March 21, 2022

After a multi-week bottoming process, the buyers showed up last week in a big way, producing a rare show of strength that, historically, has always preceded great gains when looking out six to 12 months. That said, the next few weeks are more of a toss-up, as the intermediate-term trends of most indexes and stocks are still iffy and news-driven action (like today’s commodity move) is still the norm. We’re bumping up our Market Monitor a notch and think it’s OK to extend your line a bit, but we still think it’s best to start small, aim for pullbacks and to go slow.

Market Overview

Bottom Likely In

After a multi-week bottoming process, it was apparent that the selling was easing, but what the market really needed was buyers to show up. And last week, they did in spades, not just driving the major indexes and most stocks nicely higher but also producing a rare, persistent show of strength—the S&P 500 rose at least 1% four consecutive days, which has only happened four other times in the past 50-plus years and has resulted in great gains when looking a few months into the future. That said, the near-term is more of a coin flip when seeing such strength (sometimes it’s a blastoff, sometimes we get another retest of the lows), and with our intermediate-term models still on the fence, we don’t advise any cannonballs back into the pool. All in all, we think the odds favor that the lows of this correction are in, so we’re bumping up our Market Monitor and think its OK to extend your line a bit—but until proven otherwise, there’s still work to do on the upside (for the indexes and individual stocks), so we favor starting with small positions and going slow, allowing the market to prove itself.

This week’s list is again heavy on commodity-type names, which were strong again today, but we’re starting to see a few more growth-y and turnaround names pop up, too. Our Top Pick is Pure Storage (PSTG), whose move to more subscription-based offerings is smoothing out results and attracting more big investors. Aim for pullbacks.

Stock Picks & Previously Recommended Stocks

Stock 1

Alpha Metallurgical (AMR)

Why the Strength

Tight global inventories, coupled with disruptions related to the war in Eastern Europe, have pushed coal prices to record levels. Alpha Metallurgical is one of the nation’s largest producers of metallurgical (or “met”) coal used for steel production, with underground and surface mining operations across Virginia and West Virginia. The company’s fourth quarter report benefitted from booming coal prices, as revenue of $828 million rose an eye-popping 156% from a year ago, driven by a nearly 60% increase in the realized price of met coal from the prior quarter. Per-share earnings of $13.37, meanwhile, beat estimates by $1.93. The stellar results prompted a major Wall Street institution to increase its rating on Alpha based on the belief the firm is “set up for a significantly improved 2022” with ample exposure to record high met coal prices. Management shares this sanguine outlook, commenting that 2022 tonnage in its met coal segment is 39% committed at healthy prices. The company also said domestic realizations are expected to improve “significantly” this year as a result of price negotiations completed by its sales team in late 2021. Alpha is using its outsized cash flows to deleverage; the company has reduced total debt by nearly 50% in the past year and plans to eliminate its entire term loan this year. Additionally, management plans to streamline operations by divesting noncore properties, while returning capital to shareholders (including the recent approval of a $150 million share buyback program with purchases to begin this month). Analysts see almost hard-to-believe earnings this year (north of $60 per share!), and even after some normalization, believe 2023 will be better than last year.

Technical Analysis

AMR spent the first five months of 2021 etching out a tight base around 15, which served as a launching pad for a quadrupling of the share price by year-end. After a brief hiccup in January, shares mushroomed to 135 in March on the back of rising coal prices. The recent post-earnings pullback was halted just above the 25-day line and the rebound has been solid. Yes, it could pull in if prices come down, but the odds favor this pullback, while possibly lasting a bit longer, leading to another leg up. We’re OK with a small buy on weakness.

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Stock 2

Dutch Bros (BROS)

Why the Strength

Every market upturn usually has a handful of cookie-cutter firms that liftoff, and we think Dutch Bros. could be one of those, as it has a simple, high-potential story that should attract a ton of big investors over time. The firm ended last year with 538 beverage shops (about half are company-operated, but those bring in most of the revenue; most new openings are company-operated) that offer everything from coffee to cold brews to iced teas to energy drinks to chai’s to lemonades to milkshakes. Business is good (Q4 same-store sales were up 10% compared to the year before) and profitable (earnings have been in the black for at least the past five years), but this story is all about what’s to come: The firm is targeting 20%-ish annual growth in the store count for a while, including in 2022, with an ultimate goal of 4,000 locations in the U.S. To be fair, that expansion pace is leading to higher-than-expected pre-opening expenses, and a shift to more ground leases (higher upfront opening costs, but lower lease costs down the road) and some higher CapEx (new roasting facility) are expected to cap earnings a bit this year (analysts see the bottom line up just 7% in 2021). But the store economics remain very strong (30% cash margin in year two!), and new openings are performing very well sales-wise (last year’s crop brought in north of $2.1 million, above the prior-year figure), so management is comfortable ramping new openings at breakneck speed. Indeed, this year, it expects to open 125 new locations, and talent-wise, Dutch Bros. thinks it has nearly 200 fully qualified regional operator candidates that grew up in the Dutch Bros. system (6.5 years of average experience) and can support an extra 750 to 1,000 new locations, with more people coming up the ranks behind them. Of course, the valuation is up there ($10 billion), so expectations aren’t modest, but there’s little reason to believe Dutch Bros. won’t grow many-fold from here.

Technical Analysis

Like many growth stocks, we can’t say BROS is going to kite higher from here, but the overall chart is constructive and should lead to higher prices if the market rally continues. The most encouraging thing here is the repeated support in the low- to mid-40s since early December, with every dip to (or slightly below) that area quickly finding buyers. And now, as the pressure came off the market last week, BROS spiked back near multi-month highs. Volatility here is extreme, but we’re OK buying a small position here or (preferably) on dips.

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Stock 3

Hilton (HLT)

Why the Strength

Hilton is one of the world’s largest hotel brands, with more than one million rooms and 6,100 properties worldwide. The company owns some of its hotels, but it’s primarily a franchiser, with 82% of hotels owned by someone else, paying Hilton general license fees and royalties on a scale based on how well revenue per room improves under Hilton’s marketing. That means improvements in metrics like customer loyalty and innovation in guest experience will result in Hilton collecting more money, since 90% of adjusted EBITDA derives from fees. Hilton Honors program members now account for 60% of room usage worldwide, and the company tweaks the program to engage customers, like converting loyalty points to Amazon purchases, allowing split payments between points and cash and letting guests share their digital keys with others through an app. That helped RevPAR – revenue per available room – bounce back strongly in 2021, rising 60% from the pandemic-stricken environment. It, along with adjusted EBITDA, are still a third beneath 2019 levels, however, which means Hilton continues to be a recovery play. Investors also watch room construction as a harbinger of future franchise fees, and Hilton’s traditional new construction rate of 6% to 7% annual room growth in the U.S. isn’t expected to return to pre-pandemic levels for a couple of more years (it’s about 5% now). But compared to competitors, the company seems better positioned since it has the largest share of rooms under construction globally – more than 400,000, and new rooms command better rooms rates and fees. This year, top line sales should touch $8.2 billion, up 29% on the year, while earnings per share should leap north of $4 per share, which would be a new all-time high.

Technical Analysis

HLT shares have been volatile within a range of 135 to 155, and area they stepped up to in September after firming a 115-135 range earlier in 2021. Two weeks ago, bears tried to crack shares with a push to 128 but HLT quickly recovered, taking back the 200-day and then the 50-day lines in just over a week. Yes, there’s still some overhead to chew through, but we think the various dips and shakeouts in recent weeks should pave the way for higher prices—we’re OK starting a position here with a stop in the mid 130s.

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Stock 4

Lantheus (LNTH)

Why the Strength

Few have heard of Lantheus, but it’s actually a big player in its niche—the firm has a dominant market share in many medical imaging agents, which improve the contrast in scans like ultrasounds. The firm’s largest product has historically been Definity, which when injected into a patient, enhances a clinician’s view of the left ventricle of the heart during an echocardiogram. It’s been a slow, steady growth offering, making up nearly half of sales in Q4 and growing 6% from the prior year (though full-year growth was up 19% as more people came back to doctors as the virus eased), and there’s still solid potential here, with five to 10 million “suboptimal” echocardiograms in the U.S. each year (Definity has an 80% share in agents used for these scans). However, the stock is strong today because of a new product: Dubbed Pylarify, it’s administered via intravenous injection in conjunction with certain scans for those with suspected recurrence of prostate cancer, or those with possible metastatis of that type of cancer—in total, there are 220,000 scans in these categories, representing a whopping $900 million market opportunity, which is more than double Lantheus’ trailing 12-month revenue! There is a little competition, but Pylarify is off to a fast start, with $35 million of revenue in Q4 alone, and analysts see a step function increase in the firm’s overall results in 2022 as the imaging agent captures market share—revenues are expected to leap 66% this year while earnings surge north of $2 per share (both probably conservative), with more (but tamer) growth likely in the years after that and potential upside if Pylarify achieves any further label expansions. It’s not changing the world, but Lantheus should have a booming few quarters ahead.

Technical Analysis

LNTH was a thin trader and mostly a nothing-burger for the past few years net-net, with a big drop into the pandemic, a nice rally after, and then many months of choppy sideways action in the second half of last year and into 2022. But that all changed four weeks ago—LNTH staged a monstrous gap after earnings and kept right on going, and it refused to give up any ground when the market was sliding. We think dips of a point or two would be buyable.

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Stock 5

MP Materials (MP)

Why the Strength

Along with other key commodities, rare earths are in short supply and are sorely needed for critical military and commercial applications. Helping the U.S. to shore up its supply of these key metals is MP Materials, which operates one of the largest rare earth mines in the Western Hemisphere. The company accounts for around 15% of total global supply, with a focus on Neodymium-Praseodymium (NdPr)—a crucial input for making rare-earth magnets that are used in devices like EVs, wind turbines, military weapons and drones. The latest earnings report is a reason for the stock’s strength, as MP had a banner year in 2021, selling over 42,000 metric tons of rare-earth oxides that helped it generate record revenue of $332 million (up 147%). Q4 sales of $99 million, meanwhile, were up an equally impressive 135% from a year ago, while per-share earnings of 31 cents beat estimates by eight cents. Production of rare earth oxides in Q4 rose 10%, and the firm’s average realized price for rare-earth oxides soared 148%. And this isn’t just a story about benefitting from higher prices: Just prior to the Q4 release, the company received a $35 million award from the U.S. Department of Defense to assist in MP’s development of a commercial-scale processing facility for heavy rare earths at its Mountain Pass mine, and MP also signed a long-term agreement with General Motors to supply alloy and magnets for powering GM’s electric vehicles. The strong earnings results, coupled with the recent deals, prompted a major Wall Street bank to name MP as one of its top picks that could benefit from rare earths scarcity. Looking ahead, analysts see revenue rising mid-40s percent this year and next with earnings lifting nicely as well. It’s a solid story.

Technical Analysis

After hitting a peak at 52 last March, MP had its first major post-IPO correction, with shares falling to 23 by May. The rally from there was a bit disjointed, but shares did react well to earnings late in the year and the stock nosed to new highs in January—before the stock was nailed by the market’s weakness. However, while shares remain very choppy on a day-to-day basis, MP has come back nicely since then, with higher lows in March and a push into the upper 40s in recent days. If you want in, start small and aim for dips.

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Stock 6

Nutrien (NTR)

Why the Strength

A decision to suspend fertilizer exports by Russia, one of the world’s leading producers of nitrogen and potash, has fueled fears of a global shortage of these important crop inputs. Add to that soaring fertilizer costs due to rising natural gas prices, tight global inventories (“as low as we’ve ever seen” according to one major producer) plus transportation bottlenecks, and suddenly the once-stodgy fertilizer industry has become red hot. Enter Nutrien, the world’s top producer of potash and third-largest nitrogen fertilizer maker. The war between Russia and Ukraine has prompted Nutrien to boost its planned potash production to approximately 15 million tons in 2022, an increase of nearly one million tons compared to previous expectations. This amounts to a 20% increase from 2020 levels and will mean that Nutrien’s higher output will account for an astonishing 70 percent of global production added in 2022. Given the industry backdrop, Nutrien unsurprisingly topped earnings and revenue estimates in Q4, with sales jumping 79% from a year ago to $7.3 billion and per-share earnings of $2.47 beating the consensus by 5%. The bullish earnings were driven by higher net realized selling prices across the company’s fertilizer businesses, higher potash sales volumes, an 84% surge in overall crop nutrient sales and strong retail product sales growth (up 48%). The results were followed by a ratings upgrade for Nutrien by a major Wall Street institution (from “neutral” to “overweight”), along with a higher price target—another reason for the strength. Going forward, Wall Street sees earnings doing a moonshot this year, but even assuming some normalcy in 2023, the bottom line should remain north of $8 per share.

Technical Analysis

For most of 2021, NTR’s uptrend was conservative with prices rising in a measured, stair-step fashion; indeed, the stock etched a multi-month base-on-base formation, with the June-September rest leading to another one from mid-October through mid-February. But then NTR completely changed character, with a massive-volume moonshot to 102, a quick shakeout and, today, a move back to new highs. Near-term, we think further wobbles are likely, so we suggest aiming to enter on pullbacks.

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Stock 7

Oasis Petroleum (OAS)

Why the Strength

Oasis Petroleum has one of the best small-cap stories in the oil patch, bolstered by an upcoming merger of equals that should boost shareholder returns even more from already-elevated levels. The firm specializes in the Williston Basin, and now Oasis is taking the next step that should produce a powerhouse in the region: The firm is embarking on a merger of equals with Whiting Petroleum, resulting in a 974,000 acre position in the Williston Basin, a nearly net-debt-free position (just 0.2 times annual cash flow), plenty of potential synergies ($65 million annually, or $1.50 per share), and it will have 10 years of drilling inventory and should be accretive to all key metrics. Impressively, Oasis will pay a whopping $15 special dividend upon closing (expected early in the second half of the year), but it’s what comes after that’s so impressive—in the second half of the year alone, the combined entity believes it will crank out cash flow of $600 million ($14 per share) assuming oil of $85 and natural gas of $3.50 (both well below current prices). And best of all, 60% of that should be returned via the base dividend (current yield around 1.5%), special payouts and share buybacks. Translation: At $85 oil and $3.50 gas, Oasis expects shareholder returns to be north of 11% of the current share price at an annual rate (and more when you take into account the upcoming special dividend). In the meantime, Oasis is continuing with its pre-merger plan to return around $3.50 per share, per quarter, again either via dividends or share buybacks. Obviously, if oil prices really tank, that could change the calculus here, but barring that it seems like the new entity will be spinning off tons of cash flow for years to come. As far as small-cap energy plays go, we like it.

Technical Analysis

OAS stormed out of Chapter 11 in late 2020 and had an amazing run to 108 last July before finally pulling back some for a few weeks—but that then launched another run to 133 in November, and the stock has been grinding higher since then, with higher highs and higher lows in recent months. The latest shake came thanks to the recent energy stock dip, but OAS found support near its 50-day line and bounced well. We’re OK starting small here or on dips of a few points, with a stop in the low 140s.

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Stock 8

Pure Storage (PSTG) ★ Top Pick

Why the Strength

Pure Storage has long been a leader in the storage industry, providing flash-based data storage hardware and software products for data centers, as well as offering storage-as-a-service solutions that combine on-premise data storage with public cloud services. But the company’s transition from a traditional hardware-based business to a subscription and services model is accelerating growth from recurring revenue and leading to higher margins as well. Additionally, more than half the company’s revenue is now from enterprise clients, with its top 10 customers spending over $100 million annually. In its fiscal Q4 (ending January 31), Pure posted consensus-beating revenue of $709 million that was 41% higher from a year ago, while full-year revenue of $2.2 billion rose 29% and Q4 earnings per share of 36 cents beat by 10 cents in Q4. The company more than doubled its cash flow from operations, to over $400 million, and ended the quarter with $1.4 billion in cash. Other metrics were equally impressive, with subscriptions and services revenue leaping 42% and remaining performance obligations (which includes committed and non-cancelable future revenue) rising 29%--with both showing accelerating growth from the prior quarter. Subscription annual recurring revenue (ARR) grew 31% to nearly $850 million, and Pure added 470 new customers, bringing the total to more than 10,000. Management guided for fiscal Q1 revenue to be around $520 million and expects full-year revenue to increase 18%, and for the year, Wall Street sees the top line rising 20%. It’s not changing the world, but Pure Storage’s shift to a recurring, subscription-type model should pay dividends for a long time to come.

Technical Analysis

PSTG has been an on-and-off performer during the past year, with a good run into February 2021, a deep correction into the fall, a nice rally to new highs near year-end but then another sharp dip with the market—net-net, shares did bupkis for about a year. But PSTG reacted well to earnings three weeks ago and has pushed higher since, testing its old highs near 35 on great volume. We won’t argue starting a position here, though we’d prefer to get in on dips of a point or two.

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Stock 9

Regeneron Pharma (REGN)

Why the Strength

Regeneron has turned strong as investors expect good news for three of the pharmaceutical company’s products. Eylea, a 10-year-old treatment for macular degeneration, is in promising clinical trials demonstrating it’s more effective at higher doses, which would keep its double-digit annual growth path intact (Eylea sales grew 17% in 2021 to $5.8 billion). Another treatment, Dupixent, is under FDA priority review to expand its label to treating uncontrolled moderate-to-severe atopic dermatitis in children six months old to five years. That would also reinforce its blockbuster status, given it sold $6.2 billion globally in 2021. A third drug, Libtayo, is less popular than those two, but management sees a pathway for it to grow by treating a number of cancers, including ovarian and prostate. Originally addressing a type of skin cancer, Libtayo was approved a year ago for advanced basal cell carcinoma and non-small cell lung cancer. The strong pipeline should take Wall Street’s eyes off slowdowns for Regeneron’s flagship REGN-COV, a post-COVID infection cocktail that provided Regeneron with $5.8 billion sales last year. REGN-COV isn’t as effective against the omicron variant and, while an updated version is coming, sales hopes are low given how well vaccines perform. That means you should set aside the eye-popping $16 billion revenue Regeneron booked in 2021, but remaining comps are still good. Top line sales should rise 29% this year compared to $11.9 billion in 2020, while earnings per share should top $47, up 35% from two years ago. Even though the REGN price tag looks high at a recent 689, that’s less than 15 times forward earnings, compared to the three-year average of 20 times for the pharma industry.

Technical Analysis

REGN tested its old highs last September before pulling back, and a rally around year-end again ran into some trouble, this time because of the market. But even as the market continued to struggle in recent weeks, this stock tightened nicely just above its 40-week line, and now it’s taken off—REGN has pushed higher nine days in a row on solid volume. Sure, it could pull in some, but given the long dead period, we’d guess retreats will be contained.

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Stock 10

Steel Dynamics (STLD)

Why the Strength

War in eastern Europe continues to disrupt steel exports, while skyrocketing energy costs have forced steelmakers to raise prices across the board. On top of that, top producer China has seen a 10% decrease in tons produced so far this year (continuing a trend seen in 2021, partly due to environmental concerns), while its consumption of the metal is expected to increase on the back of recent fiscal stimulus. All these factors paint a rosy picture for Steel Dynamics (covered in the March 7 report)—one of America’s largest producers of carbon steel used in buildings, bridges, rails and pipelines. Another big reason behind the latest strength (and what’s changed since that early-March writeup) is the bullish guidance the company provided last week, which caught Wall Street by surprise. Management now expects Q1 earnings to come in at around $5.85 per share (excluding the impact from costs associated with the startup of the firm’s Texas flat roll steel mill). If realized, this would amount to a 2% increase from last quarter’s per-share earnings at the midpoint, but it’s also an eye-opening 16% above analysts’ Q1 estimates! Steel Dynamics further anticipates profitability from its steel operations in Q1 will be “historically strong, but significantly lower” than the record Q4 results, as average expected flat roll prices are forecast to decline over 10%, more than offsetting anticipated higher shipments. However, Q1 earnings from steel fabrication are projected to nearly double record results from Q4 due to higher realized prices and strong shipments. The firm’s metals recycling earnings, meanwhile, are expected to be in-line with Q4 results, thanks to higher metal margins. Exact details aside, the bump in guidance advances the idea that earnings here will remain elevated (analysts see north of $14 per share this year!) for longer than many expected just a couple of months ago. A 1.6% dividend yield tie a bow on this package.

Technical Analysis

When we last wrote about STLD just a couple of weeks ago, the stock had just pulled back some after a monster recovery from the January lows—and that did turn out to be a great entry point, with shares motoring higher last week after the Q1 guidance bump. However, we still think STLD could be early-stage, with the long basing action late last year and the big early-2022 shakeout probably wiping out the weak hands. Keep your eyes open for another pullback during the next week or two.

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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 March 28, 2022.