Closing Recap

Tuesday, January 04, 2022

Equity Market Recap

·     It was a rough day for technology, but stocks finish mixed. After touching fresh record intraday highs initially for the S&P 500 and Dow, things turned South quickly as a big pullback in technology weighed heavily on the Nasdaq Composite which fell as much as 2% late day and pressured the S&P 500, as surging treasury yields for a second day to start the year impacted high growth/rate sensitive sectors. It wasn’t all bad as financials, energy, materials, consumer staples and discretionary showed strength, but the S&P 500 falling despite those strong sectors showed just how much of an impact technology stock have on major averages. Several 52-week highs in area “not tech”: in financials, AFL, BK, CMA, CFG, KEY, PNC, RJF, SCHW, SNV, TD, UBS, WFC; in energy CVX, DVN, MRO; in REITs: AVB, EQR, ESS, FRT, O, UDR; in staples; HSY, KO, KMB, MCD, STZ, TSN; in hotels and lodging: H, HLT, WH and in utilities: NI, PEG just a few.

·     Stock & Sector movers: Auto sector leads as Ford (F) surges to highest levels in over 20 years after nearly doubling the factory capacity for its electric F-150 Lightning, GM hits record highs ahead of tomorrow’s introduction of its electric Silverado pickup, TM soars to ATH after selling the most cars in the U.S. in 2021, RACE jumps as Morgan Stanley’s auto stock for 2022; KO hits record highs after Guggenheim upgrade amid strength in consumer staples; also saw strength in defensive foods K, KR, MDLZ, CPB, and products such as KMB, PG; energy stocks CTRA, OXY, FANG, HAL, APA outperform with WTI Crude prices hitting highest in over a month after OPEC agrees to continue 400k bpd output increase next month; banks RF, BAC, RJF, JPM, BAC strong for the 2nd straight day to kick off the year as yields run higher again after several near-medium-term yields closed at their highest since the start of the pandemic yesterday; travel stocks advanced again with airlines and cruise operators rising on lower Omicron variant fears; High-growth tech stocks sold off as the yield on the 10-year U.S. Treasury reached 1.674%, a rise of more than 2.8% and the highest levels in two weeks – NET, CRWD, OKTA, SNOW, TWLO.

Economic Data:

·     Weaker data as ISM U.S. Manufacturing activity index reported at 58.7 in December (lowest since Jan 2021) vs 61.1 in November and below estimates of 60.0; prices paid index 68.2 in December vs 82.4 in November; new orders index 60.4 in December vs 61.5 in November; employment index 54.2 in December vs 53.3 in November

·     U.S. Job openings (JOLTs) fell to 10.56 mln in Nov. From 11.09 mln; a record 4.5 million Americans quit their jobs in November

Commodities

·     Oil prices rise as WTI crude gains $0.91 or 1.2% to settle at $76.99 per barrel, but off earlier highs of $77.64 per barrel. OPEC+ agreed to stick to its planned increase in oil output for February as expects the Omicron coronavirus variant to have a short-lived impact on global energy demand. The group has raised its output target each month since August by 400,000 barrels per day. OPEC+ is unwinding record production cuts of 10 million bpd, which were imposed in 2020. Gold prices gain despite a further bounce in yields and the dollar, with Feb gold $14.50 or 0.8% to settle at $1,814.60 an ounce after slipping to roughly 2-week lows Monday.

Currencies & Treasuries

·     Treasury yields were mixed with the long end of the curve extending Monday gains, with the 10-year falling just short of 1.7% after a 12 bps move the day prior, while shorter term Treasury yields slipped after the 1, 2, 3, and, 5-year Treasury yields closed at their highest levels since the start of the pandemic on Monday as investors’ attention returned to the outlook for higher U.S. interest rates. The U.S. 10-year Treasury yields rose to their highest level in six weeks on Tuesday, as a selloff in governments bonds resumed. The U.S. 30-year yield extends climb to 2.10%, last seen Oct. 25. The U.S. dollar was mixed with the euro dropping back below the 1.13 level while the dollar/yen rises above 116 for the first time since January 2017 amid rising bets of increased interest rate hikes by the Fed this year.

Sector News Breakdown

Consumer

·     Retailers; consumer discretionary names was a pocket of strength, with M, UA, DDS, GPS edging higher early; FL was downgraded to Underweight at JPMorgan and cut tgt to $42 from $60 citing the combo of market share compression in an expanding total addressable market athletic category and multi-year margin pressure points on both rising occupancy and wage costs; REAL and SKX were both upgraded to Outperform at Wedbush from Neutral saying for REAL, the new CFO may be key to improving profitability, while for SKX, fundamentals appear solid, governance changes may unlock value

·     Auto sector; Ford Motor Co (F) trades at 20-year highs after saying it will nearly double annual production capacity for its F-150 Lightning electric pickup to 150,000 vehicles as the model has already attracted nearly 200,000 reservations ahead of its arrival this spring at U.S. dealers. Ford’s announcement comes a day ahead of rival GM’s public introduction of the Chevrolet Silverado electric pickup; GM said dealers sold 440,745 vehicles in Q4, down 43% vs q4 2020 and that Q4 production & wholesale deliveries up significantly from Q3 as semiconductor supply conditions improved; TM reported December U.S. 2021 sales of 174,115 vehicles, decrease of 30.2% on a volume basis & down 27.7% on a DSR basis; Morgan Stanley ranked all their names in auto coverage from 1-33 – in order: RACE, RIVN, FREY, TSLA, GM, FSR, CVNA, PII, KMX, APTV, MGA, LICY, LEA, QS, HTZ, ABG, AN, GPI, HOG, AXL, PAG, LAD, ADNT, SAH, TEN, VC, F, CAR, MVST, REE, BWA, LCID, and RIDE

·     Consumer Staples & Restaurants; KO was upgraded to Buy from Neutral at Guggenheim with a $66 price Target as they see the company exiting FY21 transition year citing strong emerging markets, on-premise recovering faster than originally forecasted, restructuring and portfolio rationalization led to a more focused and agile organization, and gross margin benefiting from incidence model; PEP tgt was raised to $195 from $180 at Argus as expect cost cutting to continue to benefit earnings, and look for PepsiCo to achieve its goal of $1 billion in annual cost savings; SG said it is running a pilot program for a new subscription program called Sweetpass; CMG dips below its 200-day MA of $1,661.50, with shares down as restaurants were mixed; ULTA touching new 52-week highs today

·     Casinos, Gaming, Lodging & Leisure sector; RCL commenced a private offering of $700 mln of senior unsecured notes due 2027; said intends to use proceeds from sale of notes to repay principal payments on debt maturing in 2022; overall the travel and online bookings areas, along with hotels (HLT) saw modest strength as reopen stocks see further money put to work

Energy

·     E&P and Majors; among top sectors; BP was upgraded to Outperform from In-Line at Evercore/ISI on the back of their 2022 outlook for the Big Oils where rising returns driven by the upstream is the focus; in services, HAL upgraded to Overweight from Equal Weight at Morgan Stanley with a price target of $30, up from $28 noting the stock underperformed peer SLB in 2021 as market sentiment was focused on international and energy transition, where Halliburton comps less favorably; the firm says they remain bullish on SLB on int’l pricing power + energy transition opportunity while more optimistic than consensus on US pressure pumping (LBRT, NEX, PTEN) and remain less optimistic on land drilling and frac sand industries (HP, NBR, SLCA); NEX said it expects Q4 revenue between $500M-$510M, higher than estimate of $493.63M

·     Utilities & Solar; in research, SPWR, SOL, TPIC upgraded to strong buy from OP at Raymond James, while FSLR, CLNE upgraded to Market Perform while AQUA, NEP downgraded to Market Perform from OP and XYL downgraded to Underweight noting they are taking profits in some of the value-type, better-established names (disproportionately larger-cap ones) that outperformed; and redeploying capital into some of the speculative story stocks (mostly on the smaller end of the spectrum) that were on the losing side of last year’s rotation

Financials

·     Bank movers; Wolfe downgraded JPM to Peer-Perform on the threat of tougher regulations and higher capital minimums with consensus not adequately reflecting expense growth, leaving WFC as their only OP among money centers; UBS upgraded HLI to Buy as they expect much stronger FY22-23 earnings driven by accretion from the recently closed GCA deal; Wells downgraded UMBF to EW on valuation with shares now trading at a modest premium from a steep discount and they do not expect further valuation expansion and UMPQ to EW as shares are unlikely to see much valuation expansion until the COLB merger is integrated, which is currently planned for 1Q23, and its earnings growth is likely to underperform as rates rise because of its higher dependence on mortgage banking than peers; OZK increased its dividend for the 46^th consecutive quarter, now paying 30c from prior 29c; Asset Managers; Goldman downgraded APAM to Neutral and NDAQ, TROW to Sell while upgrading NTRS to Neutral; TPG plans to sell about 28.3M shares at $28-31 in its IPO as it aims for a valuation as high as $9.3B

·     Insurance; JPMorgan lowered their 4Q21 estimates on life insurers to incorporate higher Covid claims but raised their 2022 EPS forecasts to above consensus levels for most to reflect the strong equity market, slight rise in rates, and other factors, and feel projections for VOYA, MET EQH are too low while RGA, GL seem high, and further said valuation is attractive within the sector with GL, LNC, MET their favorite stocks; Well upgraded AXS to EW as it should benefit from continued favorable market conditions, recently announced a buyback, and trades at a cheap valuation just under book value; HRTG announced a $25M share buyback

·     FinTech & Payments; WEX raised its Q4 guidance for adj EPS to $2.45-2.55 from $2.25-2.45 on revenue $485-495M from $468-483M, now expecting FY21 adj EPS $9.01-9.11 vs prior $8.81-9.01 on revenue $1.838-1.848B from $1.821-1.836; UBS issued downgrades to Neutral on STNE with a $21 PT from $47 as 2022 could be challenging with too many points to focus on after shares dropped 80% in 2021 and PAGS with a $30 PT from $50 after cutting its EPS forecast due to the environment that includes rising policy rates, higher D&A, and a cautious approach in lending business; PSFE shares rose in pre-market trading after CNNE purchased ~5.7M shares for $22.2M through a subsidiary; Morgan Stanley said RPAY’s acquisition of Payix yesterday is unlikely to move the needle near-term; NU initiated at Buy with a $12 PT at Citi and Neutral with a $10 PT at JPMorgan; Loop initiated GPN at Buy with a $180 PT as shares are near a 5-year low on price to forward earnings despite raising its near-term cycle growth guidance and its position to benefit from the secular growth in digital payments, incremental growth driven by their powerful combination digital payments, and SaaS offerings to drive program winning solutions for new clients that provides an unappreciated visible and durable growth outlook

·     Consumer Finance & Services; Evercore downgraded SLQT to In-Line with an $11 target from $18 as AEP volumes look less robust vs. peers and valuation upside looks limited in 1H22 despite its 2021 underperformance; SPGI acquired Climate Service Inc to add to its ESG data portfolio; RBC upgraded EQGPF to Outperform as a sleeper idea for 2022 with the potential to have the highest return in their coverage; JW launched an IPO of 7M shares and sees pricing $29-32/shr; AFCG filed for a common stock offering of up to 3M shares with a price anticipated between $21-21.50

·     REITs; CBRE said it has agreed to buy a global portfolio of logistics properties valued at $4.9 billion, representing one of the largest sales ever of industrial property; DLR announced plans to acquire a 55% stake in Teraco for $1.9B, marking a significant expansion on the African continent and entrance into South Africa; TWO was initiated at Neutral by Citi as their positive view of its agency RMBS and MSR strategy with an internally managed structure is balanced with near-term risks of the Fed reducing its agency MBS purchases and potentially raising interest rates; LSI raised its quarterly dividend to $1 from $0.86; Manhattan real estate sales hit an all-time record of $30 billion in 2021 – CNBC reported

Healthcare

·     Vaccine news: a fourth dose of COVID-19 vaccine boosts antibodies five-fold a week after the shot is administered, Israeli Prime Minister Naftali Bennett said on Tuesday, citing preliminary findings of an Israeli study; MRNA said FDA has granted priority review designation for BLA filing of COVID-19 vaccine and that they anticipate development candidate for Covid booster + flu booster in a single dose, MRNA-1073, will be in the clinic soon

·     Biotech movers; AVRO said it is deprioritizing its Fabry disease program due to several factors, including new clinical data showing variable engraftment patterns from the five most recently dosed Phase 2 FAB-GT patients which would significantly extend the program’s development timeline, as well as an increasingly challenging market and regulatory environment for Fabry disease; ITCI slips as files to sell $400M in common stock; BIIB said it exercises option with IONS to develop and commercialize investigational ASO for SMA as Biogen made a one-time $60M payment to Ionis in q4 of 2021; CGEM said its CLN-081 was granted Breakthrough Therapy Designation by the FDA for the treatment of non-small cell lunch cancer

·     MedTech Equipment; ICAD slips after guides year revs $33.6M-$33.8M, below est. $36.15M; in research, Piper upgraded GMED and SYK to Overweight as both have the momentum to continue delivering better than average share performance again here in ’22, while the firm downgraded MDT, TFX and ZBH from Overweight to Neutral saying they understand that all three have seen pressure recently and trade at modest valuations but all three have headwinds that we believe will make it difficult for the stocks to work in the near- to intermediate-term; NVRO said that UNH will provide coverage for the company’s high-frequency 10 kHz Therapy for the treatment of PDN (Painful Diabetic Neuropathy) for dates of service on or after March 1, 2022

Industrials & Materials

·     Industrial & Machinery; GE was upgraded to Outperform from Neutral with $122 tgt at Credit Suisse while HON downgraded to Neutral from Outperform saying they continue to believe that HON is a high-quality Industrial Software company with leading businesses across each segment…but see more upside potential in GE; CARR announces $500 million accelerated share repurchase program

·     Metals & Materials; Steel stocks rebound after pressure Monday (X, NUE, STLD, CLF); BMO noted U.S. spot HRC steel prices declined 8.9% to $1,500/st over the past two weeks, the lowest level seen since early May. In the latest Steel Monitor, notes spot prices are now down 23.5% from the all-time high in late September (+48.7% y/y), and spot sheet prices are likely to continue to decline in the near term; Citigroup noted US flat rolled steel prices have corrected ~25% lower since September and now stand at $1,500/st (still >2x normalized). The good News is that steel equities have only fallen 5-10% lower so far. Historically US prices fall to marginal cost following big rallies, which would be ~$700-750/st today (prime scrap +$175) but scrap will likely weaken

·     Chemicals: SHW was downgraded from Outperform to Market Perform at BMO Capital noting it was one of the best performers in 2021. This came as investors looked through the supply disruptions as well as inflationary pressures on 2021 earnings with expectations that when those pressures level off SHW will capture significant value. While we believe that will likely be the case (hence our 25% EPS growth forecast in 2022), it appears to be largely factored into the stock; BASFY to buy back up to eu3b in shares until end of 2023; NTR named Ken Seitz, the head of its potash unit, as its interim CEO after top boss Mayo Schmidt stepped down in just eight months

·     Paper & Packaging movers: Citigroup called AVY its top pick while downgraded BLL to Neutral from Buy saying after outperformance in 2020, Packagers ended up lagging the S&P in 2021 (+6.9% vs. +26.9%). Packagers benefitted in the early stages of the pandemic from surging vols without feeling the bite of higher costs, thereby boosting margins; this reversed as historic inflation led to near-record margin compression in 3Q ‘21. We view 2022 as rocky terrain for Packagers, which as converters are especially vulnerable to price/cost pinches.

Technology, Media & Telecom

·     Internet; PINS was downgraded to Neutral from Buy at Guggenheim and cut tgt to $39 from $46 saying Ads Manager data indicates user declines for the second consecutive month, while download data also points to further declines; overall, the high growth area saw big selling pressure with SNAP, TWTR, SHOP tumbling and more modest declines early for NFLX

·     Semiconductors; MRVL tgt raised to $115 at Needham, choosing it as their top semi pick for 2022; at the CES conference, AMD unveils Ryzen 6000 Series processors for laptops; NVDA announces new GPUs, 3080 Ti and 3070 Ti laptop GPUs; QCOM unveiled a partnership with Microsoft (MSFT) for chips to be used in metaverse hardware

·     Software movers; OKTA highlighted as one of Opco’s top picks for 2022 saying the CIAM share gain opportunity in CY22 is underappreciated, as Okta is benefiting from a two-pronged product approach, addressing the developer community (Auth0) and IT Ops/managers; PD, TDC, ZUO named the top three software ideas for 2022 at Craig Hallum; SE 14.5M share Block Trade priced at $208; weakness in software stocks amid concern the rising Treasury yields could crimp growth outlooks – shares of AYX, ESTC, MDB, OKTA, PANW, U, SNOW, TWLO, ZM, ZUO lower

·     Hardware, Components & Services; HPE was upgraded to Overweight from Equal Weight at Barclays saying they believe core Server and Storage is stabilizing and moving to as-a-service, while Networking and HPC should see solid growth, while valuation is lowest in the group

·     Media & Telecom movers; WMG 8.563M share Spot Secondary priced at $41.00, while separately, Jefferies upgraded shares from Hold to Buy and upped tgt to $50 from $41 on a higher level of confidence: 1) digital streaming is still early and will provide steady predictable growth; 2) emerging platforms are underappreciated in Street models; 3) capital structure provides flexibility in new investments/initiatives; Wells Fargo with several changes in its media sector, lowering ests in cable for CMCSA, CHTR, while downgraded SIRI to Equal weight saying they are fans of the model and mgmt team, but think the stock ebbs and flows w self-pay net adds which will be weaker in 2022 as the trial funnel compresses; Wells also said like the scaled streaming players w various risk rewards (NFLX, DIS, DISCA) also think studios like LGF (which they upgraded) and VIAC can unlock value during this gold rush, like DIS for lg cap growth, DISCA for lg cap value and IMAX for SMID-cap growth and GTN for SMID-cap value