Closing Recap

Thursday, December 09, 2021

Equity Market Recap

·     This week’s rally in stocks took a pause on Thursday, as the S&P went red for the first time this week with growth stocks especially hit hard, though the Nasdaq and Russell 2000 remain on track to snap weekly losing streaks after the Nasdaq posted its best day since March on Tuesday and the Russell kicked off the week with consecutive daily gains above 2%. Weekly jobless claims came in at their lowest level in 52-years for the second time in three weeks, potentially bolstering the Fed’s case to increase their pace of tapering bond purchases and bring forward its timeline to raise rates at next week’s meeting. Today’s late day market selling action appeared to be profit taking ahead of tomorrow’s November CPI data for the latest gauge on inflation fears, and current projections are for the reading to show a 6.8% increase in prices. After three days of broad-based gains, today saw the opposite with oil, gold, Treasury yields, Bitcoin and stocks all falling. Information technology, Consumer Discretionary, Financials, and Comm Services were among the biggest drags in the S&P while defensive Consumer Staples and Utilities were higher.

·     Stock & Sector Movers: HRL spikes to lead the S&P on strong quarterly sales and growth with CVS just behind it after their raised FY22 forecast, dividend raise, and new buyback program; CIEN surges to a high of $73.35, its first time above $70 since March 2002, after its quarterly results and a new $1B stock buyback plan, RH soars on its beat-and-raise among post-earnings winners; several retailers trade lower after quarterly results – GME sinks after reporting a wider loss than expected and disclosing an SEC subpoena in August, 2021 IPOs CURV, RENT both touch record lows, SPWH plunges back to its mid-$12 pre-deal level after missing on EPS without providing guidance; telecom names weak again with CHTR sinking on a Morgan Stanley downgrade, ATUS rolls to 3-year lows after JPMorgan downgrades it; CMCSA hits 52-week lows; EV sector generally lower with LCID stumbling after its proposed $1.75B notes offering, TSLA among the worst decliners in the S&P; EVGO outlier in the space as it rises on a JPM initiation at OW; BA slips after AAL said it has had to cut international flights while it awaits Boeing deliveries; JETS airline stocks modestly lower on the day, LUV underperforms other after Jefferies downgraded; energy tumbles on lower oil, financials drop on lower yields and defensive staples outperform.

Economic Data:

·     Weekly jobless claims fell to 184,000 (a 52-year low) and was well below the 215,000 estimate and the upwardly revised 227,000 from 222,000; the 4-week moving average fell to 218,750 from 240,000; continued claims rose to 1.992M from 1.854M (est. 1.9M); U.S. insured unemployment rate rose to 1.5%

·     U.S. wholesale inventories increased a bit more than initially thought in October, accelerating 2.3%, instead of 2.2% as estimated last month while sales at wholesalers increased 2.2% in October after rising 1.7% in September.

Commodities, Currencies & Treasuries

·     Gold prices slipped -$8.80, or 0.5%, to settle at $1,776.70, as it had been soft into this morning’s jobless claims data and faded further after the lower claims while the Dollar index advanced. With today’s decline, prices fell for the first time in three sessions

·     Oil prices fell with WTI crude settling lower by -$1.42, or 1.96%, at $70.94 per barrel, reversing off yesterday’s two-week high after Citi downgraded their price forecast given Omicron demand concerns

·     The U.S. dollar saw steady buying late day ahead of tomorrow’s inflation report, while the euro, pound stabilized. China’s yuan fell from a 3-1/2-year high and was set for its biggest drop in more than four months after the central Bank raised FX reserve requirements. Next week a big one for currencies as the U.S. Federal Reserve, European Central Bank and Bank of England among those meeting to discuss monetary policy.

·     Treasury yields failed to rally with the dollar on the long-end of the curve ahead of tomorrow’s CPI inflation data, but the shorter-term 2-yr was steady on fears a “hot” reading, following better jobless claims data today raises prospect of higher rates from the Fed earlier next year.

Sector News Breakdown

Consumer

·     Retailers; GME shares slipped after posting a larger quarterly EPS loss of (-$1.39) vs. est. loss (-$0.52) and revealed it was issued subpoena by U.S. securities regulator in August for documents on an investigation into its share trading activity; CURV tumbles as revenue fell short of consensus and management issued a more cautious near-term outlook as it manages supply chain headwinds; RENT reported Q3 revenue $59M vs est. $53.5M, 116.8k active subs, guided Q4 revs $62.8-63.3M vs est. $62.7M with active subs 121-122k, which is still below their pre-pandemic active subscriber count over 133k; SBH withdrew its proposed $780M public offering of senior notes due 2030 because of market conditions; OXM and SPWH other earnings movers

·     Auto sector; LCID announced its intention to offer, subject to market and other conditions, $1.75M aggregate principal amount of convertible senior notes due 2026; EVGO rises after JPMorgan initiated at Overweight and $20 tgt as anticipate the company driving outsized revenue growth on rapidly increasing fleet adoption and higher utilization; UBER slides after the European Commission announced draft rules for gig workers saying companies that set pay and standards of conduct for workers will have to classify them as employees entitled to a minimum wage, paid holidays, and pension rights

·     Housing & Building Products; RH shares outperform after reported 3Q results that topped expectations on the top line (with sales increasing 19% vs. consensus’ 16%) and handily beat on margins (of 27.7% vs. consensus’ 26.5%), but did not raise the high end of its 2021 guidance for sales

·     Consumer Staples; in food, HRL posted better earnings and sales in Q1, topping Wall Street’s expectations as sales were $3.45B, up from $2.42B YoY and ests $3.22B; IPAR guides FY net sales $840M, above prior view of about $810M; NAPA posted meaningful beats across metrics and reiterated FY’22 guidance; in tobacco (PM, MO, BTI), New Zealand plans to raise the legal smoking age by one year every year, effectively banning the sale of tobacco to people born after 2008

·     Restaurants; YUM was upgraded to Overweight at Atlantic Securities seeing it as their favored name to play the attractive global QSR category as offers mid-to-high single digit global system growth, balanced between new units and comps; workers at Buffalo SBUX voted to unionize in its labor board election, the first successful unionization attempt at a Starbucks

Energy

·     E&P and Majors; overall energy sector weaker as oil prices pullback initially; JPMorgan’s is constructive on Upstream fundamentals for 2022, and they downgraded CNQ to Neutral as its relative valuation is now in-line with Canadian peers and upgraded OXY to Neutral as recent underperformance suggests valuation is closer to fair

·     Refiners: JPMorgan upgraded PSX to OW as they believe the company is turning the corner on execution and not getting for cost savings initiatives and downgraded CVI to UW as they are cautious on margin potential in renewable diesel and valuation looks full compared to peers

·     Utilities & Solar; JPMorgan has their highest level of conviction regarding the secular growth and profitability for the sector in ~10 years of covering this space, with ARRY, NOVA, RUN as their top picks, upgraded BEP, BEPC to OW given recent relative underperformance, downgraded EVA to Neutral given relative outperformance since it announced its Simplification process, and downgraded SPWR based on relative valuation; PNM shares fall after the New Mexico Public Regulation Commission rejected the merger agreement between them and AGR as the NMPRC voted 5-0 to reject the parties’ agreements reached in the merger proceedings; FLNC Q4 adj EPS (74c) on revs $188.2M, expects FY22 revenue $1.1-1.3B vs est. $1.29B

Financials

·     Bank movers; Wedbush believes HBAN is one of the banks better positioned to regain positive operating leverage in 2022, driven by stronger revenue growth and lower expense; CADE authorized a 2022 buyback program for up to 10M shares; NU (Nu Holdings) 289.151M share IPO priced at $9.00

·     Insurance; RBC downgraded CINF to Sector Perform as they have increased their exposure to catastrophe risk in recent years and on industry-wide pressures on loss trends in the company’s personal lines book, and they also downgraded MMC so Sector Perform as they believe multiples across the insurance broker segment have become extended and see little room for further multiple expansion; Wells downgraded ALL to UW and remain UW on PGR as they are cautious on the personal auto sector given they don’t believe enough price is going through the system just yet and the next two quarters are going up against tough comps; Truist initiated WRB with a Buy rating and $105 target since the company has hit its topline growth stride, which ought to be preparatory to margin expansion from expense leverage as well as accelerating reserve gains

·     FinTech & Payments; Morgan Stanley started UPST at EW with a $200 PT as future success is currently priced in, and they are monitoring credit performance and expansion into existing verticals for further upside; Connexpay announced a $20M Series B funding round led by MQ, who will now have one seat on the company’s board

·     Consumer Finance; NVEI reaffirmed its financial outlook and called yesterday’s short report from Spruce Point ‘intentionally misleading’ and was also upgraded to Outperform at BMO; Citi upgraded ESMT to Buy as they believe the extent of the selloff after Q3’s beat-and-raise was not justified and none of the possible explanations seem to suggest a fundamental change in the underlying story; Macquarie initiated INFO at Outperform with a $40 target as they see potential for durable mid-20s% subscription ARR growth with solid margins; CNS reported preliminary AUM of $100.2B as of November 30, a decrease of $1.4B from October largely due to market depreciation

·     Bitcoin news; MSTR bought 1,434 Bitcoins from Nov. 29-Dec 8 for ~$82.4M in cash; FB launched a cryptocurrency payments pilot on WhatsApp to send/receive crypto within a chat, powered by their digital wallet Novi; MOGO announced a $27.5M registered direct offering

·     REITs; Bank of America added REXR to their US 1 List; ADC priced its 5M share offering at $68.15, a discount of ~4.5% to yesterday’s closing price

Healthcare

·     Biotech & Pharma movers; RETA plunges after the company received a negative opinion from a FDA advisory committee for its new drug application for bardoxolone methyl, leading to analysts on Wall Street to slash their target price; ICPT slides after notifying the EMA of its decision to withdraw marketing application for product candidate, obeticholic acid (OCA), to treat liver scarring due to nonalcoholic steatohepatitis (NASH); ZYME and BGNE said they dosed the first patient in a phase 3 trial evaluating the latter’s zanidatamab for advanced or metastatic HER2-positive gastroesophageal adenocarcinomas; SRPT upgraded to Outperform at Oppenheimer with $125 tgt saying the company is poised for significant steps in 2022

·     MedTech Equipment; XAIR shares tumble after saying based upon ongoing communications with the FDA, the Company no longer believes that the U.S. commercial launch of LungFit PH will take place prior to Dec 31^st; Needham downgraded ZBH from Strong Buy to Buy and cut tgt to $158 from $175 saying given the potential for additional COVID waves driven by new variants and hospital staffing challenges to weigh on elective procedure volumes, ZBH is no longer our top pick; INGN was upgraded to Buy at Needham as believe that INGN’s supply chain issues are temporary, adequately factored into consensus, and may already be starting to improve; EW tgt raised by several analysts after investor meeting where the co reaffirmed its FY ‘21 guidance, provided initial 2022 guidance, and gave several pipeline updates

·     Healthcare Services; CVS to buy back up to $10B shares; boosts dividend and raises FY21 revenue view to at least $290.3B from $286.5B-$290.3B vs. consensus $288.93; LH announces multiple new initiatives including a $2.5B share repurchase program and a dividend in 2Q22; PHR Q3 EPS (71c) was a wider loss than est. (38c) on revs $55.9M vs est. $48.8M, and FY revenue outlook for +20-25% growth is below est. +33.4%

Industrials & Materials

·     Industrial & Machinery; general weakness early; TGLS tumbled after a negative short report from Hindenburg Research saying they have no faith in TGLS financials given management’s background and the irregularities they uncovered and encourage its auditor to do a full review of its customer transactions and outstanding balances; in research, ALSN was downgraded to Underweight and lower tgt to $30 from $37 at Morgan Stanley saying its automatic transmission markets face headwinds as MD & HD trucks transition to zero-emissions, while the firm upgraded URI to Equal Weight from Underweight with a $395 PT saying the confluence of inflecting Non-Resi spending & an infrastructure uplift in 2023+ results in a more optimistic top-line outlook

·     Transports; LUV was downgraded to Hold from Buy at Jefferies and cut ests and tgt to $45 from $60 saying its LCC model seems to be more exposed to inflationary pressures, given a distributed network and fewer new efficiencies and sees lower normalized pricing power vs. pre-COVID; AAL said it plans to cut some international flights while it waits on BA Dreamliner order

·     Chemicals; Wolfe Research upgraded LIN to Outperform from Peer Perform while downgraded APD from Outperform to Peer Perform, while AI remains our Underperform-rated stock within the subsector – notes LIN relatively outperformed both APD and AI-FR this year, as the latter struggled to make improvements on its margins, the key driver behind our Underperform rating, while APD dealt with the overhang of closing on the Jazan project agreement; DD said to work with GS on selling unit Advent with CG said to show interest in the $12B unit

·     Metals & Mining; Morgan Stanley with a handful of changes as they upgraded RIO to Overweight saying operating setbacks, iron ore prices, and rising capex have led to RIO underperforming ASX200 materials and BH, but now see all negative news largely priced in; firm also upgraded VALE to Overweight from Equal Weight and SCCO to Equal Weight from Underweight; KGC announced to acquire Great Bear Resources for C$29 per share or C$1.8B; MP announced an agreement with GM to supply U.S. sourced and manufactured rare earth alloy and magnets to power more than dozen models

Technology, Media & Telecom

·     Internet; TWTR rises early after investor Ark Invest’s Cathie Wood tells CNBC that Twitter might play bigger role with non-fungible token (NFT); UDMY Q3 adj EPS in-line (4c) on revs $129.6M vs est. $125.9M, guides Q4 revs $130-134M above est. $129.8M

·     Software movers; RNG shares slump after announcing that Anand Eswaran is stepping down from his role as President and COO, and that Vaibhav Agarwal, Chief Accounting Officer, has been appointed as Interim CFO effective Jan. 1, 2022 (marks the third C-level departure in the last four months); TWLO upgraded from Equal-weight to Overweight at Barclays saying shares have approached a more reasonable valuation vs. faster-growth peers since 3Q21 earnings, and believe investor concerns on its 4Q21 are overly represented in shares; SKLZ said it intends to offer, $300 mln of senior secured notes due 2026 in private offering; PERI 7.3M share offering priced at $21.50; FROG upgraded to Buy at Stifel who believes the company can sustain revenue growth of 30+% in the coming years; PATH reported a breakeven Q3 vs est. (4c) loss on revs $220.8M vs est. $208.8M and Berenberg upgraded the stock to Buy after falling ~36% over the past six months; RENN tumbled more than 50% after saying the Commercial Division of the New York State Supreme Court declined to approve an October stipulation of settlement regarding shareholder derivative litigation.

·     Hardware, Components & Services; Morgan Stanley said hardware stocks should underperform in ’22 as multiples derate, margins compress, and EPS revisions peak – they prefer stocks with more recurring revenue & secular growth, with AAPL favorite large cap (and overall Top Pick) and NCR favorite small cap idea while downgrade SNPO to Equal-weight and lower tgts on TDC and SONO receives $7.9 million system order from major German car maker for mass production of automotive components; CIEN board of directors authorized repurchase of up to $1.0B of stock while reporting in-line Q4 results while mi-point if year rev guidance tops views ($870M-$910M vs. est. $881.2M)

·     Media & Telecom movers; broadband sector remains under pressure, with analysts getting more cautious; ATUS was downgraded to Neutral at JPMorgan following recent comments by the co which guided to residential broadband net losses of 5-10k in 4Q21 vs. prior expectations for growth (and our prior +2k) as losses in Fios overlap territories persist; Morgan Stanley downgraded both CHTR and LSXMK to Equal-weight (CHTR tgt to $740 from $810, LSXMA to $56 from $57) and also lowered tgts on CMCSA (to $65) and LBRDK (to $172) saying broadband is a great business, but it’s maturing and attracting competition, putting pressure on cable net adds and they expect the post-pandemic hangover for net adds to continue in ’22; LUMN lands U.S. Army reserve network contract; 11-year task order, which has an initial term of one year with 10 one-year options, is worth $23M; WMG 4.16M share Block Trade priced at $41.50; JPMorgan initiated FUBO at OW with a $28 PT as they see an attractive entry point with shares down ~59% since Q3 earnings