May 3, 2021

Still Not (Yet) Letting Things Run

Current Market Outlook

To us, the major (and most disappointing) theme of the past few weeks has been the selling in stocks as they approach their old highs—selling on strength has been seen in growth stocks for a couple of months but it’s even seeping into many cyclical-type names, too. In other words, while selling pressures are controlled (the intermediate-term trend remains up), buyers aren’t exactly stepping up in a major way. Of course, the real question is whether earnings seasons causes the bulls to flex their muscles; so far, that hasn’t happened, but there are a ton of reports coming this week and next, so we’ll see how it goes. Not to sound like a broken record, but we continue to think keeping some cash on the sideline and aiming to enter mostly on pullbacks remains the best play. We’re again leaving our Market Monitor at a level 6.

This week’s list has a hodgepodge of names, many of which have reacted well to earnings, so if you’re going to buy strength, these are some top candidates. Our Top Pick is Crocs (CROX), one of the few growth-oriented names that has shown great power of late.

Academy Sports and Outdoors (ASO)

academy.com

Why the Strength

Last year’s shutdowns accelerated the home fitness paradigm, and even as the economy reopens, millions of Americans plan to stay fit by avoiding crowded gyms and doing more sports-related activity. This trend has been a tremendous boon for Academy Sports, which operates a chain of retail outlets in the southeastern U.S., specializing in sporting goods, shoes and apparel. With 259 stores throughout the region, it has exposure to some of the fastest-growing cities in the nation, including Dallas, Austin and Charlotte. Like many retailers, Academy has prioritized digital sales channels, and the investment has paid off: In the first half of 2020, digital sales grew an astounding 284%, in part a result of the shutdown, but also due to the long-term shift in consumer spending trends. In-store sales also remain healthy as the firm’s “buy online, pick up in store” (BOPIS) policy has contributed to increased foot traffic, as evidenced by six consecutive quarters of positive same-store sales and profit growth. In Q4 (reported March 30), the company delivered a consensus-beating $1.6 billion in revenue (up 17%), while same-store sales were 16% higher, driven by strong demand across all merchandise divisions (especially sports and recreation). E-commerce sales jumped 61%, led by an increase in online visits and the continued adoption of its BOPIS policy. Most important, per-share earnings of $1.09 breezed past estimates of 59 cents. Looking ahead, management sees opportunity from its store credit card customers (who tend to shop more frequently), as well as in transaction-level data mining and analysis (to better tailor advertising). Analysts see earnings slipping this year but remaining elevated compared to the pre-pandemic trends ($2.89 per share this year, compared to $1.12 in 2019) and even those figures are probably way too low.

Technical Analysis

Most IPOs take some seasoning to get going, but ASO has been a big exception. The stock came public last October at 12 and immediately commenced a multi-month ascent without experiencing any sustained selling. A narrow sideways consolidation in February and March ended when the stock bounced off the 50-day line to a high of 34, and shares have tightened up since then despite the tricky market environment. If you’re game, you can grab some here as the stock finds support near its 25-day line.

ASO Weekly Chart

ASO Daily Chart

Bloomin’ Brands (BLMN)

bloominbrands.com

Why the Strength

Bloomin’ Brands is one of many “turnaround” retail stories that’s thriving as investors look ahead to a post-pandemic earnings boom. The company is a good-sized player in the casual dining market, with 1,450 restaurants across four main brands (Outback Steakhouse, Carrabba’s Italian Grill, Bonefish Grill and Fleming’s Steakhouse) in the U.S. and 20 other countries. Bloomin’ has been nicely profitable for a while, but the growth story has been so-so (earnings up just 21% total from 2015 through 2019). Now, though, the economic rebound is set to boost results as the economy reopens, while management is focused retaining the off-premise business surge that it saw during the pandemic (partially driven by upgrades to its online ordering system). In Q1, same-store sales in the U.S. rose 3.3%, driven by a whopping 147% gain in U.S. digital revenue; Covid-related shutdowns in Brazil dragged down the company’s overall results, but even there the restrictions are starting to be eased so the future looks better. Indeed, the main reason for the recent strength was the top brass’ update regarding the current quarter—in the four weeks ending April 25, U.S. same-store sales were up 12.6% from two years ago (up 156% compared to the depths last year); combined with a huge Q1 earnings beat (63 cents per share was nearly twice expectations), estimates are skyrocketing ($1.99 per share for this year, up from an estimate of $1.20 before the report). Longer term, Bloomin’ isn’t going to be a huge growth story, but cost cuts and its improved digital business should make for a great next few quarters.

Technical Analysis

BLMN changed character along with most names last November when the vaccine news came out—shares lifted to multi-month highs above 18 and glided higher into late March, with some big-volume buying showing up. Then came a rest, but there really wasn’t much selling, with the stock meandering on light volume as the 10-week line caught up. Last week’s quarterly report kicked the stock to new highs, and you can buy some here or on dips of a point or so.

BLMN Weekly Chart

BLMN Daily Chart

Capital One Financial (COF)

capitalone.com

Why the Strength

What’s in your wallet? Chances are at least one (and perhaps more) credit cards issued by this leading consumer finance powerhouse. However, while Capital One does earn about 50% of revenue and net income form its credit card business, it’s very well diversified, offering a broad range of financial services to consumers, small business and commercial clients and is one of the top-10 banks in the U.S. based on deposits. Interestingly, Capital One enjoys a lower cost structure than many of its big bank peers thanks to a relatively a limited branch network, which keeps labor costs lower than most of its peers. Instead, Capital One has relied more heavily on investments in technology and marketing for its online banking business, gathering deposits and growing assets on the cheap and making it more efficient and less vulnerable to cyclical swings. Even so, for the here and now, Capital One is benefitting from strong tailwinds in its credit card segment, helped along with a charge-off (bad debt) rate less than half of expectations. That’s pushing earnings up a ton, with Q1 earnings totaling north of $7 per share, nearly $3 more than estimates! This won’t be a huge growth story longer term, but Wall Street now sees earnings of $18 per share this year and, even after some retrenchment in 2022, the bottom line should still be noticeably higher than pre-pandemic 2019.

Technical Analysis

COF’s chart during the past few months looks like a lot of financial stocks, with a steady advance along the 10-week line. But what really catches our eye is the (very) long-term chart—COF just lifted out of a multi-year base (arguably 15 years!) in February, and the follow through since then bodes well. Back to the here and now, the good-volume thrust to new highs of late is encouraging, though we favor buying dips.

COF Weekly Chart

COF Daily Chart

Chart Industries (GTLS)

chartindustries.com

Why the Strength

Chart Industries is in the unique position of having exposure to several growth trends, including fuel, biomedical and cannabis. Chart’s primary market involves the manufacture of cryogenic equipment used to convert natural gas into a more portable liquefied natural gas (LNG) form, presenting a big opportunity in the lucrative natural gas important/export market. Chart is also involved with the biopharma industry, providing some of the storage equipment needed to keep coronavirus vaccines super-cooled. And in the weed sector, it makes equipment that’s used to extract CBD oil from cannabis. In the first quarter, revenue of $288 million was 4% lower from a year ago, but in line with the company’s expectations. Per-share earnings of 80 cents were 30% higher (and 5% above consensus) due to the easy comparison. More important were the forward-looking measures: Chart boasted record orders of $417 million in the quarter, driven by demand for clean energy products, as well as increased liquefaction orders for LNG and hydrogen. This resulted in a record backlog of $934 million (up 29%), while gross margin hit a four-year high. Going forward, management sees opportunity in the clean energy revolution, which it believes is in the early innings (the company recently acquired a 5% interest in sustainable chemical technology company Transform Materials, which converts natural gas into acetylene and hydrogen via a net carbon-negative process). Chart further expects a strong second half of 2021 and predicts this year’s top line will be around $1.38 billion—up 17% and in line with the consensus—while earnings are expected to surge 41% from last year. It’s a good story.

Technical Analysis

GTLS built a two-month base early last fall, with an October breakout bringing the stock to yearly highs. The run from there was terrific, not hitting resistance until sellers stepped in during February. After that came a lot of chop and a couple of shakeouts below the 50-day line, but the action since earnings has been solid, with GTLS snapping right back to its old high. The pullback of the past couple of days looks normal to us, so if you’re game, you can start a position here.

GTLS Weekly Chart

GTLS Daily Chart

Crocs (CROX)

crocs.com

Why the Strength

Crocs began years ago as a fashion fad before becoming a mainstream success in casual footwear and apparel. Last year, its clogs and other relaxed shoes became a pandemic stay-at-home favorite, and now Crocs looks primed for more growth as the economy booms and spending picks up. The stock is strong today because Q1 results proved that business is booming. In the first quarter, Crocs saw sales explode 64% to $460 million, easily beating street estimates. EPS surged to $1.49, also above consensus estimates and a big improvement vs. just $0.22 during last year’s pandemic-marred first quarter. Better yet, the company achieved record sales and profits with growth in all regions and in all sales channels, which equates to a grand slam. Not surprisingly, Crocs raised its full-year guidance as consumer demand for its products accelerates globally: The top brass is now expecting 2021 operating profit margins of around 23%, up from 18.5% previously, which caused analysts to trip over themselves to hike estimates (now $5.52 per share for this year, up 71% from last year and up from an estimate of $4 before the report!). Overall, there’s nothing overly unique here, just a good company doing good business as demand picks up here and overseas. A reasonable valuation (18 times this year’s earnings) and expectations for continued growth in 2022 (earnings up 13%, likely conservative) also helps.

Technical Analysis

CROX has been advancing since the market bottom last year, though after tagging 80 in early February, shares did hit some resistance—the stock ended up chopping sideways for 10 weeks with the market, including three probes below the 50-day line to shake out the weak hands. But now CROX is up and out, bolstered by a very powerful earnings reaction (up 15%, 7.5 times average volume), which is a rarity these days. Round number resistance near 100 is possible, but we’re OK starting a position here or on dips.

CROX Weekly Chart

CROX Daily Chart

Fortinet Inc. (FTNT)

fortinet.com

Why the Strength

While many enterprise cybersecurity providers are scrambling to adjust to a work-from-home paradigm that’s fast becoming the norm, Fortinet is sitting pretty. The security juggernaut was already an established player in the field before the pandemic hit, providing end-to-end firewall and anti-virus protection for enterprise customers and data centers. But Fortinet has made a smooth transition into the home/mobile-based work environment, recently striking a $75 million strategic alliance with Linksys, a major provider of home networking hardware. The partnership will allow Fortinet to provide enterprise-grade network security and connectivity for home-based workers and is expected to keep the firm’s double-digit annual sales growth trend intact. That trend was clearly visible in Q1: Fortinet reported revenue of $710 million, up 23% from a year ago, with product revenue up 25%—the fastest growth rate for this metric in five years! Per-share earnings of 81 cents (up 35%) sailed past estimates, and billings increased 27%, driven by “solid execution” across a broad, integrated product and service mix. Security subscription services revenue increased 21% due to “outsized growth” from SaaS offerings. Cash flow also remained strong for Fortinet, and after a $1 billion debt issuance in Q1, the firm has $3 billion in cash (which management plans to use for organic growth and possibly acquisitions). Analysts see top- and bottom-line growth of around 20% and 14% (respectively) this year, though Fortinet almost always outdoes expectations by a good margin. All told, there looks to be a long runway of growth ahead.

Technical Analysis

FTNT was one of last year’s big post-crash early leaders, quickly reversing its losses and soaring to new highs just a few weeks after the March panic. But that didn’t follow through, resulting in what turned out to be a nine-month consolidation. The breakout came in February, and while there’s been some hiccups with the market, FTNT has pushed nicely higher, with last week’s earnings-induced buying a good sign, though further chop wouldn’t be surprising.

FTNT Weekly Chart

FTNT Daily Chart

Matador Resources Company (MTDR)

matadorresources.com

Why the Strength

Energy stocks remain choppy, but some are finding support as the new thesis in the sector (less spending and production growth in exchange for huge cash flow even at modest prices) plays out. Matador (which gets the vast majority of its production from the Delaware basin in Texas) looks like a smaller-cap leader in the group, and it’s regained some strength after Q1 results showed its strategy took hold. Total production was up 4% from a year ago, but costs fell off (drilling and completion costs per foot drilled are fading at double-digit rates), which, combined with somewhat higher prices and a growing midstream operation (its San Mateo Midstream subsidiary is solidly profitable), led to excellent profits—EBITDA was up 41% from the prior year, while Matador cranked out $64 million of free cash flow and paid off $100 million in debt. (There are no debt maturities until 2023 at this point.) And there should be much more where that came from, with the top brass actually expecting production to rise at an 11% clip for the full year (Q1’s output was curtailed by bad weather), while CapEx will rise just 7% and cash flow will be solidly positive, allowing it to continue slashing its debt load while it started paying a token dividend (0.4% annually). It’s worth noting, too, that Matador’s oil price received in Q1 was just $50 per barrel, so the longer prices stay up here (north of $60), the higher that figure should go. There’s nothing revolutionary here, just a well-run energy outfit with some great acreage, a reasonable growth plan and a huge cash flow profile in the quarters to come.

Technical Analysis

When we last wrote about MTDR in early February, shares had just broken out to multi-month peaks, and that rally continued into early March, when the stock stalled out near 27. What followed was a reasonable seven-week rest (including a little shakeout below the 50-day line) before the stock popped on mild volume before and after its quarterly report last week. Like everything else, MTDR did see some selling near its highs, so it may need a bit more seasoning, but we’re OK grabbing some shares here or on dips.

MTDR Weekly Chart

MTDR Daily Chart

Robert Half (RHI)

rhi.com

Why the Strength

Staffing agencies tend to do well in the early stages of an economic recovery, as many firms need to restock their employee roster with both temporary and permanent staff. Robert Half, regarded as the world’s largest accounting and finance staffing firm, connects job seekers to staff positions in finance, law, technology and other areas. It generates revenue across three segments, including temporary and consultant staffing (the bulk of its sales), permanent placement and risk consulting staffing and internal auditing services. Not surprisingly, Robert Half’s staffing activities increased during the first quarter, which management said indicated a faster early-cycle pace than it has ever before experienced. The recovery was broad-based across several geographies, industries and skill levels, with permanent placements to small- and medium-sized businesses (up 22% sequentially) leading the way as they recover from last year’s shutdown. The company also indicated that its investments in advanced artificial intelligence allowed it to quickly adapt to the new remote and hybrid work environment. Moreover, the Robert Half’s temp business rebounded 18% from last year’s pandemic low, while the permanent placement business is up 56%—both significantly above early-recovery norms. While Q1 revenue was down 7% from a year ago, its Protiviti segment revenues grew 35%, reflecting continued momentum across its wide array of service offerings. Earnings growth remained strong at 98 cents per share (up 24% and 18 cents above estimates). Looking ahead, management guided for Q2 revenue growth of around 31%, with per-share earnings of $1.05 which, if realized, would be an all-time high. A record number of U.S. small business job openings means it’s boom times for Robert Half.

Technical Analysis

RHI spent much of last year languishing despite the uptick in the economy, but it surged in November to multi-month highs. The advance was slow to develop, but RHI picked up steam in February and, after a five-week rest, has pushed ahead to new highs after earnings. We’re OK snagging shares here or on dips.

RHI Weekly Chart

RHI Daily Chart

Scientific Games (SGMS)

scientificgames.com

Why the Strength

The land-based casino industry took a big hit last year, but social gaming, online gambling and sports betting picked up the slack and should provide solid growth opportunities going ahead. Scientific Games has exposure to each of these areas and offers systems and services for gaming establishments worldwide, including computerized and mechanical slot machines, lottery gaming systems, server-based interactive gambling, social gaming and sports betting. With an uncertain future for casino gambling, the company is focused on new opportunities in digital gaming and sports betting. To that end, a group led by gambling industry investor Caledonia recently bought a large stake in Scientific. The deal is expected to help Scientific realize this focus, as an increasing number of U.S. states legalize sports wagering. (Several huge, key states, including Florida and California, are expected to legalize online sports betting this year.) Although Q4 revenue was down 11% from last year due to pandemic impacts, it was 9% higher from the previous quarter. In fact, the firm saw sequential improvements in all lines of its gaming business, and it reported early successes in executing its new global R&D and product road map strategy. Scientific is also in the process of deleveraging, which, as one Wall Street analyst notes, opens the potential for a “strategic transaction.” Looking ahead, management sees a “tremendous opportunity” for its iGaming (online casino betting) business as more U.S. states legalize that and as the firm continues its international expansion. The consensus agrees and expects significant improvement, including 15% top line and rapidly shrinking losses, which given its pipeline of U.S. sportsbook deployments, could prove conservative. Earnings are due out May 10.

Technical Analysis

SGMS peaked at around 60 in 2018 and entered a bear market which ended last March when the stock fell to a low of 4. The recovery from there was choppy, but shares blasted higher in September on massive volume after the Caledonia deal. The most recent pullback in March bottomed above the 40-week line, and SGMS’ recent action has been very impressive, with five weeks up in a row to new highs (including four on above-average volume). Given the upcoming report, we suggest aiming to enter on dips.

SGMS Weekly Chart

SGMS Daily Chart

United Parcel Service (UPS)

Why the Strength

UPS needs no introduction, as it and FedEx are the two dominant package delivery outfits, and the reasons for the strength here are about as straightforward as it gets. First, the company is one of the most direct plays on a booming economy, as more activity in general means more purchases and deliveries, while the acceleration of e-commerce during the past year is also a huge tailwind. The growing share of online purchases has been a long-term tailwind, but the reason the stock is strong is because the post-pandemic boom is causing earnings to take a step-function leap higher this year—economists see retail sales growing nearly 12% in 2021, while overall economic growth should top 6%. And UPS is as busy as can be, with revenue growth accelerating during the past four quarters (see table below) and earnings going through the roof. In Q1, U.S. parcel (up 13%) and revenue (up 22%) growth topped expectations, and growth was even faster overseas (parcel volume up 23%, operating profit doubled)—all told, earnings crushed estimates ($2.77 per share topped by more than a dollar) while free cash flow came in at north of $4.25 per share! UPS is playing it safe for now (paying down debt, not engaging in share buybacks), but it does pay a decent dividend (2.0% annual yield) and the sale of its freight business (less-than-truckload shipping) for $800 million should close in the current quarter, further boosting its cash hoard. Really, though, when it comes to the stock, it’s all about the economy, and with leading indicators still near multi-decade highs, analysts have been tripping over themselves to up their outlook—Wall Street now sees UPS’ bottom line totaling more than $11 per share this year, up 34% from 2020 and up from an estimate of $8.91 before the Q1 report. It’s not a hot young growth stock, but UPS looks like one of the better cyclical plays out there.

Technical Analysis

UPS busted loose from a two-plus-year base last June as investors anticipated business to ramp, but the advance proved short lived, with the stock effectively going sideways from last September through mid April. But now the buyers are back at it again, with another excellent breakout last week following earnings; we like the five days in a row of huge-volume buying, a sign big investors are piling in. While a pullback will likely come, we’re not expecting a big retreat—you can pick up shares on modest dips.

UPS Weekly Chart

UPS Daily Chart

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 green.

The next Cabot Top Ten Trader issue will be published on May 10, 2021.