So Far, So Great
The past three weeks have gone about as well as anyone could have hoped (assuming you’re a bull), with three main positive things. First and foremost, the major indexes have rallied enough to quickly flip the intermediate-term trend back up. Second, the upmove has been both broad (most stocks and sectors have rallied, with the rotation of 2021 taking a back seat for now) and coming during a spate of worrisome news (hyperinflation!). And third has been the action of leading stocks (especially growth stocks), many of which have been lighting up the sky. It’s not all peaches and cream, with earnings season set to really pick up steam, and that can always change a stock’s positioning. Thus, you shouldn’t throw caution to the wind, but you also shouldn’t ignore the shift in the evidence—we’ll keep our Market Monitor at a level 7 today but could hike it if we start seeing some bullish earnings gaps.
This week’s list has something for everyone, from small growth stocks to good-sized commodity plays that are seeing earnings boom. But we’re going with an oldie-but-goodie for our Top Pick: Netflix (NFLX), which isn’t the young buck it once was, but business is doing great and the stock is picking up steam after breaking out from a year-long base.
| Stock Name | Price | |
|---|---|---|
| Arch Coal (ARCH) | 97 | |
| Ford Motor Co. (F) | 16 | |
| KKR & Co. Inc. (KKR) | 75 | |
| Marathon Oil (MRO) | 17 | |
| monday.com Ltd. (MNDY) | 383 | |
| MongoDB (MDB) | 519 | |
| Netflix, Inc. (NFLX) | 672 | |
| SiteOne Landscape Supply (SITE) | 228 | |
| Tandem Diabetes (TNDM) | 129 | |
| United Rentals, Inc. (URI) | 366 |
Arch Coal (ARCH)
Why The Strength?
Prices for coal have soared to record highs as China’s government, worried about an energy crisis, has directed state-owned coal producers to secure winter supplies regardless of costs. Beyond supplying fuel needs, metallurgical (or coking) coal used for making steel is also in high demand thanks to a resurgence of industrial production. Arch Resources (formerly Arch Coal) provides coal that powers electric utilities, steel manufacturers and other industries and is the second-biggest supplier in the U.S., producing over 13% of the coal used domestically. Along with 32 active mines and 5.5 billion tons of coal reserves, Arch’s flagship Leer mine ranks among the lowest-cost, highest-quality U.S. metallurgical mines. Management said the company “hit on all cylinders” in Q2 while laying the foundation for an even stronger performance in the coming quarters. In the company’s legacy thermal coal segment, it achieved a 25% increase in sales volume during a traditionally light shipping quarter while significantly expanding full-year commitments. And though the overall industry is struggling to contain costs, Arch plans to ramp up production at its Leer mine while expecting lower unit costs, plus higher output of coking coal by an anticipated three million tons per year. Revenue rose 41% from a year ago in Q2, while per-share earnings of $1.66 beat estimates by 55 cents. Looking ahead, Arch sees high coal prices supported by ongoing steel demand and constrained coking coal supply growth, while anticipating higher thermal coal sales due to exceptionally high natural gas prices. Analysts see earnings exploding in the quarters ahead and reaching $26 per share (!!) next year. Earnings are out tomorrow morning (see below).
Technical Analysis
ARCH was slow out of the gate this year, finally lifting to multi-month highs in June. There was plenty of volatility after that, but overall, the stock has essentially accelerated higher since that point, including a big push up to 100 in late September. That round number has offered some resistance, with shares dipping to the 25-day line before bouncing. Earnings tomorrow morning complicates things, but barring a huge downdraft, we think ARCH will be buyable—we’ll set our buy range around here.
| Market Cap | $1.46B | EPS $ Annual (Dec) | |
| Forward P/E | 6 | FY 2019 | 13.52 |
| Current P/E | N/A | FY 2020 | -22.74 |
| Annual Revenue | $1.55B | FY 2021e | 15.31 |
| Profit Margin | 6.2% | FY 2022e | 26.31 |
| Qtrly Rev | Qtrly Rev Growth | Qtrly EPS | Qtrly EPS Growth | |
| ($M) | (vs. yr-ago-qtr) | ($) | (vs.yr-ago-qtr) | |
| Latest qtr | 450 | 41% | 1.66 | N/A |
| One qtr ago | 358 | -12% | -0.40 | N/A |
| Two qtrs ago | 361 | -34% | -5.17 | N/A |
| Three qtrs ago | 382 | -38% | -12.64 | N/A |
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Ford Motor Company (F)
Why The Strength?
The global chip shortage was bad news for vehicle sales in the third quarter, as major U.S. automakers were forced to idle factories, hurting inventories. Despite this, there were some bright spots for Ford. Although the company sold 27% fewer vehicles in Q3 compared to a year ago, retail sales increased 34% in September compared to the prior month thanks to an inventory improvement. Ford’s flagship F-Series trucks also posted their best month since the semiconductor shortage began, selling over 63,000 units in September—down 18% from a year ago but up 13% from August, and easily besting competitors like GM’s Silverado trucks. Moreover, Ford said it sold nearly 157,000 vehicles last month, more than half of which were trucks, which boosted the Q3 sales total to a respectable 400,843 vehicles. This has led to speculation among industry observers that Ford may have finally received shipments of semiconductors, allowing it to revitalize vehicle shipments. What’s more, the company’s foray into electric vehicles (EV) is proving to be a huge success, hitting a new record in September as EV sales surged 92% from a year ago off a small base, to 9,150 vehicles, led by sales of the full-electric Mustang Mach-E. Additionally, Ford noted that reservations of its upcoming F-150 Lightning EV truck had jumped 50% to 150,000 at the end of Q3. Also contributing to the strength was a recent upgrade from a Wall Street investment bank based on what the firm sees as a “significant turnaround” in Ford’s business and its transition to EVs. Analysts see earnings up big this year and more in 2022, and the next update will come on Wednesday (October 27).
Technical Analysis
F rode the wave of higher auto sales higher in the first five months of this year before hitting a wall as the chip shortage rippled through the supply chain. Shares peaked at 16 in June, then fell to 12.5 in August and double-bottomed around the 40-week line. But we’re impressed with the power of late—F is up six weeks in a row, five of which came on big, above-average weekly volume. Yes, earnings are out in a couple of days, but we’re not opposed to a small buy ahead of the report given the action.
| Market Cap | $65.0B | EPS $ Annual (Dec) | |
| Forward P/E | 10 | FY 2019 | 1.19 |
| Current P/E | 8 | FY 2020 | 0.41 |
| Annual Revenue | $137B | FY 2021e | 1.56 |
| Profit Margin | 1.9% | FY 2022e | 1.84 |
| Qtrly Rev | Qtrly Rev Growth | Qtrly EPS | Qtrly EPS Growth | |
| ($M) | (vs. yr-ago-qtr) | ($) | (vs.yr-ago-qtr) | |
| Latest qtr | 26.8 | 38% | 0.13 | N/A |
| One qtr ago | 36.2 | 6% | 0.89 | N/A |
| Two qtrs ago | 36 | -9% | 0.34 | 183% |
| Three qtrs ago | 37.5 | 1% | 0.64 | 88% |
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KKR & Co. Inc. (KKR)
Why The Strength?
Private equity deals in the U.S. are on fire, hitting a record in the third quarter both in terms of deal volume and funding levels. Add to that soaring stock prices, hyper-abundant liquidity and a growing thirst for alternate investments and it’s not surprising that KKR (covered in the September 20 report) is having a banner year. KKR is one of the first buyout firms and is also the second-largest in the world based on assets under management (AUM). Additionally, it manages multiple alternative asset classes, including credit and real assets, with strategic partners that manage hedge funds. But private equity is the firm’s specialty, accounting for 55% of its investment holdings, and it raised a record $59 billion in Q2 alone (a 34% improvement from all of 2020!) across its private market strategies. What’s more, the firm’s total AUM has mushroomed 93% from a year ago, to $429 billion, while fee-paying AUM (which adds predictability to the firm’s cash flows) nearly doubled, to $319 billion. Of note, KKR recently announced a management shakeup with two of its founders stepping down as co-CEOs; it also simplified its corporate structure by eliminating preferred shares while swallowing up one of its subsidiaries. Wall Street doesn’t appear fazed, however; indeed, the company has strengthened of late while engaging in an October buying spree—it just purchased a majority stake in mortgage funding platform eRESI Mortgage, acquired a hospitality-inspired multifamily property in Texas and bought the KMR Music Royalties II portfolio—a huge collection of established song copyrights. For Q3, analysts expect top- and bottom-line growth of 24% and 97%, respectively. Earnings are due out November 2.
Technical Analysis
KKR looked just OK through January of this year, but then it began to accelerate higher, surging in nearly a straight line to 59 in May and, after a couple months of rest, up to 68 in August. Then came the correction, with shares backing off for eight weeks as the market finally dipped. But while the near-term break of support was worrisome, the rally since then has looks fantastic, with KKR easily soaring to new highs as volume has picked up. Given that earnings are coming up and the recent run, we’d aim for dips to enter.
| Market Cap | $42.9B | EPS $ Annual (Dec) | |
| Forward P/E | 20 | FY 2019 | 3.54 |
| Current P/E | 8 | FY 2020 | 3.37 |
| Annual Revenue | $11.6B | FY 2021e | 3.67 |
| Profit Margin | 41.9% | FY 2022e | 3.94 |
| Qtrly Rev | Qtrly Rev Growth | Qtrly EPS | Qtrly EPS Growth | |
| ($M) | (vs. yr-ago-qtr) | ($) | (vs.yr-ago-qtr) | |
| Latest qtr | 3.14 | 135% | 2.05 | 65% |
| One qtr ago | 4.56 | N/M | 2.68 | N/A |
| Two qtrs ago | 2.01 | 89% | 2.46 | 170% |
| Three qtrs ago | 1.9 | 140% | 1.79 | 316% |
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Marathon Oil (MRO)
Why The Strength?
Marathon Oil is a relatively small player in the U.S. oil story, but it’s shown up in Top Ten a couple of times this year as its cash flow profile is as good as any of its peers. The firm has operations in a handful of the top basins in the U.S., including the Delaware, Eagle Ford, Stack/Scoop and the Bakken, and it also has a small-ish thing going on in Guinea, but the focus is now on efficient production, not on growth; indeed, the firm expects production growth of less than 5% annually in the years ahead. But management is content with keeping CapEx in check (about $1 billion this year; breakeven oil price below $35 oil), which is leading to truly jaw-dropping amounts of cash flow—for 2021, the top brass thinks it will earn $1.9 billion of free cash flow (nearly 15% of the market cap), and that’s assuming just $65 oil and $3 natural gas! And there’s a lot more where that came from, with management believing it can crank out $1.6 billion of free cash flow annually through 2025 at just $60 oil! For now, most of that cash is going to debt reduction—$1.4 billion of debt has been slashed so far this year—but it’s close to meeting its goals on that front, which should leave a ton to return to shareholders in the quarters ahead: As of Q2, it said it aims to return $1 billion or so in 2022 assuming oil is at $60 or above, and that could come via dividends (the base dividend yields 1.2% but could be hiked significantly) or share buybacks (current repurchase authorization is nearly 10% of the market cap!). The next report is due November 3, and we’ll be interested to hear (a) any updated cash flow projections given current energy prices and (b) whether they start handing out wads of cash earlier than expected.
Technical Analysis
MRO peaked at 13.3 in early March and, net-net, did nothing for the next six and a half months. But now the buyers are back, with a decisive breakout and upside follow-through since then on accelerating volume (four straight big-volume buying weeks of late). We can’t rule out a shakeout of some sort, but we’re not expecting a major retreat given the massive buying—we’re OK starting a position here or on dips.
| Market Cap | $13.1B | EPS $ Annual (Dec) | |
| Forward P/E | 15 | FY 2019 | 0.75 |
| Current P/E | 539 | FY 2020 | -1.16 |
| Annual Revenue | $3.79B | FY 2021e | 1.12 |
| Profit Margin | 15.1% | FY 2022e | 1.62 |
| Qtrly Rev | Qtrly Rev Growth | Qtrly EPS | Qtrly EPS Growth | |
| ($M) | (vs. yr-ago-qtr) | ($) | (vs.yr-ago-qtr) | |
| Latest qtr | 1.14 | 320% | 0.22 | N/A |
| One qtr ago | 1.07 | -13% | 0.21 | N/A |
| Two qtrs ago | 0.83 | -32% | -0.12 | N/A |
| Three qtrs ago | 0.75 | -44% | -0.28 | N/A |
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Previously Recommended Stocks
| HOLD | |||||
| 10/11/21 | Acuity Brands | AYI | 203-210 | 207 | |
| 10/4/21 | Affirm Holdings | AFRM | 105-111 | 160 | |
| 9/7/21 | Ambarella | AMBA | ★ | 132-138 | 180 |
| 9/13/21 | Antero Res. | AR | ★ | 15.4-16.1 | 21 |
| 9/27/21 | APA Corp. | APA | 22-23.5 | 28 | |
| 7/6/21 | Asana | ASAN | 61-65 | 136 | |
| 10/4/21 | Beauty Health | SKIN | 24.5-25.5 | 28 | |
| 6/21/21 | Bill.com | BILL | 176-182 | 301 | |
| 9/27/21 | Brooks Automation | BRKS | 102-106 | 110 | |
| 8/23/21 | Builders FirstSource | BLDR | 49-51 | 60 | |
| 10/4/21 | Caesars Entertainment | CZR | 113-117 | 112 | |
| 10/18/21 | Cameco | CCJ | 25-27 | 27 | |
| 9/13/21 | Celsius Holdings | CELH | 84-88 | 100 | |
| 10/4/21 | CF Industries | CF | ★ | 58-61 | 59 |
| 6/14/21 | Cloudflare | NET | 90-93 | 189 | |
| 10/4/21 | ConocoPhillips | COP | 67-70 | 77 | |
| 8/30/21 | Continental Res. | CLR | 37-38.5 | 52 | |
| 8/9/21 | Datadog | DDOG | 124-128 | 162 | |
| 5/10/21 | Devon Energy | DVN | ★ | 25-26.5 | |
| 7/19/21 | Dexcom | DXCM | 425-438 | 568 | |
| 9/27/21 | DoorDash | DASH | 206-212 | 216 | |
| 6/28/21 | Dynatrace | DT | ★ | 57-59 | 78 |
| 4/26/21 | Floor & Décor | FND | 109-113 | 136 | |
| 10/11/21 | Goodyear Tire | GT | 18-19 | 21 | |
| 10/11/21 | Hilton Worldwide | HLT | 139-142 | 142 | |
| 7/19/21 | Horizon Therapeutics | HZNP | 90-93 | 116 | |
| 10/4/21 | Int’l Game Tech | IGT | 26-28 | 30 | |
| 9/20/21 | KKR & Co. Inc. | KKR | 63.5-65.5 | 75 | |
| 8/9/21 | LendingClub | LC | 25-27 | 36 | |
| 10/4/21 | Live Nation | LYV | 95.5-98.5 | 101 | |
| 10/11/21 | LPL Financial | LPLA | ★ | 165-169 | 175 |
| 10/4/21 | Matador Resources | MTDR | 37-39 | 45 | |
| 10/18/21 | MGM Resorts | MGM | 47-48.5 | 48 | |
| 10/11/21 | Mosaic | MOS | 39-41 | 42 | |
| 8/30/21 | Palo Alto Networks | PANW | 440-455 | #N/A | |
| 8/9/21 | Paycom Software | PAYC | ★ | 448-462 | 539 |
| 8/16/21 | Paylocity | PCTY | ★ | 242-248 | 296 |
| 10/11/21 | Pioneer Nat. Resources | PXD | 187-192 | 193 | |
| 9/13/21 | Pure Storage | PSTG | 25-26 | 26 | |
| 9/27/21 | SeaWorld Entertainment | SEAS | 56.5-58.5 | 67 | |
| 9/27/21 | Signet Jewelers | SIG | 82-85 | 91 | |
| 10/18/21 | Snowflake | SNOW | 322-333 | 342 | |
| 9/27/21 | SVB Financial | SIVB | 655-675 | 746 | |
| 9/13/21 | Teck Resources | TECK | 23.5-24.5 | 29 | |
| 10/18/21 | Tesla | TSLA | 845-865 | 1025 | |
| 10/18/21 | Xenon Pharm. | XENE | 29.5-31.5 | 31 | |
| 10/18/21 | Zscaler | ZS | 292-302 | 311 | |
| WAIT | |||||
| 10/18/21 | Atlassian | TEAM | 392-405 | 429 | |
| 10/18/21 | Range Resources | RRC | 21.5-23 | 26 | |
| SELL RECOMMENDATIONS | |||||
| 8/16/21 | Avis Budget | CAR | 91-94 | 177 | |
| 9/20/21 | Chesapeake Energy | CHK | 58-60 | 68 | |
| 9/13/21 | ICU Medical | ICUI | 233-243 | 225 | |
| 9/7/21 | Macy’s | M | 21-22 | 27 | |
| 9/27/21 | Snap Inc. | SNAP | 78-81 | 55 | |
| DROPPED | |||||
| 10/11/21 | Applovin | APP | 83-86 | 94 | |
| 10/11/21 | Upstart Holdings | UPST | 285-300 | 360 | |
The next Cabot Top Ten Trader issue will be published on November 1, 2021.