Closing Recap

Monday, December 06, 2021

Equity Market Recap

·     Stocks were in rally mode following last week’s declines, with nearly every sector moving higher today outside of semiconductors, some software, and vaccine names (MRNA, BNTX, NVAX, PFE) as data this weekend on Omicron indicated the severity of the illness is less than that of the Delta variant, which has also helped the risk-taking backdrop (lifting travel, retail, energy, leisure names). Stocks were choppy early, moving back and forth the first hour or so of trading before markets pushed higher, with defensive, housing, large cap tech, restaurants (behind M&A in the sector), energy and financials all surging to the upside. There was no specific news leading to the bounce, other than investors “buying the dip” off last week’s drop while Treasury yields and the dollar climbed. Oil prices also jumped, with WTI crude trying to snap its 6-week losing streak. Omicron variant and Fed taper fears pressured markets last week but taking a backseat today.

·     Stock and Sector movers: Reopen names among top gainers with rally with cruises NCLH, CCL, RCL, airlines AAL, UAL, ALK, casinos LVS, MGM, CZR, travel EXPE, BKNG, LYV leading the S&P; KSS soars after the WSJ reported an activist investor is encouraging it to sell its e-commerce business, M jumps after announcing it will be added to the S&P 500, $KE gains after announcing a special $5.65 dividend, HD hits record highs after OpCo upgrades it to Outperform; TSLA entered into a bear market from its early November highs before recovering, LCID stumbles after both report SEC investigations; Bitcoin rolls to a low of $42,874 over the weekend, its lowest level since September initially weighing on related names MARA, RIOT, MSTR, COIN, SI (before they rebounded with broader market rally); casual diners/restaurants rise as JACK acquires TACO for $12.51 per share (~40% premium to Fri’s close) in a $575M deal; SAM soars after being upgraded at Cowen as other beverage makers outperform; MRNA, BNTX plummet to give up all of their Omicron-related gains since Nov. 24 as vaccine makers underperform PFE, NVAX.

Commodities

·     Oil prices rise, with WTI crude gaining $3.23 or 4.87% at $69.49 per barrel, boosting shares of energy names all day, as WTI looks to snap its 6-week losing streak. Hopes that the Omicron coronavirus variant would have a less damaging economic impact if its symptoms proved mostly mild helped prices along with the prospect of an imminent rise in Iranian oil exports receding.

·     Natural gas futures dropped 47.5 cents, or 11.5%, to settle at $3.657 per million British thermal units (MMBtu), their lowest close since July 15 as forecasts for mild December temperatures soured the demand outlook.

·     Gold prices slip -$4.40 or 0.3% to settle at $1,779.50 an ounce, holding up relatively well despite the bounce back in Treasury yields (10-yr up 9 bps to 1.435) and the dollar. Rising inflation and lingering uncertainty over the Omicron coronavirus variant moderate losses ahead of key CPI inflation data late this week. Global stock markets staged a solid rebound from last week’s selloff driven by worries over the spread of Omicron, also pressuring gold prices.

Currencies & Treasuries

·     The U.S. dollar index (DXY) rose, touching highs of 96.42, as the dollar rallied to 113.37 highs against the Japanese yen, up from 112.82 seen overnight and off the 112.50 low last week, with the buck getting a boost from firmer Treasury yields as the 10-yar moved back above 1.4% (still roughly 30 bps off the 1,7% highs just two-weeks ago). Incoming data this weekend on Omicron indicated the severity of the illness is less than that of the Delta variant, which has also helped the risk-taking backdrop (and boosted shares of the reopen stocks, travel casinos). Treasury yields edge higher throughout the morning into the afternoon, with the 10-yr rising to 1.43% (off lows 1.37%). No economic data moving markets today.

Sector News Breakdown

Consumer

·     Retailers; KSS rises after the WSJ reported activist investor Engine Capital is said to be pushing the department store chain to sell itself or to separate its e-commerce business and believes there are private equity firms that would pay at least $75 per share https://on.wsj.com/3lxvrCv ; BKE announces $5.65 special dividend and raises qtrly dividend by 6.1% to $0.02; Macy’s (M) is moving to the S&P MidCap 400 index from the S&P SmallCap 600 while HBI is moving to the MidCap 400 from the S&P 500; Baird upgraded HIBB to Outperform with a $100 PT after their shares have declined ~30% over the past two weeks to make risk/reward too compelling to ignore; LVLU initiated with OW/Buy ratings at Goldman, Jefferies, Baird, Cowen, Telsey, KeyBanc, and Piper; Following Q3 reports, Wells sees an underappreciated margin dynamic in TDUP despite nearer-term tailwinds with supply chain constraints, said GPS is too cheap to ignore after looking at their recent guidance reduction and an updated SOTP look with the value of Athleta and its real estate assets, and CRI’s wholesale operations was disappointing; UBS raised their PT on ASO to $56 from $52 ahead of Friday’s earnings report, Lake upgraded SPWH to Buy with a $20 target after they terminated their merger with Great Outdoors and ahead of Friday’s earnings given elevated demand above historical levels and attractive valuation; Bank of America reiterated DG at Underperform as they believe its long-term strategic drivers will be overshadowed by near-term headwinds and continued margin pressure

·     Auto sector; HTZ initiated with Buy/OW ratings at Deutsche ($34 PT), JPMorgan ($30), Barclays ($28), and Neutral at Goldman ($32) and Morgan Stanley ($27); RBC raised their price target on F (Ford) to $21 from $17 after updating their valuation methodology to incorporate recent developments and further break up the business into key pieces and on TSLA to $950 from $800 after raising their delivery forecasts for 2023-25 due to increased production capacity and updated demand views; VLTA announced its expansion into Europe with an initial focus on Germany, Austria, Switzerland, and France;

·     Electric vehicles: The SEC opened an investigation into TSLA over whistleblower claims on solar panel defects sending shares lower initially; LCID tumbles after the EV maker said it had received a subpoena from the U.S. SEC, requesting documents related to an investigation on its blank-check deal with Churchill Capital Corp; RIVN received several initiations, with Buy/OW ratings from Bank of America ($170 PT), RBC ($165), Baird ($150), Piper ($148), Morgan Stanley ($147), Mizuho ($145), Deutsche ($130), Wedbush ($130), and Wolfe ($130), and Neutral from Barclays ($120), Wells ($110), JPMorgan ($104), Goldman ($94); UBS initiated WBX with a Buy rating and $25 PT as it is a leader in the resi-focused EV charging market, which they believe is the most attractive market for charging solutions; BLNK entered into a master development and production agreement with SGBX to deploy their chargers at all properties; KNDI authorized a share buyback program for up to $20M

·     Housing & Building Products; HD upgraded to Outperform from Peer Perform at Oppenheimer and upped LOW tgt to $300 from $235 saying they are more confident that risks of a significant, transitional-type setback, for Home Improvement Retail and/or its leading players, have diminished, and underlying demand growth within the space is apt to persist, even as pandemic tailwinds abate; RH tgt lowered to $600 from $760 ahead of earnings at Wedbush saying after a number of beat-and-raise quarters, they expect at best an in-line 3Q21 as supply chain challenges likely delayed revenue recognition and order backlogs increased; BECN and GMS both upgraded to Outperform at Raymond James saying both trade at double-digit FCF yields with EV/ EBITDA ~1 std dev below historical levels, and have seen significant recent insider buying; BTIG said the recent pullback in LOVE offers an opportunity to buy ahead of earnings as they think their estimates will likely prove highly conservative based on their checks that show robust demand trends, gross margin tailwinds, and incremental revenue upside from new innovation

·     Consumer Staples & Restaurants; SAM upgraded Underperform to Market Perform at Cowen and raising PT to $500 from $400 saying Nielsen trends starting to show signs of stabilization and think the lower expectations are now priced into the stock; TACO to be acquired by JACK for $12.51 per share in cash, in deal valued at $575M including existing debt; shares of BJRI, FRGI, LOCO, DIN, CAKE among casual diners/restaurants rising amid the M&A news in space)

Energy

·     Energy stock movers; huge day of gains for energy stocks with oil prices jumping nearly 5% late day (closing near the highs); Natural gas prices extended its recent decline (-23% last week) after the National Weather Service issued 6-14 day forecasts that almost the entire United States is seeing warmer than typical seasonal temperatures

·     E&P and Majors; COP announced preliminary 2022 capital expenditures budget; initiates three-tier returns of capital program and declares quarterly variable cash distribution; planned companywide 2022 capital expenditures of about $7.2B; expected 2022 return of capital to shareholders of about $7 bln, representing about 16% increase versus 2021; Credit Suisse reiterated HFC at Outperform as they see it as a catalyst rich name with strong potential to re-rate in the next 6-9 months as it starts its renewable diesel facility, reinstates the dividend, and closes the Sinclair acquisition, and is not getting credit for closing its Puget Sound refinery acquisition that adds to near-term earnings upside; ROCC raised Q4 sales guidance to 26,700-28,000 bpd from 25,700-27,700

·     Pipelines: HMLP said it received a buyout proposal from Höegh LNG Holdings to acquire all publicly held common units for $4.25/unit in cash as the proposal would take effect through a merger between the Partnership and a subsidiary of Höegh LNG.

·     Utilities & Solar; in solar, SEDG will be added to the S&P 500 index effective prior to the open of trading on Monday, December 20, 2021 to coincide with the quarterly rebalance; SOL announces $50M share buyback; ENPH Battery Storage expands in Texas following severe power outages; in utilities, SO upgraded to Neutral from Underperform following the filing of GPSC Staff testimony on December 1 as the GPSC Staff cost and schedule projections are largely in line with Mizuho’s prior estimates; NRG announced a $1 billion stock repurchase program

Financials

·     Bank movers; a sector that has been under pressure of late given the tumble in Treasury yields, mostly on the long-end of the curve; in research, Morgan Stanley busy as they upgraded WFC to Overweight in large cap with $61 tgt citing the biggest driver being higher Fed Funds Futures and also upgraded GS to Equal weight from Underweight citing ROE/ROTCE focus, share gain retention, tech investments; the firm downgraded shares of Citigroup (C) to Equal-weight in the absence of near-term catalysts for the stock, cut BK to Underweight on valuation, low loan exposure, and negative operating leverage; in the regional bank space, Morgan Stanley downgraded PNC to Underweight on valuation, currently trading at 12x our 2023 EPS with a 12% 2023 ROE, implying a 10% cost of equity, while upgraded SIVB to overweight and raised tgt to $985 from $770 saying expectation for a faster pace of Fed rate hikes benefits SIVB more than nearly any other bank in our coverage universe

·     Bitcoin news; nothing specific to account for the weekend volatility that saw Bitcoin prices drop to lows around $43K (well below the all-time highs above $69K in Nov 10^th), before rebounding back around $49K midday (still down), along with weakness in Ethereum and other crypto assets; weakness across the board early in the crypto asset sector as Bitcoin, Ethereum and others plunge over the weekend in volatile trading (MARA, MSTR, RIOT, SI slide initially before paring losses or edging higher in some cases)

·     Financial services/exchanges: MKTX monthly trading volume for November 2021 of $653.4 bln consisting of $212.4 bln in credit volume and $440.9 bln in rates volume; TW says November total volume of $24.2 trillion and average daily volume of $1.18 trillion

·     REITs; WE and Softbank Group agree to extend WeWork’s commitments for a total of $1.75 billion of liquidity from Feb 2023 to Feb 2024 and also extend the $500 mln senior secured notes commitment from Starbright WW LP to Feb 2024, co says; Evercore/ISI upgraded shares of BXP to Outperform with $126 tgt and downgraded ESRT to in-line; ARE raises Q4 dividend to $0.15 from $0.12

Healthcare

·     Pharma movers; ABBV’s Rinvoq achieved primary and key secondary endpoints in first phase 3 induction study in patients with Crohn’s disease; CYTH rises after getting FDA approval to initiate human mid-stage trials for its lead drug candidate – Trappsol Cyclo, in treating early Alzheimer’s Disease; OCUL announces positive topline results from its Phase 2 clinical trial of OTX-DED (dexamethasone intracanalicular ophthalmic insert) for the short-term treatment of dry eye disease; ACET reported positive interim data from its Phase 1 study of ADI-001 for the potential treatment of B-cell Non-Hodgkin’s Lymphoma

·     Biotech movers; RETA slides after the U.S. FDA raises concerns about safety and efficacy of co’s drug candidate, bardoxolone, ahead of advisory panel meeting on Wednesday; BHVN said topline phase III data from its second pivotal trial for intranasal migraine therapy, zavegepant, met the co-primary regulatory endpoints; BLCM announces positive interim data from its Phase 1/2 GoCAR-T clinical trials, in the first cohort of metastatic castration-resistant prostate cancer (mCRPC) patients treated in the clinical trial for BPX-601

·     MedTech Equipment; EW, SWAV, NVRO all upgraded at Wells Fargo saying EW raised to overweight as see a long runway for transcatheter aortic valve replacement growth beyond low risk; upgrade NVRO to overweight as see a favorable risk/reward given the recent pullback; SWAV upgraded to Overweight as think the peripheral above-the-knee opportunity is almost as large as the coronary opportunity and the enhanced reimbursement for ATK procedures (+60-110%), which starts Jan 1, 2022, combined with the new M5 Plus device should drive significant upside in sales over the next few years.

·     Healthcare Services; Piper said that WBA’s potential divestiture of its Boots business would be a welcomed action to refocus towards the US, but does not fundamentally solve the key near-to-medium term issues; Wedbush upgraded WOOF to Outperform given its position to continue taking share in the fast-growing pet retail market; HQY entered into a custodial transfer and asset purchase agreement; purchase agreement contemplates transfer to co of about $1.3 bln of HSA assets held in approximately 87,500 HSAS on March 2, 2022

Industrials & Materials

·     Aerospace & Defense; LMT active following a report saying the Finnish Defense Forces propose the U.S. defense company’s F-35 fighter jet as the state’s newest combat aircraft; Finnish media outlet Iltalehti reported the F-35 is one of the five aircraft proposed to Finland; SAIC said the U.S. Navy awards co $1.1B to produce, assemble, test, and deliver torpedo afterbody tailcones

·     Industrial & Machinery; DE a positive mention in Barron’s saying the stock could benefit from sustained inflation as the recent selloff in industrial stocks has left some names looking particularly cheap with Deere trading at 14.7x its next 12 months; Saint-Gobain will acquire GCP for $32.00 per share, in cash, in a transaction valued at about $2.3B https://bit.ly/3DrUXPM ; LII was upgraded to Buy at Deutsche Bank with $392 tgt saying after 2-yrs of underperformance, LII currently trades nearly in line with the MI/EE group median on NTM P/E; CAT was added to Best Idea Long list at Hedgeye with clear demand drivers

·     Transports; in general a pocket of strength today led by package delivery (FDX), and truckers (CHRW); in airlines, TSA reports checkpoint travel results decline 10-11% vs 2019 this past weekend, not showing significant Omicron impact; ODFL November revenue per day increased 29.9% as compared to November 2020 due to an 11.5% increase in LTL tons per day and an increase in LTL revenue per hundredweight; in research, Evercore/ISI upgraded airlines AAL (to in-line) and SAVE (to outperform); online travel rebounds (BKNG, EXPE)

Technology, Media & Telecom

·     Internet; BABA announced that Toby Xu, Deputy Chief Financial Officer, will succeed Maggie Wu as the company’s Chief Financial Officer, effective April 1, 2022; Wedbush downgraded CHWY to Neutral as they expect in-line 2H21 results at best with below-consensus growth in 2022; Truist sees an in-line Q1 for SFIX despite shares being ~34% since last earnings but their data show Q2 is trending below expectations, and they lowered their PT to $46 from $60 but maintain their Buy rating due to compelling valuation

·     Semiconductors; Cowen raised their target on MU to $99 from $80 and named it one of their Best Ideas for 2022 based on a notable reduction in customer DRAM inventory levels, more rational DRAM wafer capacity growth in C22 than C21, and strong leverage to growing DRAM content in AI/ML servers, ADAS and EV vehicles, and 5G Android smartphones; NVDA extended their recent decline after EU antitrust regulators paused their investigation into their deal for ARM as they await more information; Westpark lowered their price target on Buy-rated QRVO to $190 from $230 because of continued supply and demand challenges; AMAT named Citigroup top semiconductor pick for 2022, citing a preference for semiconductor capital equipment names into next year; UMC November net sales grew 33.52% Y/Y to NT$19.66B, compared to NT$19.16B in October; YTD sales were up 19.31% Y/Y to NT$192.73B; MRVL target raised to $105 from $74 at Argus after their EPS and revenue beat consensus

·     Hardware, Software movers; NTODY a positive mention in Barron’s this weekend calling it an overlooked metaverse play and saying it is time to buy stock; EA was upgraded to Buy at Citigroup while trim tgt to $150 from $160 as view risk/reward favorable and view the recent weakness as a buying opportunity; high growth names remain pressured (MDB, NET, U, CRWD); BLZE was initiated at Opco with Outperform and $28 tgt on favorable secular trends and strong revenue growth potential and Raymond James with Outperform and $26 tgt; MSFT office prices going up 20% for some business clients unless they move from monthly to annual subscriptions – CNBC