Closing Recap

Tuesday, January 11, 2022

Equity Market Recap

·     Stocks rise as the S&P 500 snapped its 5-day losing streak, rising back above the 4,700 level (has not posted a 6-day decline since February 2020) and recovered its 50-day MA resistance level of 4,677 today after holding its 100-day MA support yesterday of 4,568 (low yesterday was 4,582). Stock movement was choppy early before stocks began their climb, with big gains in growth stocks while defensive utilities, consumer staples, and REITs lagged. Eight of the 11 S&P sectors higher with Energy the top, followed by Info Tech, Comm Services & Consumer Discretionary. Stocks were boosted as Treasury yields pulled back off near 2-year highs as the 10-yr dropped to 1.75% from yesterday highs above 1.8%, snapping a 7-day streak of high yields – longest since April 2020. Fed Chairman Jerome Powell, in his testimony to Senate Banking Committee today, basically said that QE will end in March accompanied by a rate hike and Quantitative tightening (QT) will start – remaining hawkish but in-line with recent other Fed speakers over the last week – so no real surprises. Fitch Ratings now forecasts two fed rate hikes this year, four in 2023 (note Goldman and Bank America recently said they expected 4 rate hikes this year – JPM CEO Dimon said yesterday in a CNBC interview he will ‘be surprised if there are just four hikes this year).

·     Sector & Stock movers: ANF soars despite lowering guidance as it was due to inventory and not demand, AEO rises after raising 2023 targets after clearing its prior targets two years early, DLTH climbs after reporting holiday sales, BBW hits its highest levels since July 2007 on raised FY21 sales guidance before paring gains, and BIG slides after lowering its Q4 guidance and on softening traffic and trends; ILMN surges to lead the S&P on revenue guidance ahead of consensus and on several new partnerships while its development of DNA technology sinks shares of PACB along with its weaker Q4 revenues; energy stocks pace the S&P as WTI Crude rises almost $3 today to settle above $81; ACI shares initially move higher pre-market on its beat and raise report but shares trade at their lowest levels since October; CVS hits 6.5-year highs after raising its FY21 guidance; SHAK spikes on strong prelim Q4 results; LVS rallies after being added to JPMorgan’s Focus List in their upgrade to OW; utilities ETR, ES, ED XEL, staples MO, CPB, PG underperform.

Fed Speakers:

·     Fed Chairman Powell speaking in testimony to Senate banking Committee said “if we have to raise rates more over time, we will’; will probably remain in an era of very low interest rates; said inflation so far above target signals U.S. economy no longer needs our highly accommodative policy; said Fed will be moving to a policy closer to normal in 2022; Powell on supply chains: "not seeing the kind of progress we thought we’d be seeing by now; said at some point, perhaps later in 2022 fed will allow b/sheet to shrink – will in all likelihood normalize policy in 2022, including rate hike, may start b/sheet runoff later this year

·     The Federal Reserve may need to raise interest rates at least three times this year, starting with a rate increase at the March meeting, to respond to a tight labor market and inflation that is persistently high and broader based, Cleveland Fed President Loretta Mester said.

·     The U.S. Federal Reserve should begin to reduce its holdings of U.S. Treasury bonds and mortgage-backed securities accumulated during the pandemic in the not-too-distant future, Kansas City Fed President Esther George said on Tuesday, the latest policymaker to urge a swifter runoff of its balance sheet than during the last tightening cycle

·     High inflation and a strong recovery will require the Federal Reserve to raise interest rates at least three times this year, beginning as soon as March, and warrant a rapid rundown of Fed asset holdings to draw excess cash out of the financial system, Atlanta Fed Pres Raphael Bostic said

Commodities

·     Oil prices jump with WTI crude up $2.99 or 3.82% to settle at $81.22 per barrel, its biggest one-day gain since early December and its highest closing levels since the middle of November supported by tight supply and expectations that rising coronavirus cases will not derail a global demand recovery. It was generally a “risk-on” day with stocks and commodity prices climbing throughout the day. On the demand side, Federal Reserve Chair Jerome Powell said he expects the economic impact of the Omicron variant to be short lived, adding that ensuing quarters could be very positive for the economy. Gold prices rise $19.70 or 1.1% to settle at $1,818.50 an ounce, its third straight day of gains, closing at the highs of the day as the U.S. dollar slipped to a 4-day low as commodity prices in general were higher.

Currencies & Treasuries

·     The U.S. Treasury sold $52B in 3-year notes at a yield of 1.237% (highest since Feb 2020), below the 1.241% when issued prior as the bid-to-cover (demand) was 2.47 with indirect bidders awarded 61.65%, directs 15.51%, and primary dealers 22.84%. This was the first sale of $110 billion in coupon-bearing supply this week as the US will also sell $36 billion in 10-year notes on Wednesday and $22 billion in 30-year bonds on Thursday. Short-dated U.S. Treasury yields hit almost two-year highs on more warnings from the Fed that interest rates hikes are likely coming soon, with expectations growing for possibly as many as four times this year. Two-year note yields jumped to 0.945% before slipping back below 0.9% while the benchmark 10-year note yields fell to 1.775%, after rising to 1.808% on Monday, the highest since January 2020.

·     In crypto, nice rebound for Ethereum, rising over 5% to $3,230 after dropping below $3K yesterday; while Bitcoin also rebounds 2.5% to $42,750 after breaching $42K Monday to lowest levels since September; the U.S. Dollar (DXY) index slips to 4-day low, down 0.35% at 95.60 on profit taking, as the Canadian dollar strengthens to highest in nearly 8 weeks at 1.2595 per U.S. Dollar; the USD/JPY rallied to 115.68 highs as stocks surge. Hawkish Fed commentary from Mester and George, failed to reduce risk appetite for stocks today.

Sector News Breakdown

Consumer

·     Retailers; AEO raises 2023 financial targets, taking operating income to $800 million reflecting outstanding execution on real power; and expects record Q4 revenue with growth in mid-to-high teens compared to q4 2020; ANF guides Q4 net sales +4-6% y/y and 0%-(2%) vs 2019 as prior outlook of +3% to +5% to 2019 was impacted by additional unexpected and uncontrollable inventory receipt delays; BBW raises FY21 revenue view to $408M-$412M from $390M-$400M (est. $393.48M); BIG shares slide after lower guidance as sees Q4 EPS $1.80-$1.95, below prior view $2.05-$2.20, following suit of fellow discount retailer FIVE yesterday with its weaker outlook; DLTH reported FY4Q weeks 1-9 revenue up 6.4% (Retail +37.8%, Direct -5.4%) and reiterated the FY21 outlook for revenue, adj. EBITDA, and EPS; URBN said holiday net sales rose 14.6% vs. same period in 2019; ADDYY upgraded to Outperform and Puma both top ideas – and we view recent share price weakness as an attractive entry point in retail; SHOO upgraded to Buy at Loop Capital with upside to $50 as increasingly optimistic near-term

·     Auto sector; TSLA tgt raised to $1,300 from $1,200 at Morgan Stanley and remain Overweight saying Q4 deliveries were 20% above his forecast, and that the message to investors on Tesla is as straightforward as it is easy to ignore; RIVN slipped after reported that its chief operating officer left the company last month as it ramped up production; VLDR has signed a five-year sales pact for its lidar sensors with QinetiQ Inc.; FREY signed a Head of Terms agreement for pursuing a JV with the ambition to establish an LFP cathode plant in the Nordic region; Truist said five favorite stocks for 2022 across the Automotive and Transportation sectors include ABG, ACVA and IAA on the auto side which were overly punished in 2021 and on the Transportation side view ATSG and GXO are best in class

·     Consumer Staples; ACI raised its year guidance EPS ($2.90-$2.95 from $2.50-$2.60) and sales growth (to decline -0.8%-1.2% from prior view of -2.5%-3.5% decline) after posted better-than-expected Q3 results – but said Q3 margins were hurt by increased product costs/higher supply chain costs; REYN downgraded to Neutral from Buy, price target $35 at Citigroup; CHEF guides year sales view to $2.1B-$2.2B vs. est. $2.0B and sees FY 2022 adjusted EBITDA between $99 million and $111 million; MO, PM continue to remain buy rated at Stifel and maintain positive outlook for tobacco stocks in front of 4Q21 earnings driven by the strong growth they forecast for the coming year and the upside potential to our estimates; KMB downgraded to Neutral, target $148 at BNP Paribas; WW was downgraded from Buy to Hold w/ $18 PT at Craig Hallum

·     Restaurants; SHAK guides Q4 revs $203.3M vs. est. $197.9M and prelim 4q comp sales +20.8%, est. +17.0%, helping lift shares; bank America initiations: DPZ Buy – well-positioned to benefit from a fast growing pizza segment, with tailwinds from consolidation; DNUT Buy, can centralize production without compromising quality to a far greater extent than can other restaurants; YUM neutral – following Yum’s refranchising initiatives, the portfolio is largely stable and profit margins are too, WEN Underperform saying after franchising initiatives, we believe there are fewer margin levers left to pull; QSR Underperform fated as BK faces intense competition from McDonald’s and Wendy’s and recent sales trends have lagged both

·     Casinos, Gaming, Lodging & Leisure sector; JPMorgan upgraded LVS to OW and added it to its Analyst Focus List as a value idea with outsized risk-reward after massive underperformance last year (-35% vs US gaming +59%, S&P +25%); WYNN downgraded to Neutral from Buy at Citi; BMO said the correction in ed-tech provides compelling entry points and raised their price targets on favorite names LRN and LOPE, lowered them on ATGE, BFAM, CHGG, STRAand TWOU, and upgraded HMHC to Outperform after its recent pullback as it should continue benefitting from the shift of K-12 to digital learning accelerated by the pandemic; PLNT to buy franchisee Sunshine Fitness in $800 million deal; XPOF expects to meet or exceed the high end of its previous FY21 guidance for revenue $147-148.5M

Financials

·     Bank movers; KBW downgraded BK to Market Perform on less upside potential for EPS estimates after the stock outperformed peers over the past month and to reflect their preference for NTRS, STT; Citi upgraded CFG to Buy as they don’t think the stock fully reflects the positive valuation re-rating they will get with the ROTCE improvement forecasted through 2023 and RF to Buy as they expect positive EPS revisions and re-rating of the stock with increased confidence of strong returns in 2022/23; Morgan Stanley assumed OW ratings on SBNY due to its unique business model, efficiency, and strong deposit growth, SIVB as one of the biggest beneficiaries of higher rates in addition to being one of the fastest growing banks under their coverage, CFG due to its above-peer earnings growth story driven by multiple broad-based drivers, and FITB after its underappreciated sizable expense reduction initiatives, with EW ratings on MTB as more of a safe-haven play with a lack of loan growth and FRC HBAN, KEY on their valuations and balanced risk/reward; Bank of America removed GS from its US 1 List after its downgrade to Neutral from Buy last week; BAC made sweeping changes to its overdraft services, including eliminating non-sufficient funds fees and reducing overdraft fees; JPM CEO Jamie Dimon warned consumer loan growth could take 6-9 months to return to normal after consumer lending’s sharp drop since the pandemic began; JEF reports earnings tomorrow morning and earnings season starts Friday with C, JPM, WFC, PNC, BLK, FRC reporting pre-market

·     Asset managers: The Wall Street Journal reported Citadel Securities is set to receive its first outside investment with VC firm Sequoia Capital and crypto investor Paradigm investing $1.15B in a deal that values Citadel at ~$22B; Into Q4 earnings, Citi opened a 30-day positive catalyst watch on RJF and BENkept their 90-day positive watch on LPLA open, and established a 30-day negative watch on APAM with it being UW as part of their new pair trade with OW AB; BMO’s Q4 estimates are ahead of the street for GS (higher IB), APO (higher SRE), and TROW (higher MFees); CNS preliminary AUM $106.6B as of December 31, 2021, a $6.4B increase from November due to net inflows of $1.5B and market appreciation of $6.1B, partially offset by distributions of $1.2B

·     FinTech & Payments; Raymond James said them being bullish on fintech is a massive understatement as 2021’s choppy underperformance sets the sector up for an epic 2022 with FIS, MA being their top large-cap picks, IIIV, ESMT among their best SMID-cap ideas, and GPN, Visa (V), FLYW, LPRO, EVRI as other high conviction ideas; Cowen upgraded PAYX to Outperform as they see a confluence of company-specific and market-driven factors to make it an attractive compounder with strengthened fundamentals and detachment from growth factor pressure; MOGO announced its expansion into the metaverse with an investment in NFT trading platform NFT Trader through a convertible note that will represent a 25% interest if converted; BMO said payment names offer upside following last year’s de-rating and to buy IMXI and NVEI into quarterly reports; PYPL confirmed it is exploring a branded stablecoin

·     Consumer Finance; RBC remained favorable but are taking a more balanced approach in stock preferences, liking AXP for its premium customer base, DFS for their prime revolver focus, SYF on its position to perform well as the economy accelerates and the consumer begins to re-lever, and also believe that names like COF, ALLY, SLM and ADS have merit at these valuations; Wells estimates that OMF’s BrightWay credit card launch came close to hitting the upper bound of its goal for up to 60k cards issued by year-end based on app data it is tracking; Seaport initiated LC at Buy with a $35 target on its significant growth opportunity; In the real estate space, RBC started CSGP at Outperform with an $85 PT as its strong momentum should accelerate revenue growth and Berenberg initiated OPEN, OPAD, PRCH, LTCHand COMP at Buy

Healthcare

·     Pharma movers; GSK and VIR announce U.S. gov’t agreement to purchase additional supply of Sotrovimab, authorized for the early treatment of COVID-19; 600,000 additional doses to be supplied to the US government for distribution in Q1 2022; ALLO said the FDA has lifted the clinical hold for all of ALLO’s clinical trials. ALLO plans to initiate pivotal trial for ALLO-501A (CD19 allo CAR-T) in B-cell lymphoma and expect to report additional clinical data in 2022

·     Biotech movers; BNTX said it would likely generate up to 17 billion euros ($19 billion) in 2022 revenue from the COVID-19 vaccine it co-developed with partner PFE; BIIB named Catalyst Driven Idea at Morgan Stanley saying with CMS to release its draft coverage decision by the 12th, firm base case scenario is coverage with evidence development anticipating the stock to trade 10%-15% higher; ESPR said it expects prelim Q4 net U.S. product sales of $12M-$12.5M

·     MedTech Equipment; DHR said Q4 ore revenue growth is expected to be above the company’s previously announced guidance; ILMN forecast robust 2022 sales and announcing four partnership deals as sees year 2022 revs about $5.15B-45.24B topping the $4.9B estimate as announced partnerships with Boehringer Ingelheim, Nashville Biosciences, Agendia NV and UNH’s Optum; VRAY upgraded to Buy at Briley after preannounced 4Q21 and FY21 results that included total 4Q21 revenue of ~$20M primarily from three new revenue units; FLDM surges after prelim q4, and FY rev exceeds prior guidance

·     Healthcare Services; CVS raised its full year 2021 GAAP diluted earnings per share guidance range to $5.87 to $5.92 from $5.50 to $5.61; ACCD Q3 revenue and adjusted EBITDA came in well ahead of consensus ests as a stronger than expected achievement of performance fees led to a pull-forward of revenue that was $4.5mm ahead of consensus expectations; TDOC tgt cut to $118 from $183 at Piper and revise ests following yesterday’s positive revenue pre-announcement where the 3-year operating targets issued at its Nov Investor Day were below our projections in terms of both revenue and profitability; UHS said has more employees on sidelines than ever before in pandemic; hopes to see significant decline in Covid rates by early Feb.; CRL rises as guides FY22 EPS $11.50-$11.75 above consensus $11.46 and said it sees FY22 revenue up 13%-15% vs. consensus $3.92B

Industrials & Materials

·     Aerospace & Defense; ERJ said its Eve unit unveiled a deal with U.K.-based aircraft operating leasing company Falko Regional Aircraft for a potential order of 200 electric vertical takeoff and landing aircraft; CACI wins $514M task order to modernize U.S. Army networks; Truist said Best Ideas for 2022 in Biz & Gov’t Services in order are: ICF (ICFI); Korn Ferry (KFY); FTI Consulting (FCN); Insperity (NSP); Brink’s (BCO); and ASGN (ASGN); BA ended 2021 with 13 deliveries of its KC-46A aerial tanker, down one from 2020 and 15 fewer than in 2019.

·     Industrial & Machinery; Bernstein initiated coverage of industrial conglomerates calling DHR its top pick with outperform rating and PT of $365 as co is well-positioned to manage the tail end of COVID-19, rates GE w/OP and $120 tgt citing upside from the spin-offs and continued cost cuts, ROK rated outperform with a PT of $378 as brokerage sees upside after co’s blockbuster Q4, rates EMR market perform with PT of $100, saying long-term concerns about oil & gas exposure vs the decarbonization agenda remain a concern, MMM rated market perform with PT of $175 as inflation concerns and uncertainty around PFAS liability keep brokerage on sidelines; in cement sector, Loop Capital revised tgts higher for MLM, SUM, VMC and introducing FY23E estimates with a base case view of LSD cement volume growth due to supply constrains but 6-7% pricing.

·     Transports; AAL said Q4 capacity was down 13% to 61.1B total available seat miles compared to 2019, which is at the lower end of prior guidance, while expects Q4 revenue to be down approximately 17% vs. 2019, which is ahead of previous guidance for down approximately 20%; sees PRASM to be up between 13%-14% compared to 2019, above prior view 8%-10%; in trucking, ODFL downgraded to in-line from Outperform at Evercore/ISI as shares a massive outperformer in 2021, trading at 31.2x our 2022 EPS estimate and at 27.7x our 2023 projection

·     Metals & Materials; AA downgraded to Hold from Buy at Deutsche Bank while raise tgt to $65 from $60 following the stock’s 105% increase since the upgrade to Buy 10 months ago, as sees Alcoa’s risk/reward as more balanced; LAC upgraded to overweight and up tgt to $41 from $32 at Piper in lithium space; Wolfe research with several downgraded in metals sector as downgraded CLF to Peer Perform from Outperform and trim tgt to $23, STLD downgrade to Underperform from Peer Perform and tgt to $60 from $66, TX downgrade to Underperform and trim Target to $45 from $46, U.S. Steel (X) downgrade to Underperform and cut Target to $24 and NUE downgrade to Underperform from Peer Perform and cut our price Target to $102 from $110

Technology, Media & Telecom

·     Internet; AMZN is Bank America top FAANG pick for 2022 with a price target of $4,450; SHOP was downgraded to Neutral from Overweight at Atlantic Equities; Atlantic initiated JD at OW with a $100 target; Bernstein downgraded BILI to Market Perform after disappointing execution in 2021 and on concerns of continued weak gross margins on gaming headwinds

·     Semiconductors; INTC said David Zinsner (formerly of Micron) has been appointed as company’s executive vice president and CFO effective Jan. 17, 2022; AMD was upgraded to Overweight with $155 tgt at KeyBanc as raise ests saying its poised to benefit from robust high teens cloud data center growth in 2022 and should meaningfully outpace industry growth, while the firm downgraded INTC to Sector Weight as believe its turnaround will take longer than we had originally anticipated to yield proof points; MPWR upgraded to Overweight at KeyBanc given the recent pullback in the stock, which is down 22% from its recent highs on 11/16/21

·     Software movers; RNG announced the appointment of Mo Katibeh to COO, where he will be responsible for the company’s products, sales, marketing and customer experience; BILL rated new Buy and $296 tgt at Goldman Sachs as view BILL as a category leader in SMB B2B payments and back office modernization, providing an end-to-end suite of business management software for managing AP/AR, T&E spending

·     Hardware, Components & Services; IBM downgraded to Sell from Neutral at UBS and cut tgt to $124 from $136 saying near-term risk to Q4 operating estimates and an elevated valuation leaves the shares vulnerable; JNPR upgraded to Buy from Underperform at Bank America and raise tgt to $40 from $22 noting in the last two quarters, orders grew by over 50%, and approx. 15% on a normalized basis in 3Q and bookings grew in the mid-teens for the third consecutive quarter; SNX with Q4 beat $2.86/$15.61B revs vs. est. $2.67/$14.25B with higher Q1 and FY22 guidance

·     Media & Telecom movers; KeyBanc proactively lowers its NFLX and ROKU estimates below consensus, and trim our price targets to $620 and $325, respectively; in Telco, Citigroup reiterates a Buy on AT with a $29 PT and add to positive catalyst watch list and CCI also reit Buy w $200 tgt and add to positive catalyst watch list.