By Michael Cintolo, Vice President of Investments, Cabot Wealth Network
Axsome Therapeutics (AXSM)
Axsome is a name we started to follow just as the market was going over the falls earlier this year, but as opposed to the market, the stock stayed down for months after its springtime dip. But after a lot of base-building, the buyers have taken control, and the growth and the story are as good as ever. As opposed to many biotechs, Axsome isn’t just a one-drug outfit: Auvelity (for major depressive disorder) is the big draw now, with sales up 69% in Q3, and management thinks peak sales could be $2 billion or so, about four times what it brings in today on a run-rate basis. Then there’s Sunosi for sleep apnea (sales up 35% last quarter) and Symbravo (acute migraines) that only recently hit the market; each likely has peak sales potential near $400 million down the road. Beyond that, there are two drugs that should be submitted to the FDA for approval over the next couple of months—one (AXS-12, targeting narcolepsy) looks like a $500 million opportunity, but the bigger one (AXS-05, for Alzheimer’s agitation) should have potential into the $1.5 billion range or more, and Axsome even has another drug in Phase III trials (for ADHD and other indications) that it thinks can be another $1 billion producer. As for the here and now, sales growth is rapid (up 63% and 72% the past two quarters), with analysts looking for 50%-plus gains all of next year; the bottom line is still in the red, but that should change some time next year as business continues to ramp (sales should continue to grow rapidly for years to come). As mentioned above, the stock etched a big launching pad—it’s been consolidating since late February—but has certainly acted better the past few months, with shares moving past their prior highs in recent weeks. Near-term volatility is possible, but we think the path of least resistance is up.
JFrog (FROG)
JFrog specializes in software development systems that can span the whole of a client’s enterprise and help build secure and increasingly interoperable applications. A driving force is that IT heads at large businesses want to move their operations to a single source of records, compared to today, where firms have tons of different software and security systems that each have their own siloed data. The terminology of JFrog’s offerings can be cryptic—DevOps, DevSecOps, MLOps, MLSecOps—as can client “binary” and “artifactory” uses. Basically, it all boils down to clients using JFrog’s software to build their own, more secure, software while providing better visibility into the operations as a whole. It’s good business so far: JFrog’s Q3 revenue rose 26% year over year (another quarter of slightly accelerating top-line growth), to $137 million, with cloud revenue (which now makes up nearly half the total) up 50%. The improvement came mainly from traditional cloud users who continue to power the business, as the company is succeeding in converting cloud customers who find their own demand exceeding their plan to pricier guaranteed contracts. The company added about 150 clients who spend more than $100,000 annually last quarter, bringing that high-spending cohort to more than 1,100, and it actually has 71 that now spend over $1 million (up 54% from last year). Earnings per share also blew away estimates, coming in at $0.22 (up 47%) when Wall Street expected $0.16. Growth is seen to be good, not great, going forward, but the market doesn’t believe that: AI is seen adding to JFrog’s tailwinds, with Nvidia recently saying JFrog’s software is especially good for scaling up AI agents (which can automate many tasks), one of the hot spots of corporate AI spending. The complexity of AI also opens doors for sales of JFrog’s system to detect vulnerabilities in AI agent design. FROG has had a few signs of major accumulation in recent months, and the Q3 report in early November gapped the stock out of consolidation dating back to February of last year. We see good potential here.
Natera (NTRA)
Natera is the leader in molecular residual disease testing, screening cell-free DNA (cfDNA) fragments in the bloodstream as telltale signs of the presence of disease somewhere in the body. The company established itself with a widely used prenatal test, Panorama, which is a noninvasive way of screening for a variety of fetal problems just by screening the mother’s blood. Today the business is led by a related test, called Signatera, which tests for a handful of diseases, including types of breast cancer, ovarian and colorectal cancer on a post-treatment basis, looking to see if the cancer has come back; the colorectal test is used by nearly a third of oncologists in the U.S. Even as competitors have come into the market with tests more sensitive to traces of disease, Natera maintains its lead in the marketplace thanks to the depth and breadth of its sequencing, which competitors have found difficult to replicate. Natera’s consistently good revenue growth backs this up: Two weeks ago, the company reported third-quarter revenue of $592 million, up 35% from the year-ago period, driven by a 15% rise in total tests and a 54% boom in Signatera tests processed in the period, along with some higher pricing. Natera did post a $0.64 net loss per share, partly from management pouring money into R&D to expand the afflictions they can test for, as well as efforts to gain Signatera market share rather than maximizing its profits right now. But longer term, the company sees a path for 85% of tests being paid for in full down the line. Sales momentum has been so good that the company raised its sales guidance for the full year by $160 million to the midpoint of $2.18 billion and $2.26 billion. The trend toward more states adding Medicare coverage for Signatera tests is another plus, as are trials to expand the diseases Signatera can detect, with the current “IMvigor” trials for detecting bladder cancer showing great promise. The stock essentially topped out near the end of last year and consolidated through September—but NTRA broke out at that point and, despite a post-earnings shakeout, remains in a strong uptrend. It looks like the next leg up has begun.
Valaris (VAL)
You won’t find a group with much greater disinterest than oil stocks, which have generally been lagging for three years, but we’ve actually seen some positive earnings reactions from the sector in recent weeks, building on decent action from the April low despite lackluster oil prices. Valaris looks like a potential leader if the sector turns, as it’s one of the larger offshore drillers out there—the firm has 48 rigs, including 33 jackups (shallower water usually) and 15 high-specification deepwater rigs (which fetch higher prices), and despite sub-par oil prices, business has been solid here as offshore drilling has solid long-term economics even at modest pricing. Indeed, at the end of September, Valaris had a solid $4.5 billion backlog, $2.6 billion of which is for its deepwater floaters, a figure that’s up 13% from the past year and has been growing for years before that, too. Looking at the jackups, Valaris’ fleet is 79% booked for next year already and 62% for 2027, far stronger than peers. Beyond that, though, is the upside—if oil prices stay down here, business should be “fine” and even creep up a bit as bookings continue at a solid pace—but should dayrates continue to pick up (they have been for the deepwater rigs), then earnings and free cash flow should boom. (Management said it’s in advanced discussions to ink deals for some drillships that are scheduled to be free in the second half of next year.) As it stands now, business may slough off a bit going forward, but free cash flow is big (about $360 million in the first three quarters of the year, or nearly $5 per share) and should stay that way in the current environment, with upside if booking activity and dayrates lift. As for the stock, it fell off a cliff with its peers in mid-2024 and cascaded into the April low, but it’s been moving higher since, with a breakout in October still holding despite the wobbly market. Obviously, if oil prices tank, all bets are off, but we think investor perception for the sector (and for VAL) has lots of upside in the weeks and months ahead.
Warrior Met Coal (HCC)
Last month, the White House added 10 minerals to the list of commodities the U.S. federal government deems essential for the nation’s economy, including metallurgical coal, which is used to make coke fuel for steel production. The news, along with a just-released Q3 earnings report, was welcome for Warrior Met Coal, which prompted the stock’s latest show of strength. Warrior produces and exports non-thermal metallurgical (or “met”) coal for the steel industry, operating two active underground mines in Alabama, with a third one under development. The company boasts some of the most extensive reserves of met coal assets in the U.S., with a focus on high-quality “hard-coking” coal used for steelmaking that allows it to sell at premium prices on the export market. In what analysts have described as a “transformational” development for Warrior, the company just started mining last month at Blue Creek, a new development project in Alabama, several months ahead of schedule. It’s expected that Blue Creek will allow the company to increase its annual coal sales by six to seven million tons, which would amount to an 80% increase from last year’s total sales. What’s more, Blue Creek is expected to contribute to an operating cost savings for Warrior, in turn resulting in a margin improvement while strongly contributing to higher EBITDA and free cash flow going forward. Last week’s Q3 report was a big reason for the latest buzz, with revenue of $329 million holding steady year-on-year, thanks to record quarterly sales volumes of 2.4 million short tons (up 27%) and total production volumes that rose 17%, all while earnings of 70 cents a share beat estimates by a head-turning $1.01. However, EBITDA of around $71 million was 10% lower, with Warrior stating that “significantly weaker” conditions in the global steelmaking market, driven primarily by ongoing depressed steel demand, excess Chinese steel exports and oversupply of steelmaking coal, are a near-term headwind. But investors are clearly focused on the highly anticipated Blue Creek development, which management said “significantly increases our production capacity and has already begun contributing to revenue and free cash flow,” while allowing the firm to increase its full-year 2025 production volume guidance by around 10%. Following a tough stretch, analysts see Warrior’s sales and earnings surging next year, with the bottom line expected to lift well over $5 per share. HCC turned the corner near the end of June and was doing OK for a couple of months—but the Q3 report gapped the stock to new highs, and the market-induced pullback since looks normal. We think there’s upside ahead.
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About Cabot Wealth Network
This report is published by Cabot Wealth Network which was founded in 1970 by Carlton Lutts, a disciplined investor with an engineering mind who developed a proprietary stock picking system using technical and fundamental analyses.
Since then Cabot Wealth Network, headquartered in Salem, Massachusetts, has grown to become one of the largest and most-trusted independent investment advisory publishers in the country, serving hundreds of thousands of investors across North America and around the world.
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