Closing Recap

Monday, February 06, 2023

Index	Up/Down	%	Last
DJ Industrials	-36.38	0.11%	33,889
S&P 500	-25.50	0.62%	4,110
Nasdaq	-119.51	1.00%	11,887
Russell 2000	-27.82	1.40%	1,957

 

Equity Market Recap

·     U.S. stocks slid, holding overnight losses in a lackluster trading day as investors await another heavy dose of earnings this week and eagerly anticipated comments from Fed Chairman Powell tomorrow around noon, in an interview at the Economic Club of Washington. Stocks fell for a second day following the massive jump in the January headline payrolls report Friday, boosting the US dollar and Treasury yields as investors raise bets of further rate hikes beyond the March FOMC meeting. The Nasdaq slips, riding a 5-week win streak (longest since Nov 2021) coming into today as major averages holding well above key technical levels. Asian equities ended mostly lower on Monday amidst geopolitical tension between China and US over a suspected Chinese spy balloon.

·     Goldman Sachs strategy said today following an improvement in US and global macro data, they raise their 3-month S&P 500 target to 4000 (from 3600). However, retain year-end S&P 500 forecast of 4000 (slightly below current level) as earnings growth this year remains on track to be anemic, believe a soft-landing is already priced into US equities, and stock valuations are currently elevated relative to history.

·     Bearish Morgan Stanley strategist Mike Wilson said today: While last week’s events did not lead to an immediate reversal in this latest bear market rally, we also don’t think they offered any conclusive evidence to suggest a new bull market began in October. While it may take a bit longer for the market to price our materially below consensus view on earnings and the fact that Fed policy is restrictive in the context of an earnings recession, we remain convicted in our thesis. Forward EPS growth has just gone negative. This has only previously happened 4 times over the past 23years. In each prior instance (2001, 2008,2015, 2020) equities have faced significant price downside associated with the shift from positive to negative earnings growth.

 

Commodities

·     Oil prices rose with WTI crude +$0.72 or 0.98% to settle at $74.11 per barrel following an 8% drop last week on supply concerns but was still trading near three-week lows. Oil rose as a major oil pipeline was temporarily halted, while key producers flagged stronger Chinese demand just as more sanctions on Russian flows take effect. Turkey halted oil flows to the Ceyhan export terminal on the Mediterranean coast after a major earthquake. Natural gas prices rose 2% to $2.457 mln Btus, snapping a 3-day losing streak.

·     Gold prices edge higher, snapping a 3-day losing streak despite the further bounce in the dollar, rising $2.90 to settle at $1,879.50 after tumbling -$54.20 or 2.8% to settle at $1,876.60 an ounce Friday to a three-week low after stronger-than-expected U.S. jobs data raised fears that the Federal Reserve could keep hiking interest rates.

 

Currencies & Treasuries

·     After weeks of a downtrend, the US dollar extended late last week gains, strengthening further as investors adjust to Friday’s surprisingly robust jobs data and its implication for the Fed’s rate path. The dollar rose 0.7% vs. the euro and 1.2% against the yen, and the Dollar Index (DXY) gains 0.8%, up more than 200-bps from last week lows just above 101 to 103.50 today. Strong payrolls have helped offset the declining inflation/improving growth backdrop, boosting the buck.

·     Treasury prices slide as yields rise, with the 10-yr yield hitting new intraday highs above 3.64%, up nearly 11-bps and the 2-yr bigger move up 16-bps to 4.46%. Yields resume upward momentum after spike Friday following the stronger jobs report.

 

 

Macro	Up/Down	Last
WTI Crude	0.72	74.11
Brent	1.05	80.99
Gold	2.90	1,879.50
EUR/USD	-0.0067	1.0727
JPY/USD	1.32	132.49
10-Year Note	0.102	3.634%

 

 

Sector News Breakdown

Consumer

Autos:

·     In auto suppliers, LEA downgraded from Outperform to In Line at Evercore/ISI and trim tgt to $145 from $150 based on 9%/7% reductions to our ‘23/24 EPS estimates.

·     TSLA raised the prices of its Model Y SUV in the US late Friday. The cost of the Model Y Long Range has increased by $1,500 to $54,990, while the Model Y Performance is up $1,000 to $57,990, according to the company’s website.

·     Nissan (NSANY) and Renault (RNLSY) unveiled details of their redesigned alliance, with the Japanese car maker committing to buy a stake of up to 15% in Renault’s electric vehicles unit Ampere.

·     In the electric vehicle sector, late Friday, the US Treasury Department updated the vehicle classification standards used to determine SUV eligibility for EV tax credits. The new standard is more liberal, including a wider range of models, and is retroactive back to January 1, 2023.

 

Consumer Staples & Restaurants:

·     In food: TSN missed consensus estimates for quarterly revenue $13.26B vs. est. $13.5B but above $12.93B y/y), hurt by slowing demand for its premium beef and pork cuts; guides FY chicken margin 2-4% (was supposed to do 7%) – shares of PPC move in reaction.

·     In household products: CHD upgraded from Underweight to Neutral at Atlantic Securities saying the company has come through a challenging period, seeing sales decline at key brands and gross margins contract for three consecutive years…but these headwinds will begin to abate in H122.

·     Food & Staples Retail at Wells Fargo – said a volatile start has caused them to adjust as top 5, now PFGC, DG, OLLI, CASY and USFD, our bottom 5 are SFM, KR, UNCI, COST and TGT.

·     In beverages: CELH upgraded to Outperform at Wedbush and raised tgt to $115 saying not only has the co transition since their initiations gone better than initially expected, but CELH has been delivering accelerating rates of market share capture, running at all-time highs.

·     In Beauty: Barron’s feature saying ULTA could continue its outperformance defying the slump from other pandemic winners; consumers are still buying beauty products.

Retailers:

·     In apparel and accessories: PLCE lowers Q4 adjusted EPS view to ($4.02)-($4.41) from $0.50-$0.75 and lowers its Q4 revenue view to $454M-$456M from $460M-$470M saying they now expect to report a net loss in the range of ($52M)-($57M) for the Q4. Deutsche Bank said per their checks, investor sentiment leans negative on VFC and RL, while more mixed on UAAGenerally, they expect in line prints from all three and see the biggest risk to VFC potentially cutting its FY23 outlook or narrowing to low-end of the prior range. Prefer UAA into the print and more neutral on RL and VFC into earnings as we do not view this upcoming cycle as a catalyst.

·     Stifel downgraded POOL to Hold from Buy in the swimming pool sector, while raised tgt to $360 given its YTD outperformance (POOL +33%, S&P 500 +8%, as it premium to specialty distribution peers has expanded against our more cautious category outlook. The firm also downgraded HAYW to Hold from Buy in the space while upped tgt to $13 also citing outperformance.

·     RCII was downgraded to Hold from Buy at Loop Capital and keep $30 tgt after outperformance.

 

Homebuilders, Building Products, Home Furnishing:

·     In home furnishings: RH released an 8-K late Friday that included an update on FY22 expectations, with revenue trending to the lower end of guidance but margins trending to the higher end of guidance.

·     In household products: ENR Q1 top and bottom-line miss estimates with EPS $0.72 and revs $785.1M below consensus of $0.75 and $789.4M and EBITDA $145.6M vs consensus $149.7M;/reaffirms FY23 guidance – EPS $3.00-$3.30 vs consensus $3.15, revenue growth LSD declines vs consensus (1.4%).

 

Energy

·     Natural gas outlook: Raymond James downgraded BSM to Outperform from Strong Buy and downgraded to AR, CTRA, NFG, SWN to Market Perform coinciding with their decidedly bearish natural gas outlook saying they believe the shift in natural gas prices is justified and that Henry Hub will remain depressed through 2024.

·     LNG sector: GLNG agreed to acquire the New Fortress Energy Inc. ownership stake in FLNG Hilli in exchange for Golar’s remaining 4.1 million shares in NFE and $100 million in cash. Golar will also take over approximately $323 million in debt obligations linked to Hilli.

·     In solar/utilities: Bloomberg reported PCG and RUN announce partnership to enlist home solar and battery systems that can shore up grid when demand spikes during hot weather. ENPH shares rise ahead of earnings tomorrow morning.

 

Financials

Banks, Brokers, Asset Managers:

·     Investment Services: VRTS downgraded to Neutral from OW at Piper saying while they continue to like VRTS on a fundamental basis and believe the firm will grow its market share they expect that recovery to begin on a more sustained basis in 2024+. Online brokers early strength with IBKR hitting 52-week highs and SCHW outperformed as well. CG shares fell after the Board named a new CEO effective February 15^th.

·     In FinTech: PYPL downgraded to Market Perform from Outperform at Raymond James following the strong start to the year, coupled with their cautious stance on the 4Q print. Simply put, while most investors expect initial 2023 revenue growth guidance to come in below the Street and they believe the 2023 top line outlook will imply flat to negative growth for branded checkout.

·     In Bitcoin: RIOT said it produced 740 Bitcoin in Jan 2023 an increase of about 62% as compared to January 2022 production of 458 BTC and held approximately 6,978 Bitcoin as of January 31, 2023, all produced by company’s self-mining operations.

 

REITs:

·     PSA made an $11 billion unsolicited offer for its smaller rival LSI valued at $129 per share, ramping up an effort to buy its smaller rival after an earlier bid was rejected; holders of Life Storage would receive 0.4192 shares of PSA common stock https://on.mktw.net/3X50gOL – other self-storage REITs EXR, CUBE, NSA moved higher in sympathy.

·     AGNC downgraded to Hold from Buy at Argus on valuation.

 

Insurance & Services:

·     In information services: Truist raised EFX PT to $260 (27.4x C24E EPS), from $195, and boost TRU’s PT to $74 from $62 saying they are bullish on EFX, despite EFX’s ~40%+ C24E P/E premium to TRU. Argue Equifax’s robust EWS organic rev growth and bottoming mortgage rev will drive superior through-the-cycle EPS growth.

·     CLVT was downgraded to Equal weight at Morgan Stanley noting it has outperformed the market by 26% YTD, and at this level, they see a more balanced risk reward, where stock appreciation will depend on a successful turnaround.

 

Healthcare

Biotech & Pharma:

·     CTLT shares jump after Bloomberg reported DHR has expressed takeover interest in the contract manufacturer and overtures made in recent months valued Catalent at "a significant premium," people familiar with the matter told Bloomberg https://bit.ly/3DHwbOh

·     For ABBV, the WSJ largely focused on the forthcoming roll-off of Humira post biosimilars, ABBV CEO indicated interest in increasing the size of potential M&A that company pursued above a “self-imposed $2B limit” since its acquisition of Allergan https://on.wsj.com/3DJW3Jy .

·     ARWR shares pressured: Cantor said in a note that a recent industry news article highlighted that JNJ as part of a comprehensive review of its portfolio, is deprioritizing hepatitis B and D therapies and will be winding down several ongoing HBV (Hepatitis B) trials. Firm said based on initial review, this seems to include a wind-down of all ongoing HBV trials testing ARWR’s RNAi drug.

·     BIIB and SAGE said FDA has accepted the filing of a New Drug Application (NDA) for zuranolone in the treatment of major depressive disorder (MDD) and postpartum depression (PPD).

·     DRRX announces $10 million registered direct offering of common stock and warrants.

·     OMER rises after receiving a $200M milestone payment from Rayner Surgical Inc. under an asset purchase agreement in which it sold its ophthalmology product Omidria to Rayner.

·     PSNL upgraded to buy from hold at Needham noting progress on cost cuts and anticipated reduction in cash burn going forward, expectations for continued strong growth in the biopharma business, and incremental revenue from new VA contract in 2023.

 

Healthcare Services & MedTech movers:

·     EW downgraded from Outperform to Market Perform at Raymond James saying they are less confident in the sustainable growth profile. EW’s revenue growth (10% 5-year, 13% 10-year avg.) has separated it from most of its peers and has long supported a premium valuation.

·     IDXX reported 4Q results, with revenue of $828.6M topping ests $820.9M and EPS of $2.05 beats the $1.92 est. with lighter gross margins offset by operating costs; FY2023 guidance bracketed consensus on revs and EPS ($9.27 to $9.75 vs. $9.59 estimate).

·     STAA downgraded from Buy to Neutral at BTIG saying the company is "wed to China and investors are subsequently wed to the undulations of the Chinese economy.”

 

Industrials & Materials

Aerospace & Defense

·     Credit Suisse turns positive on the U.S. aerospace and defense sector from cautious standpoint saying that general Q4-beat rate on rev ests has improved setup for a beat/raise in FY23 on better underlying dynamics – named LHX its "top pick" raising tgt to $427 from $408 and for GD to $239 from $222. Notes China tensions make environment incrementally more tense.

 

Materials, Metals & Mining

·     In chemicals: DOW and LYB upgraded to outperform at Credit Suisse saying that both should benefit from investors looking optimistically toward 2024 for the US polyethylene market.

·     In metals: gold miners active after reports NEM made a roughly $17 billion offer to acquire Australia’s Newcrest Mining, aiming to seal one of the biggest deals for a global gold miner https://on.wsj.com/3YtevOi ; VALE downgrade to Sector Perform at RBC Capital and lower tgt to $15 from $16 following a strong share price performance, with risks to iron ore markets and new potential Samarco liabilities; TKR slides on guidance. Aluminum producers (AA, CENX) active as US plans 200% tariff on Russian aluminum as soon as this week.

·     In industrial gases: LIN said it will invest $1.8 billion to supply clean hydrogen to OCI’s OCI.AS blue ammonia plant in the U.S. state of Texas; LIN also positive mention in Barron’s this weekend.

 

Technology

Internet, Media & Telecom

·     In Internet, SNAP shares outperform, recovering all its earnings-related losses last week, ahead of PINS earnings results tonight. Texas Governor Greg Abbott announced a statewide model security plan for Texas state agencies to address vulnerabilities presented using TikTok and other software on personal and state-issued devices. GOOGL is rolling out a new conversational artificial-intelligence service to a select set of testers, and plans a broader public launch in coming weeks, part of the company’s effort to play catch-up with challengers such as OpenAI.

·     In Music/Online: SPOT upgraded from Neutral to Overweight at Atlantic with $160 tgt based on 1.5x forward 12m revenue, well below historical levels, and supported by DCF work. Wells Fargo also upgraded shares to Overweight ($180 tgt) as see margins and valuation as upward bound with margin delivery rerating SPOT.

·     In telco, TMUS downgrade from Outperform to Market Perform at Moffett.

 

Hardware & Software movers:

·     DELL announced it will cut 6,650 heads, or 5% of its workforce.

·     In follow through strength from last week, any names related the Artificial Intelligence sector “AI” is seeing massive buy interest with shares of AI, BBAI, SOUN among volatile movers.

·     In software: Keybanc downgraded DDOG to Sector Weight, while maintain Overweight ratings within growth on key ideas including GTLB and update price targets for MDB and WDAY saying they expect a meaningful slowdown of software spending growth in 2023. SPLK was upgraded to Overweight with $130 tgt. Video gamers TTWO, ATVI earnings tonight.

 

Semiconductors:

·     Earnings tonight in chip space with SWKS, DIOD, POWI, RMBS results expected.

·     ON beat Q4 estimates but guided lower for the current period. Q4 EPS $1.32/$2.1B tops consensus $1.27/$2.08B, announces $3B share repurchase authorization but guides Q1 EPS $1.02-$1.14 below consensus $1.14 and revs $1.87B-$1.97B vs. est. $1.99B.