by steadily improving monthly metrics, with bookings the first two weeks of February 11% behind 2019’s rate. Expedia has built a wide-ranging network of online travel services beyond the eponymous website, with more than 200 brands globally. That provides the business with a strong user base that gives it some advantage over the many other booking services around. More importantly, its Vrbo subsidiary has the company competing with AirBNB in the short-term rental space, an area that is growing as workers are holding onto newfound flexibility with employers over where they can do their job. Management has been working to consolidate operations behind its many brands and that has the bottom line performing strongly, with net income of $1.70 in the just-reported end of 2021 and EBITDA, adjusted for some acquisition and compensation costs, checking in at the fourth highest level ever. Expedia also has a collaboration agreement with Trip.com, China’s leading service, giving the firm exposure to the expected increase in Chinese tourism. All told, it’s a solid reopening story.

Technical Analysis

EXPE finally broke free from the trading range between 140 and 190 that had confined it for 10 months prior to the latest earnings report. Volume has been good, not great, but buyers have taken control lately and pushed shares to an all-time high just under 214 last week. You can take a swing here, though we prefer using a pullback to nibble.

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Stock 3

LPL Financial Holdings (LPLA)

Why the Strength

Financial advisors and broker-dealers are riding high as the retail equity trading boom continues. LPL Financial is the nation’s largest independent broker-dealer and a provider of investment and business solutions for independent financial advisors. In Q4, sales of $2 billion was 32% higher from a year ago, while per-share earnings of $1.32 beat estimates by 11 cents. Total brokerage assets rose 34% to $1.2 trillion, while advisory assets were up 39%. Significantly, net new assets (NNA) grew $119 billion for the full year (a 13% growth rate), with the $17 billion added in Q4 doubling NNA from a year ago, driven by new client growth. The firm’s Business Solutions subscriptions, meanwhile, were up 16% from the prior quarter and more than double from a year ago. LPL’s client cash balances increased 13% sequentially to $57 billion and were 5% of total assets. And with the Federal Reserve expected to raise interest rates as many as six times this year, management said the first four rate hikes would generate around $310 million in annual gross profit, plus an additional $50 million for each subsequent hike. Shareholder returns is a big part of LPL’s strategy, and the company repurchased $50 million in shares during Q4 while paying $20 million in dividends (0.5% yield). LPL also remains committed to inorganic growth, recently closing its acquisition of asset manager Waddell & Reed and adding BMO Harris and M&T Bank to its institution services platform. Moving forward, analysts see LPL’s ongoing channel expansion, along with new services to support its financial advisors, driving growth in the coming quarters and expect the top line to grow 17% while the bottom line grows 48% in 2022.

Technical Analysis

LPLA’s bull market since early 2020 has occurred in multiple waves of rallies followed by multi-month consolidations that have kept shares from becoming overheated. The stock hit a peak at 160 last May and then spent the next five months building a base from which the next leg up was launched in late September. That rally took the stock up to 175 in October, followed by another high-level basing pattern lasting 10 weeks. A December rally to 180 failed and the stock pulled back to 150, but the latest move to new highs on earnings looks solid. If you want to roll the dice, you can start a small position on pullbacks.

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Stock 4

Marriott International (MAR)

Why the Strength

Hotel bookings continue to improve as vaccination rates increase and travel restrictions ease. Vacation travel is subsequently expected to rebound even more in the coming months as omicron fades, setting up what looks to be a solid summer for lodging and timeshare franchise, licensing and hotel operator Marriott. The hotelier’s Q4 report suggested the impact of omicron has been less than originally feared, as business transient and group bookings demand continued to steadily improve and rebounded to pre-omicron levels. Revenue of $4.4 billion jumped 105% from the pandemic-impacted year-ago quarter, and per-share earnings $1.30 topped estimates by 30 cents. Worldwide revenue per available room (RevPAR) increased 125% during Q3, while North American RevPAR rose 144%. And while total revenue hasn’t yet returned to pre-pandemic levels, Q4 net income of $468 million was 68% higher than the comparable 2019 quarter. Marriott also signaled that it’s back in expansion mode, adding more than 86,000 rooms globally during 2021, including approximately 43,00 rooms in international markets. Net rooms were up 4% for 2021, and the company’s global development pipeline totaled 2,831 properties and around 485,000 rooms. For 2022, management guided for gross rooms growth of around 5% and net rooms growth of 4% (assuming no renewed pandemic setbacks), adding that Marriott could begin returning cash to shareholders this year. Wall Street likes what it sees here and is forecasting top- and bottom-line growth of 38% and 71%, respectively, for the full year. In view of mounting travel momentum as the pandemic wanes, the company looks to be on a solid glide path.

Technical Analysis

The 2020 turnaround in MAR hit a speedbump early last year as shares peaked at 160 in late February and skidded for the next five-and-a-half months. Shares hit bottom at 130 in August, then launched a turnaround, reaching 170 by early November. A second decline followed later that month and temporary broke under the 200-day line, but buyers returned and the uptrend was quickly repaired. Two more tests of the trend line followed—both successful—and the stock hit a record high of 185 last week. We’re not against nibbling here, but we’ll set our buy range down a bit after the latest move.

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Stock 5

Marathon Oil (MRO)

Why the Strength

With oil prices just south of $100 a barrel, some of America’s largest drillers have decided to hold back production as the global energy market tightens. Marathon says it plans to keep oil production flat in 2022 and, after focusing last year on reducing debt, will now turn its attention to shareholder returns and growing financial metrics that matter most to its equity valuation. These are just some of the reasons why Marathon, which operates in four different basins with the Eagle Ford and Bakken accounting for most of its production (while SCOOP, the Permian and an operation in Guinea comprise the rest), is one of our favorite stories in the energy space. Last week, the company said it plans on returning “a compelling amount of capital” to its investors going forward. During the fourth quarter, Marathon returned over 70% of its cash from operations (above $800 million, or 90% of free cash flow) to investors—well above its minimum 40% commitment—and raised the base dividend 17% (a 1% yield). Marathon’s share buybacks since October led to an 8% reduction in share count, and all in a period of four-and-a-half months! Key financial metrics were also impressive in Q4, including $1.8 billion in revenue that increased 110% from a year ago and beat expectations by 12%, plus per-share earnings of 77 cents that topped the consensus by 21 cents. The strong results prompted one major institution to upgrade its rating for Marathon on the assumption the company could buy back 45% of its shares over the next five years. Moreover, the firm said its “significant” leverage to oil means that every $1 per barrel increase translates to around $60 million in incremental free cash flow. We like it.

Technical Analysis

MRO had a strong rally in September and October, followed by a 19% pullback that nearly brought it back to its prior peak from last summer (at 14). But MRO got back into high gear starting in early January, rallying to new highs with the overall energy sector on good volume. We’re not opposed to a small buy here, though a minor dip would be more to our liking.

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Stock 6

Photronics (PLAB)

Why the Strength

Photronics is the world’s largest maker of photomasks, a crucial component in microlithography, the process of making integrated circuits very small. It’s a complex technology that essentially uses clear and opaque patterns on specialized glass substrates to help create semiconductors. The Connecticut-based company’s position in the chip-making industry is one reason behind the eye-catching strength. Even while Photronics is the largest player, it’s still growing faster than its industry thanks to returns on past investments, which include 11 factories worldwide. In particular, the company has been focused on positioning itself to be a standout participant in the “Made in China 2025” central government plan to have 70% of photomasks produced domestically by 2020 (up from around 16% as of 2022). The company has two factories on the mainland, one for integrated circuits, the other for screen technologies, like OLED for TVs and AMOLED for mobile phones. Right now, the business is enjoying a Goldilocks-type of market where photomask pricing is strong throughout the industry, but not so aggressive that it justifies a massive expansion by competitors. That includes China, where Photronics believes capacity isn’t keeping up with demand growth. The result is that the firm collected 37% of its $664 million in sales from China last year and expects to be able to compete for the majority of the market moving forward. First-quarter earnings are due to be released Wednesday, February 23, with analysts expecting per-share earnings to leap 141% and revenue to increase 20% from a year ago.

Technical Analysis

PLAB had a massive earnings-related pop higher (up 19%) in December, shattering a prior ceiling at 16 that was established in late 2019 and putting shares at highs not seen in 14 years. Previous big upside moves for PLAB have tended to sag, but the stock has held its ground this time around, rallying to 20 at the start of this year before pulling back to around 17, where the 50-day line came to the rescue. If you’re aggressive, you could buy a small stake on dips, or just see what earnings bring on Wednesday.

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Stock 7

SeaWorld Entertainment (SEAS)

Why the Strength

Leisure spending is expected to surge this spring as consumers with cabin fever plan getaways for the upcoming warmer months. SeaWorld is a leading entertainment company headquartered in Orlando, Florida, with 12 recreational destinations in the U.S., including seven theme parks (Busch Gardens, Sesame Place and Aquatica) along with four water parks. As with most tourist-oriented businesses, SeaWorld experienced some strong headwinds from the 2020 pandemic but business has dramatically rebounded since then. What’s more, Wall Street sees SeaWorld’s growth prospects getting an additional boost as omicron’s impact gradually fades. Prior to omicron’s surge late last year, the company posted a record-breaking financial performance in the first nine months of 2021. And while per-share earnings of $1.28 were below consensus, revenue in Q3 exploded 391% higher from the year-ago. Season pass sales for 2022 were said to be “encouraging” as of November, while SeaWorld’s pass base was 12% higher from the prior peak pass base in 2019 in a sign that customers are feeling increasingly confident about traveling again. The company’s improved financial performance has allowed it to refinance and reduce its overall debt, and the firm resumed share repurchase activities in Q3, buying back nearly two million shares between August and early November. Additionally, construction of its first international theme park, SeaWorld Abu Dhabi, will be completed later this year, while Sesame Place San Diego will open in March. When the company reports Q4 earnings on February 24, analysts expect revenue to increase 122% with mid double-digit growth in Q1.

Technical Analysis

SEAS went essentially nowhere from last March through August, but finally found its legs and broke out to new highs in late September. The stock continued climbing before running into resistance at 70 and pulling back and then chopping around in a lateral range for the next ten weeks. SEAS bottomed at the 40-week line at 56 in January and shot back up to slightly above the prior record peak. Shares have pulled back a bit since then, but we’re encouraged by the persistence of the relative strength. Minor weakness should be buyable.

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Stock 8

Star Bulk Carriers (SBLK)

Why the Strength

Star Bulk (covered in the January 10 report) is the largest U.S.-listed dry bulk carrier, operating 128 vessels of various sizes that carry grain, iron ore, alumina, minerals and more all around the world. With uncertainties abounding the ocean shipping space (mainly geopolitical tensions and port congestions), Wall Street didn’t have high expectations for Star Bulk’s fourth quarter performance. But last week’s Q4 report blew those expectations sky high, as the company posted “record-high profitability” as shown by per-share earnings of $2.96 that beat estimates by a mouth-watering 44 cents and were 10 times higher than a year ago! Revenue, meanwhile, skyrocketed 169% from a year ago, to $500 million accompanied by strong profit margins. For full-year 2021, sales of $1.4 billion increased 106%, while earnings rose nearly 70 times to $6.71 per share. New orders placed in 2021 increased 67% from the pandemic-impacted 2020. And while there has been a big rebound in ordering activity, the company’s new shipbuilding order book remains at a historical low level of 7% of the fleet, pushing charter rates higher and boosting profits. Surging global steel prices are another reason behind Star Bulk’s strength, as rising prices have pushed scrap prices to record levels and, in turn, increased shipping demand. Consequently, the firm said it has already chartered 80% of its fleet available days for Q1, while management sees “promising supply and demand balance for the coming years and is “optimistic” about the prospects for the dry bulk market. Looking ahead, analysts expect higher sales and earnings of 69% and 280%, respectively, in Q1. It’s a cyclical industry, but the growth potential is high.

Technical Analysis

After a tremendously strong 2020 performance, SBLK spent a lot of time drifting sideways last year. Shares spent a good chunk of 2021 bouncing between 17 and 25, making no real progress until this month when the stock finally broke out of its nine-month trading range days before earnings were released. The bullish report juiced SBLK even more on volume that was nearly five times above average. While we’re not opposed to starting small here, using dips to nibble is ideal.

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Stock 9

Teck Resources (TECK)

Why the Strength

Energy demand is exploding worldwide, which explains why copper usage is dramatically growing (it’s the most widely used metal for energy generation, transmission and storage). So high, in fact, is demand that global copper stocks are down to historically low levels, threatening supply for a variety of industries. A major Wall Street bank, meanwhile, has declared that copper is the new oil, due to its conductive benefits are needed in virtually every major aspect of the ongoing transition to alternative energy in many countries. These developments are why copper producers like Teck (covered in the January 18 report) are showing strength in an otherwise weak broad market. Key to the Teck story is the company’s total operating cash flow, which improved by a stellar 280% in the third quarter and should allow Teck to fund its production activities at its Quebrada Blanca Phase 2 project (QBD) in Chile, as well as facilitating future growth. The company plans to start up the QBD project—one of the world’s largest undeveloped copper resources—during the second half of this year. Management has high hopes for the low-cost project, which is forecast to double its consolidated copper production by 2023. Revenue in Q3 soared 73% from a year ago, thanks in part to a sizable increase in realized copper prices, while per-share earnings of $1.52 beat the consensus by 28%. When Teck reports fourth quarter earnings on February 23, analysts predict even more eye-popping sales growth of 80% (up 13% sequentially) and EPS growth of 413%. Moreover, high double-digit top line and triple-digit bottom line growth are forecast for this year’s Q1 and Q2. There’s a lot to like in this story.

Technical Analysis

After forming a seven-month, base-on-base formation, TECK initiated lift-off last September. The breakout didn’t last long, but a calmer, tighter consolidation occurred during the fourth quarter. Buyers returned with a vengeance at the start of this year, with shares hitting new price and RP peaks on good volume in January and hitting another record high this month. You could take a swing here or (preferably) use dips of a point or two to enter.

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Stock 10

Titan International (TWI)

Why the Strength

With food crop and metal prices on the upswing and housing demand booming, companies that provide equipment for industries like farming, forestry, construction and mining are making bank. Titan is one of the largest manufacturers of industrial tires in North America, offering a full line of wheels, tires and undercarriage products for off-road equipment catering to each of these industries. The company also owns the farm tire business of Goodyear and is exclusively licensed to make Goodyear ag equipment tires, which is currently the main driver of Titan’s growth story, as ag led the firm’s third-quarter performance. Revenue of $450 million increased 48% from a year ago, with ag segment revenue soaring 60% from a year ago, followed by a 36% jump in earth moving and construction equipment sales. Gross margins improved to 15% (versus 10% a year ago). Adjusted EBITDA for Q3 was $35 million, the strongest third-quarter performance in eight years, with per-share earnings of 17 cents in-line with estimates and up substantially from a year ago. Helping the top line is Titan’s focus on expanding partnerships with other equipment dealers; the firm recently struck a deal with tractor and construction equipment maker Kubota to exclusively provide select tires for tractors used in residential, commercial and agricultural applications. Management said it expects customer demand for its industrial products to remain steady and at a “high level” in the coming quarters and guided for full-year 2021 adjusted EBITDA of over $130 million (up 225% from pre-pandemic 2019!). Analysts expect a 35% increase in Q4 revenue, followed by several quarters of low double-digit growth. Earnings are due out March 3.

Technical Analysis

After hitting a multi-decade low of 1 in May 2020, TWI doubled in June but quickly pulled back and spent some time basing before taking flight in August. The rally peaked just under 12 last May and the stock entered a seven-month decline before bottoming near 7 in December, mirroring a similar trend in crop prices. But TWI turned the corner that same month as shares blasted straight back up to the old high in January before dipping to the 50-day line, then rising to a higher peak. We’re fine taking a stab here or on minor weakness.

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Previously Recommended Stocks

Below you’ll find Cabot Top Ten Trader recommended stocks. Those rated HOLD are stocks that traded within our suggested buy range within two weeks of appearing in the Top Ten and still look good; hold if you own them. Stocks rated WAIT have yet to dip into our suggested buy range … but can be bought if they do so within the next week.

Those stocks rated SELL should be sold if you own them; they will no longer be listed here. Finally, Stocks in the DROPPED category are those that failed to trade within our buy range within two weeks of our recommendation; that’s not a bad thing, we just never got the price we wanted. Please use this list to keep up with our latest thinking, and don’t hesitate to call or email us with any questions you may have. New recommendations each week are in bold.

The next Cabot Top Ten Trader issue will be published on February 28, 2022.