Closing Recap

Wednesday, July 24, 2024

U.S. stocks tumbled in the worst sell-off for the S&P and Nasdaq in 2024! Scary statistics were plentiful given today’s pullback as the S&P 500 slides over 2% for its worst day since February 2023 and turned negative on the month with pullback; the VIX new highs up over 22% above 18.40 (took out last week high 17.19) and highest since 18.72 on 4/22. The NASDAQ 100 fell over -3.5% in biggest decline since October 2022. The Dow falls over 1% to move back below 40,000. Just relentless selling pressure from overnight, to the open, and throughout the trading day with tech bashed the most. TSLA and GOOGL both got the selling started last night on disappointing results, but this was a move that may have been overdue. @bespokeinvest tweeted earlier noting that “coming into today, it’s been 356 trading days without a 2%+ drop for the S&P 500, the longest streak since 2007.

What today’s market action reminded investors was… stocks can actually go down! We are currently more than 4% off the recent S&P record peak, but these types of dips happen, maybe moreso ahead of earnings season when corporate America is generally in their “blackout period” to buyback shares ahead of earnings. We’ve only had one 5% mild correction already this year, with much uncertainty ahead, as we anticipate FOMC interest rate cuts in September and the Presidential election in November which just underwent drastic changes the last two weeks (the assassination attempt on Donald Trump, President Biden dropping out of the election amid pressure from his party, and the news that current VP will run as the Democratic party leader in November). NYSE breadth was negative at 3:1 margin for decliners leading advancers despite Utilities, Energy, and Healthcare (all defensive sectors) rallying while Consumer Discretionary and Technology were crushed over 4% each with no lift all day.  

The Smallcap Russell 2000 was down, but again outperformed large caps, continuing the trend for July. European shares closed lower, dampened by luxury stocks after dour results from LVMH and PPRUY weighed on the sector, as the pan-European STOXX 600 index closed 0.6% lower, French benchmark CAC 40 index lost 1.1%, underperforming other regional bourses. The main macro news of the week comes Thursday with the first estimate of U.S. second quarter GDP and Friday with the Personal Consumption Expenditures Price Index (PCE), which the Federal Reserve relies on to gauge inflation.

• U.S. S&P Global July flash services PMI at 56.0 (vs 55.3 in June) and U.S. S&P Global July flash composite PMI at 55.0 (vs 54.8 in June).

• The dollar index (DXY) down slightly though the Japanese rises 1% to 153.90 (hit 153.12 earlier), the strongest since May as short/yen carry trades were unwound ahead of next week’s Bank of Japan meeting, with expectations for a hawkish move to begin removing monetary stimulus. The buck briefly pared losses after S&P Global said that its flash U.S. Composite PMI manufacturing and services sectors edged up to best levels since April 2022.
• Treasury yields were mixed as the long end of curve saw yields rise, while the short end saw declines. The benchmark U.S. 10-year Treasury yield pushed higher late day, up over 3 bps to 4.276% while the 30-yr gained 7 bps to 4.54%. The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, declined -3.5 bps to 4.41% (off earlier lows below 4.39%). More supply auctioned today as the US sold $70B in 5-year notes at yield of 4.121% vs. 4.11% when issued prior with bid-to-cover at 2.4 as Primary dealers take 13.97% of U.S. 5-year notes sale, direct 18.78% and indirect 67.25%. Tomorrow afternoon sees a $44B 7-year auction.

• In Beauty: ULTA downgraded to Neutral from OW at Piper and lower tgt to $404 from $494 following further analysis of the competitive and promotional state of the business as well as a deeper understanding of possible scenarios coming out of the October investor day. EL was upgraded to Outperform from Sector Perform with $131 tgt at RBC Capital as believes EPS and investor sentiment have troughed and believe the risk-to-reward profile skews favorable.
• In Consumer Products: PG downgraded from Buy to Hold at Jefferies and cut tgt to $175 from $182 and CL downgraded to Hold with $95 tgt (down from $103) saying they think there’s more scope for downside (vs upside) for PG and CL shares from here. Elasticities are getting softer in the US. Input costs are rising, while pricing will fade over the next 12 months.
• In Food & Beverages: LW shares tumbled after Q4 EPS of $0.78 missed the $1.26 consensus as sales fell -4.9% y/y to $1.61B, missing the $1.7B estimates citing a global slowdown in restaurant traffic. LW also said Q4 volume declined 8%, with more than half of that decline reflecting market-share losses and lowered year sales view to $6.6B-$6.8B vs. est. $6.79B (results/guidance impacted frozen fry restaurants MCD, QSR, SHAK, WEN). OTLY 2Q Adj EBITDA loss $11m vs est. loss 15.4m and revs $202.2m vs cons $201.7m.

• In Lodging/Leisure: RRR reported mixed results as EPS missed, but revs and Ebitda topped consensus, while Wells Fargo downgraded noting the solid Q2, w/ EBITDA of $202M +3% vs their est’s but says risk/reward seems balanced. Boating company MBUU was upgraded to Buy at Davidson with a $45 PT after its latest boat industry checks revealed incremental progress re-routing Tommy’s Boats inventory to other dealers, paving the way for an improved FY25.

• In Oil E&P Sector: EQT Q2 adj EPS (-$0.08) vs est. (-$0.20), adj EBITDA $464Mm vs est. $407.43Mm; sees Q3 sales volume 510-560 BCFE; reaffirms FY sales volume 2,100-2,200 BCFE; MTDR better Q2 results as EPS $2.05 vs. consensus $1.76; Q2 revs $847.14M vs. consensus $825.29M; increased its full-year 2024 guidance range for total oil and natural gas equivalent production, oil production and natural gas production. RRC Q2 adj EPS $0.46 vs. est. $0.42; Q2 revs $530.04M vs. est. $594.28M; targeting a maintenance production program in 2024, resulting in approximately flat production at 2.12 – 2.16 bcfe per day; said 2024 all-in capital budget is $620M-$670M; expects annual production to be near high end of guidance.
• In Oil Equipment and Services: NBR Q2 EPS loss (-$4.29) vs. consensus loss (-$1.85); Q2 revs $735M vs. consensus $739.25M; sees 3Q lower 48 avg rig count of approximately 70 rigs; Q2 adjusted EBITDA of $114.0M, compared to $120.4M in Q1. WFRD Q2 revs $1.405B vs. est. $1.419B; Q2 adj Ebitda $365M vs. est. $353.5M; authorized a three-year share repurchase program of $500M

• In Consumer Lending: ENVA upside was driven primarily by modestly stronger-than-projected volumes and a lower share count while full-year guidance for revenue and EPS growth were raised to reflect more than the Q2 upside.
• In Insurance: CB Q2 EPS beat on lower catastrophe losses and higher favorable prior-year development, primarily NA Commercial while double-digit P&C growth continues; Global P&C core loss ratio improved 20bps YoY; commercial P&C conditions remain favorable with firming in casualty line
• In Crypto: Bitcoin miner RIOT said it bought Block Mining for $92.5 million in cash and stock, boosting its power capacity and exposure to additional energy markets.
• In Financial Services: MCO was downgraded to Market Perform at BMO Capital and cut tgt to $455 from $482 saying while the company posted another "beat and raise" quarter, there were some signs of caution, including continued expectations for "muted" Q424 debt issuance and some pull-forward from 2025. QTWO was downgraded to Neutral from Buy at Davidson as the strong run in the shares over the last year has pushed the valuation to a level where it believes the risk / reward is more balanced.

• EGP 2Q24 FFO of $2.09/sh, or $2.05/sh excluding certain non-recurring gains. On a comparable basis to consensus, results were in line. Management raised its FY24 FFO guidance by 0.7% at the midpoint, or $0.06/sh, which includes $0.03- $0.04/sh related to non-recurring gains realized this quarter and $0.02-$0.03/sh of outperformance.
• ROIC reported 2Q FFO of $0.25/sh, which is in line with both consensus and our estimate. While management revised its FY24 FFO guidance range by narrowing the range and lowering the midpoint by $0.005/sh (0.5%), the revised midpoint is slightly above consensus and implies a modest sequential uptick in quarterly FFO in 2H24. SSNOI growth decelerated to 1.7% from last quarter’s elevated print of 5.7%, though leasing was steady and same store occupancy improved by 70 bps sequentially.

• GERN said its chief commercial officer is leaving the company in August, just two months after the approval of its first medicine, a treatment for a type of blood cancer.
• PFE said that its gene therapy for hemophilia A, significantly cut the number of annual bleeding episodes in patients with the rare disorder in a late-stage study and performed better than the current standard treatment.
• SAGE shares fall along with BIIB after announced topline results from Phase 2 KINETIC 2 Study of SAGE-324 for the treatment of essential tremor. No statistically significant differences were demonstrated between any dose of SAGE-324 and placebo in the change from baseline for the primary endpoint.
• SGMO shares surged on the PFE hemophilia news, with STAT news saying, “the hemophilia A gene therapy is no longer considered a major revenue driver for PFE, but it’s a potential lifeline for Sangamo Biosciences, the biotech that licensed the drug to Pfizer in 2017.”
• VSTM shares tumbled as its 13.333M share Spot Secondary priced at $3.00.

• In Life Sciences: TMO raised its annual profit forecast to between $21.29-$22.07 per share vs previous forecast of $21.14-$22.02 (consensus $21.70) and slightly raised lower end of its annual revenue forecast from $42.3B-$42.4B as maintains upper end at $43.3B which followed better Q2 EPS and in-line revs.
• In Healthcare Facilities and Services: TD Cowen said top picks for sector are ADUS, ELV and ACHC, while raises PT on HUM and lowering PT’s CNC noting for several months they posited elevated trend would persist into 2Q24; ELV, UNH and HCA seem to confirm our thesis. They also posited mid-year was an inflection point for sentiment & trend reversal; their June Hospital Survey lends credibility to that thesis. CNC downgraded to Hold from Buy at Jefferies saying to offset higher Caid utl, CNC needed ~$600M of HIX risk adj benefit plus NII help. THC joins HCA the day prior with better results/guidance in hospital provider sector.

• OTIS cut 2024 net sales forecast to $14.3B-$14.5B from prior $14.5B-$14.8B prior citing softening demand for its new equipment from North America and China; noted Q2 sales fell -3.2% y/y to $3.6B vs. est. $3.73B.
• WNC shares declined after weaker Q2 results while lowered 2024 EPS view to $1.50-$1.60 from $2.00-$2.50 vs. $4.83 last year and cut 2024 revenue view to $2.0B-$2.2B from $2.2B-$2.4B vs. $2.54B last year.
• In Transports: ODFL Q2 EPS rose to $1.48 from $1.33 and beat the $1.45 consensus while revs climbed 6.1% to $1.50 billion, in line with analyst projections as shipments climbed and cost-cutting efforts helped the bottom line. ODFL said shipments per day were higher during Q2, partially offset by a small decrease in weight per shipment.

• GD mixed Q2 results with a slight EPS miss but revs rose 18% y/y to $11.9B topping views; CEO said has recently seen improved interest from Chinese customers for its high-end Gulfstream business jets; said that incremental interest would add to an aerospace backlog of $20B; said Q2 margins rose on its sales of shells, tanks and armored vehicles; notes 2024 aerospace revenue expectations unchanged, but profit margins will be down.
• GEV posted Q2 revs of $8.20B, slightly below the $8.26B estimate while forecasted revenue trending toward higher end of $34B-435B for 2024, expects flat revenue growth from wind segment/reported 30% higher orders from gas and hydro segment, while seeing 40% fall in offshore wind orders.
• LMT was upgraded from Hold to Buy at TD Cowen and raised PT to $560 from $480 after results saying strong Q2, F-35 delivery restart, and the #1 FMS/munitions play give LMT enhanced visibility of ~5% sales gains, 10-20bps P.A. margin lift, and rising cash flow in 2024-26E.

• In Lithium sector (LIT, ALB, SQM): Bank America noted lithium prices remain under pressure on unabated supply increases, and they do not expect the ongoing surplus to peak until next year. To highlight the scale of the rebalancing problem at hand, EV penetration rates would need to be 7-10ppts higher to clear the current surplus in the lithium market (I.E., rebalancing via higher demand). Instead, BAML has recently downgraded EV penetration rates by 2ppt as the popularity of EVs has waned ex-China.

• In Telecom: AT Q2 adjusted EPS $0.57, in-line with consensus and Q2 revenue $29.8B vs. est. $29.92B; Q2 419,000 postpaid phone net adds vs. ests. 284K; backs FY24 adjusted EPS $2.15-$2.25, adjusted EBITDA view up 3% and FY24 capital investment view $21B-$22B; Q2 Free cash flow rose more than 9% to $4.6B vs. est. $4.2B.
• In Media & Leisure: MSGE upgraded to Buy from Neutral at Goldman Sachs with $45 tgt following recent underperformance that firm believes has created an opportunity for investors to gain exposure to a unique, pure-play venues business with an attractive financial model. Highlights 4 main reasons that bolster conviction of the stock: 1) upside to consensus, 2) durability, 3) capital returns, and 4) attractive valuation.

• In Comm & Equipment: VRT reported Q224 orders +57% y/y and +10% q/q, well above its prior outlook. VRT also delivered a healthy EPS beat on stronger margin performance while raising FY24 sales/EPS guidance midpoints (0.3%) below/5% above the Street view, respectively.
• IT Services & Consulting: MANH posted Q2 results that were better than feared, with top line and margins largely exceeding expectations. While management called out more deal slippage than in normal quarters, the $85 million in RPO was better than feared.

• In Hard disk drive makers, STX Q4 top and bottom-line beat (EPS $1.05/$1.887B vs. est. $0.75/$1.872B) as non-GAAP gross margin expanded to nearly 31%, and non-GAAP EPS exceeded the high end of our guidance range while also issued upbeat Q1 guidance.
• In Analog semis, TXN reported a Q3 EPS beat of $1.22 on in-line revs $3.82B while forecasting Q3 profit and rev mid-point slightly below consensus, but somewhat in-line (analog semi sector fell the day prior after weaker NXPI results and guidance, weighed on ADI, MCHP, ON).