Closing Recap

Tuesday, December 14, 2021

Equity Market Recap

·     It was another red day on Wall Street (though major averages finished significantly off afternoon lows) as stocks extend Monday’s late declines amid profit taking in some of the bigger winners over the last month in tech (AAPL, NVDA, MSFT), while energy and financial stocks edge higher ahead of the FOMC two-day policy meeting results on Wednesday. Software stocks were slammed on concerns surging inflation would dent growth in high-fliers, while one analyst (JPM) downgrading a handful of names citing limited upside and valuation amid a rising rate environment in 2022 by the Fed. Speaking of, market expectations are for the Fed to reign in the pace of asset purchases at tomorrow meeting, with hopes for a clearer picture on the timing of rate hikes. The more “hawkish” outlook expected by the Fed was likely further affirmed today by the second surging inflation data point in a week, as the producer price index (PPI) for November came in well above estimates. While inflation and rising rates top investor market concerns according to CNBC today, the virus remains a concern as Governments around the world, including most recently Britain and Norway, have tightened restrictions to stop the spread of the Omicron variant. Note despite major U.S. averages (S&P 500, Nasdaq, Dow) having barely pulled back off highs due to outperformance of a handful of large cap giants (AAPL, MSFT, NVDA, AMZN), many high growth tech stocks are down well over 20% from 2021 highs.

·     Stock and Sector movers: Software names underperform with ADBE, FTNT, CDNS, NOW, PTC among the worst S&P performers, NET, ZS roll after JPMorgan’s 2022 outlook for the sector included several downgrades; UBER rallies after its CEO said last week was their best ever as a public company and they are on track to come in at the top end of their Q4 guidance, also boosting LYFT; Solar names weak with RUN hitting 52-week lows, NOVA, SPWR, ENPH sinking after yesterday’s California proposal to reduce the rate at which homeowners can sell excess electricity from their rooftop solar panels into the grid; ALL, TRV, LNC, PRU insurance names, banks CMA, RF, HBAN among S&P leaders with rising yields; BYND rebounds off yesterday’s 52-week lows on a Piper upgrade it to Neutral; NEOG announced it will combine with MMM food-safety unit to create a business with an enterprise value ~$9.3B, TMX spikes after RTOKY acquires it in a $6.7B deal worth $55 per share; CNC new record highs after reaching an agreement with an activist investor for 5 new directors on the company’s board and the current CEO to retire.

·     The U.S. House of Representatives will vote to raise the federal government’s debt limit as soon as possible after it receives the passed measure from the Senate, House Democratic Caucus chairman Hakeem Jeffries said on Tuesday. The Senate bill would raise the debt limit by $2.5 trillion as lawmakers seek to avoid a historic default on upcoming loan payments

Economic Data:

·     Inflation data surges as PPI shows record jump after 40-year highs for CPI last week: Producer Price Index (PPI) Final Demand MoM rises +0.8%, above ests +0.5% and on a YoY basis surges +9.6% vs. +9.2% est. (and prior 8.6%) – record high readings. On a core basis (ex food & energy), PPI MoM rose +0.7% vs. est. +0.4% and on YoY basis surges +7.7% vs. est. +7.2%

Commodities

·     Oil prices slip on Tuesday ahead of weekly inventory data tonight (API) and tomorrow morning (EIA), as WTI crude slid -$0.56 or 0.79% to settle at $70.73 per barrel (high $72.03 and low $69.51). Earlier, the International Energy Agency (IEA) said the Omicron coronavirus variant is set to dent the global demand recovery. Higher inflation data also weighed on commodity prices as the higher producer price reading affirmed market expectations of faster stimulus tapering to emerge from this week’s Federal Reserve meeting tomorrow. Recall on Monday, OPEC raised its world oil demand forecast for the first quarter of 2022 and stuck to its timeline for a return to pre-pandemic levels of oil use, saying the Omicron variant’s impact would be mild and brief.

·     Gold prices slide -$16.00 or 0.9% to settle at $1,772.30 an ounce, posting its lowest closing level in roughly 2-weeks amid a rebound in the dollar ahead of tomorrow’s FOMC policy meeting update where a quickening of asset purchase tapering is expected to be announced given the recent spike in inflation readings this week (CPI and PPI) to multi-decade highs.

Currencies & Treasuries

·     The U.S. dollar edged higher, erasing earlier losses with the dollar index (DXY) up +0.2% around 96.50 as markets jostled with the direction major central banks will choose to fight inflation and the pandemic’s economic drag. “Hotter” inflation data this morning (PPI) affirmed expectations that the U.S. Federal Reserve will announce tomorrow a quickening of its withdrawal from bond purchases (tapering of assets). Markets are now pricing for the Fed to wrap up bond-buying around March and proceed with rate hikes. The euro bounced off a one-week low of $1.1260 overnight, while the British Pound gained 0.2% to $1.323. Treasury yields initially slipped despite the strong inflation read, but later pushed modestly higher to around 1.45%.

Sector News Breakdown

Consumer

·     Retailers; consumer stocks among the hardest hit on Monday, more mixed on Tuesday; in research, RL downgraded to Sell from Buy and cut tgt to $110 from $142 at Goldman Sachs saying while they are constructive on the mix shift to DTC.com and accompanying margin expansion, they believe that this benefit is a more limited tailwind vs. other brands in our sector in the near term; CPRI upgraded from Neutral to Buy at Goldman saying they are encouraged by CPRI’s recent performance, with the company reporting EBIT margins above pre-pandemic levels for the past three consecutive quarters; PRPL slides as sees FY21 revenue, adjusted EBITDA at low end of prior view as updated its outlook for the calendar year 2021; Robert T. DeMartini succeeds Joseph B. Megibow, who is stepping down as CEO; ASO upgraded to Buy from Neutral at Goldman Sachs with a price target of $58 from $47 as believes consumers have adopted new interests within outdoor, fitness, and sports categories and that this trend will be sticky into 2022; PTON swings lower after Digitimes reports that the company has halted new product projects for 2022; for mattress retailers (TPX, SNBR), Piper said November PSC Mattress Retail Survey showed y/y sales growth of +16-18%, the 5th straight month of 15%+ sales growth

·     Auto sector; TSLA CEO Elon Musk says co will accept dogecoin for merchandise such as apparel, belt buckle, mini models of its vehicles on a test basis; separately, TSLA CEO Musk sold another $906.5M worth of Tesla shares according to a filing overnight as exercised 2.13M options and sold 934,091 shares; in research, GM and Ford (F) downgraded to Neutral and Underperform respectively at Daiwa as see risks to current valuations from downside to margins during the transition to EVs from ICE vehicles and a higher interest rate environment; UBER rises after saying at UBS conference last week was the best week ever as a public company and company looks to monetize non-strategic stakes in other companies, including China’s Didi, over time

·     Consumer Staples; BYND upgraded to neutral from underweight at Piper saying a U.S. nationwide launch in McDonald’s appears to be coming late in the first quarter of 2022, earlier than they anticipated; VINE 2.2M share IPO priced at $10.00; defensive food names outperform again early with CPB, CAG, KR among movers; CPB said it is expanding its cost-saving program to $1 billion by the end of fiscal 2025, adding that it would include strategic tuck-in dealmaking among its priorities.

·     Casinos, Gaming, Lodging & Leisure sector; PLNT upgrade Market Perform to Outperform at Cowen saying mgmt. meetings left them more constructive on PLNT’s near- and longer-term outlook saying key near-term catalysts that will likely drive stock upside are an inflection in member growth in 1Q22; in casinos, MLCO upgraded from Equal weight to Overweight w/ $13 PT (from $11) at Morgan Stanley saying current valuation EV/EBITDA is the cheapest among peers. However, on an FCFE yield basis, the valuation discount is less.

Energy

·     Energy stock movers; EQT reinstated its dividend at an annual $0.50/share or ~2.5% yield, announced a $1B share repurchase program, and upgraded its near- and long-term leverage reduction plans; Wolfe downgraded SWN to Peer-Perform as a hedge against a warm winter and they see less upside vs nat gas peers and less return of capital potential as they focus on balance sheet de-leveraging and initiated DEN at Outperform with a $117 PT with further upside as CO2 pipeline volumes ; Jefferies remains positive on integrated oil in 2022 with seeing FCF remaining close to 2021 levels that were the highest in over a decade, and they continue to favor Eni (E), RDSA, OMV as their top picks, remain Hold on OXY, XOM, CVX due to richer FCF yields, and upgraded GALP to Buy on valuation after recent underperformance and increased FY22E FCF yield well above sector average; JPMorgan upgraded NOV to OW as a prime beneficiary of the global upstream spending recovery and secular growth opportunity in offshore wind, along with low expectations as their -5% decline YTD is 2^nd-worst performing stock in their coverage group; REPX Q4 EPS and revenue beat estimates

·     Utilities & Solar; PLUG partnered with Certarus to provide Certarus up to 10 tons of green hydrogen per day from North American hydrogen production network; Evercore downgraded VVNT to In-Line with an $11 target from $17 due to difficult comps, EBITDA headwinds as its initiatives surrounding smart energy and insurance are pulling down margins, and a tough post-pandemic set-up as consumer spending could shift away from investing in homes; At its Investor Day, AQN said its expects FY22 adj EPS 72-77c (est. 78c), annual earnings growth of 7-9% over the next five years, and now expects to spend $12.4B on capital programs over the next five years, up from its current $9.4B budget for 2021-25; RUN, NOVA tumble after yesterday’s California proposal for a monthly grid participation charge of $8/kW, more punitive than consensus $3/kW, though BMO said they would be buyers on additional weakness even as the overhang could persist for months as they expect the final order to be better than this initial proposal (FSLR, ENPH also lower)

Financials

·     Bank movers; HOOD shares a 4th straight day of decliners to fresh life-time lows below $19; big banks modest bounce along with uptick in Treasury yields following a steeper yield curve which boosts banks’ profitability, allowing them to borrow relatively cheaper in the short-term, while making more money through lending in the longer term; FinTech & Payments remain weak; Mizuho lowered price tgts on SQ to $285, AFRM to $140 and PYPL to $225

·     REITs; several analyst calls today: 1) Citigroup upgraded ACC, AIRC, RHP, PSA to Buy and downgraded ADC, COR, ELS to Neutral – said largest overweight positions fall within the Industrial, Residential, Lodging, Gaming and Shopping Center sectors, while we remain underweight Office, traditional Net Lease, Diversified Healthcare and Malls. We also hold an out of index position in the Tower stocks and are modestly overweight Self-Storage and Data Centers. We believe the REIT sector is well positioned to outperform and estimate REITs total return at +10-15% over the next 12 months; 2) Wells Fargo issued a 2022 preview, as believe equities can outpace the broader market, as part of the previews they upgrade DEI to overweight (headwinds subsiding) D/g HPP (cautious on SF mkt given the level of sublease space), u/g REXR to overweight (sector best portfolio Mark to market), D/g DRE to Equal weight (pause after a strong run), d/g PECO to equal weight (valuation).

Healthcare

·     Covid Vaccine news: Key takeaways from the Discovery Group (South Africa Healthcare provider) regarding the Omicron wave in SA including the effectiveness of PFE vaccines showed: vaccination gives 33% protection against Omicron infection; two doses of Pfizer reduces risk of hospitalizations by 70% for Omicron cases vs 93% for Delta; risk of hospitalization is 29% lower in adults, adjusted for vaccinations; those hospitalized require lower acuity care, Delta = 32% need high acuity care vs 13% for Omicron; children have 20% higher risk of hospital admission but that comes off low base; hospital admission per 1000 infections = 38 for Omicron vs 101 for Delta.  

·     Oxford study (as per Reuters) for vaccine (MRNA, PFE, BNTX) showed COVID-19 infection more likely than vaccines to cause rare cardiovascular complications; study also showed increased risks of pericarditis and cardiac arrhythmia following a positive COVID-19 test but not with any of the vaccines; says study shows increased risk of myocarditis with first dose of chadox1 and Pfizer-BioNTech)vaccines, first & second doses of Moderna vaccine; study compares myocarditis, pericarditis & cardiac arrhythmia risks after 1st, 2nd dose of AZN, PFE, MRNA shots

·     Pharma movers; PFE said final analysis of its antiviral Covid-19 pill still showed near 90% efficacy in preventing hospitalizations and deaths in high-risk patients/data suggests the drug retains its effectiveness against the fast-spreading omicron variant of the coronavirus; MRK announced that the FDA has placed clinical holds on the investigational new drug applications (INDs) for the oral and implant formulations of islatravir (MK-8591) for HIV-1 pre-exposure prophylaxis (PrEP)/the injectable formulation of islatravir for HIV-1 treatment and prophylaxis; CABA tumbles after reports top-line biologic activity data from two lowest dose cohorts in Descartes™ trial in patients with mucosal pemphigus vulgaris

·     Biotech movers; ADGI tumbles after saying that the Omicron variant led to over 300-fold reduction in neutralizing activity in ADG20, the company’s experimental monoclonal antibody (mAb) for COVID-19; MESO announced that NVS has terminated the agreement with the company on the development of remestemcel-L in COVID-19-induced ARDS; BIIB and Therapanacea announce new collaboration with the potential to advance digital health for personalized medicine in neuroscience; GRTX announces primary endpoint met statistical significance in corrected topline efficacy data of phase 3 Roman trial of avasopasem; GBT announces proposed offering of $250M Convertible Senior Notes; INO highlights key updates on phase III program for VGX-3100, its DNA-based immunotherapy

·     Healthcare Services; CNC reaches a deal with activist investment firm Politan Capital Management, under which five new directors to join co’s board and CEO Michael Neidorff to retire next year; Goldman Sachs initiates coverage of Managed Care with a positive outlook on the sector. Buy ratings on ANTM (on CL), UNH, CVS, MOH, and ALHC, a Sell rating on OSCR and Neutral ratings on HUM, CI, CNC, and BHG as the firm has a positive outlook for the sector and sees potential for 13% annual EPS growth for the large-cap MCOs over the next two years (’22-’23), more than double S&P EPS growth of 6%.

Industrials & Materials

·     Aerospace & Defense; GD upgraded to buy from Neutral and raise tgt to $245 from $220 at UBS while the firm downgraded LHX to Neutral from Buy saying as aero makes steps toward positive EPS/FCF in ’22, they believe optimism at the start of ’22 should prove more durable as COVID moves from a pandemic to an endemic stage (says leaning into commercial aero in 2022); LDOS estimates cut at Cowen saying growth goal looks realistic but cy22 guide may disappoint; Wells Fargo said it’s A&D survey indicated maintenance activity has increased, which is positive for aftermarket/TDG is the most exposed; RKLB announced the acquisition of SolAero in an $80M all-cash transaction. SolAero is a best-in-class manufacturer of spacecraft solar power systems, including solar cells, panel substrates and solar cell assemblies; WSJ reported that the United Arab Emirates is threatening to pull out of a multibillion-dollar deal to buy American-made F-35 aircraft, Reaper drones and other advanced munitions, U.S. officials said

·     Industrial & Machinery; FLR said its nuclear energy unit NuScale Power plans to go public by merging with a blank-check firm in a deal that values the combined entity at $1.9 billion, including debt; NEOG shares jumped after combining with MMM, where 3M will separate its food safety business and simultaneously combine it with Neogen in a $9.3B transaction that is expected to be tax-efficient to 3M and its holders; Barnes (B) said it now expect full year revenues to be up approximately 12% over the prior year, with organic sales growth of 10% while adj operating margin is now forecasted to be approximately 12%; in research, AME upgraded from PP to OP at Wolfe Research as prefer increasing quality/long-cycle exposure as we move deeper into the economic recovery, and AME checks both boxes., while firm downgrade VRT from OP to PP rating as believe the re-rating story has played out as much as it can in lieu of further progress on core OMX initiatives; Rentokil Initial agreed to acquire pest control company TMX in a cash-and-stock deal valued at $55 per share or an aggregate of $6.7 billion

·     Transports; UAL plans to purchase up to 100 hydrogen-electric engines; Stifel said 2022 could be the year of the trucker with supply remaining constrained and demand changing, and they favor multi-modal providers KNX, SNDR given their better ability to capture demand, and continue to see upside for WERN, HTLD given positive recruitment trends and historically favorable valuations; CP and KSU closed into a voting trust and CP revised its outlook following the impacts of the accelerated timeline of the transaction closing into trust and the impacts of the extreme weather in British Columbia, now expecting FY21 adj EPS growth in the high-single digits and volumes to be approximately flat

·     Metals & Materials; AA will move to the S&P MidCap 400, replacing HRC effective at the start of trading on Dec. 20 (HRC being acquired by BAX); steel stocks were among early movers higher with X, NUE, STLD edging to the upside

Technology, Media & Telecom

·     Internet; NFLX said it is slashing its monthly subscription rates by up to 60% in India; WB was fined by Chinese authorities for a string of infractions, the second time in two weeks that Beijing has announced the punishment of a major internet platform amid a further tightening of controls online; TRVG says Omicron variant says variant concerns and travel restrictions drive 10% decrease in holiday travel planning and resulted in an increased cancellation rate of 35% since November; FB Instagram surpasses 2B monthly active users

·     Software movers; JPMorgan issued upgrades to Overweight for CRWD and AVLR on compressed valuation, SSNC as its M&A strategy could lead to significant synergies if deals can close, and MODN as they see its organic growth returning to double-digit growth over the next couple of years, upgraded PRO to Neutral on improved 2022 outlook and more balanced risk-reward, and downgraded ADBE, AKAM, DDOG, NET, PTC, SWI, ZS, DOCS, DOX, BCOR, SPNS due to a combination of limited upside to price targets, valuation in light of risk that interest rates rise in 2022, adj discount rates for the current rate environment, re-evaluating reasonable cash flow expectations; Morgan Stanley upgraded Unity (U) and APP to OW and initiated IS at OW as emerging mobile ad networks are set to benefit from the growth in consumer time/money spent on mobile apps; Needham initiated MSP with a Buy rating and $29 target

·     Hardware & Components & Services; Evercore downgraded DELL to In-Line with an unchanged $63 PT on a more balanced risk/reward after completing the VMW spin and recent debt repayments, downgraded ST to In-Line as the accelerating shift to EVs is less favorable for them than peers, their larger focused on M&A than shareholder returns, and its conservative outlooks could lead to a more cautious guide than street estimates, named CSCO their top pick in enterprise on its potential to re-rate in CY22 driven by better macro tailwinds, product cycles across Silicon One, 400GB switching, and campus, and the potential for M&A to bolster sales/EPS, and their top picks in IT & Hardware include AAPL given multiple tailwinds including sustained iPhone growth, new product launches, and margin expansion, APH as the supply chain normalizes and M&A tailwinds pick up, and ANET as an attractive way to play hyperscale growth as it benefits from multiple growth vectors next year, as well as TEL, PSTG; AAPL upgraded to Buy with a $210 PT at Bank of America, partially due to the expected AR/VR headset launch in 2022-early 2023 which they view as a game-changer;

·     Communication & Networking: Needham started CLFD at a Buy with a $92 PT as a beneficiary from a surge in rural broadband infrastructure investment and a clear leader in Tier 2 and 3 market where they have a majority of the share with minimal competition; Wedbush sees the Street underestimating Indian IT names INFY, WNS, TWKS; JPMorgan downgraded CDNS to N as they see it fully valued as we lap the accelerated demand created by the pandemic and CCCS to UW who had the most generous valuation in their coverage, including lowest discount rate and highest terminal multiple-to-last-forecasted-growth-rate ratio;

·     Media & Telecom movers; YouTube said now in negotiations with DIS to continue distributing their content on YouTube tv; says deal with Disney expires on Friday, December 17, and if unable to reach a deal by Friday, will decrease our monthly price for YouTube tv by $15, from $64.99 to $49.99; Macquarie with several changes as they downgraded CMCSA from Outperform to Neutral w/ $52 PT (down from $65) and downgraded LGF from Outperform to Neutral w/ $17 PT (from $20), while cut tgt prices on AMCX from $57 to $42, DIS from $195 to $185, maintains Outperform, VIAC from $40 to $32 and FOX from $40 to $37; Vox Media said it agreed to acquire Group Nine Media Inc., a deal that unites two of the biggest players in digital publishing. Under the terms of the stock deal, Vox Media will have 75% ownership of the combined company, with the remaining 25% going to Group Nine Media, WSJ reported