Closing Recap

Friday, March 22, 2024

U.S. stocks finished mixed on Friday, with the Dow Jones Industrials falling behind Nike (NKE) weakness post-earnings, and the Smallcap Russell 2000 dropping over 1%, while the S&P 500 and Nasdaq posted modest gains. Still, for the week, another strong performance that saw the S&P, Nasdaq, and Dow with more than 2% gains all at or near record highs, heading into the final week of the month and quarter-end, as portfolio positioning may come into play next week. This week was dominated by central bank action where the FOMC kept rates steady as expected at 5.25%-5.5% but maintained their forecast for 3-rate cuts this year despite the uptick in CPI and PPI inflation (Powell chalked it up to seasonality for the recent pop in inflation). Also, this week, the Bank of Japan raised rates for the first time in 17-years (dollar surged vs. yen this week as move was well telegraphed), while the Swiss bank surprised with a rate cut. In Washington DC, the U.S. House of Representatives on Friday passed a controversial $1.2 trillion government funding bill with more support from Democrats than the majority Republicans, leading to a fresh threat by a hardline conservative lawmaker to oust Speaker Mike Johnson. We are in a quiet period for markets with earnings season behind us, and conferences lighten up too.

• In commodity prices, oil prices fell -$0.44 or 0.54% to settle at $80.63 per barrel, pulling back the last few days with the dollar rebounding, while Brent Crude futures settle at $85.43/bbl, down 35 cents, 0.41%. U.S. energy firms this week cut the number of natural gas rigs operating to the lowest level since January 2022 as overall fell by five to 624 according to Baker Hughes, now down 134, or 18%, below this time last year. Gold prices fell -$24.70 to settle at $2,160 an ounce, dropping from all-time highs of $2,225.30 an ounce yesterday as the dollar bounced, weighing on commodity prices.

• In Restaurants: BROS shares slipped as 8M share Spot Secondary priced at $34.00; CMG tgt raised to $2,850 from $2,400 at Wedbush saying checks point to Q1 strength (SSS growth trending above consensus of 4.1%), but rest of 2024 could see slowing transactions. SHAK PT raised from $108 to $120 at Oppenheimer and maintains Outperform noting in an unexpected move, PZZA’s CEO Rob Lynch will leave the company to become the next CEO at SHAK effective May 20^th and the firm believes the shift represents a future catalyst for shares. PZZA was downgraded from Buy to Neutral at BTIG following the departure of Mr. Lynch from Papa John’s. BTIG believes it could take at least several months to identify the next CEO, and at least another six months to develop a growth strategy.
• In Apparel: LULU shares tumbled after beat Q423 on top and bottom line (upside from GM beat, fixed cost leverage, lower tax rate = $0.14 in EPS), Q4 revs rose 16% y/y to $3.21B vs. est. $3.19B – but guidance disappoints as sees Q1 EPS $2.35-$2.40 vs. est. $2.55 and guides Q1 revenues $2.18B-$2.2B below consensus $2.26B.
• In Electronic Retail: BBY was upgraded to Overweight from Neutral at JP Morgan with a price target of $101, up from $89 as believes the company’s share of wallet pull-forward in computing, TVs and appliances is at, or nearing, an end, with a higher installed base of electronics nationally supporting a "soft landing" this year.
• In Beverages: STZ initiated at Overweight and $300 tgt, SAM with OW and $350 tgt and TAP at neutral in alcohol space at Piper. While Piper expects TAP can continue to gain share (albeit more slowly), it sees more upside for STZ and SAM. Alcohol industry trends favor spirits over beer and wine as long-term consumer preference shifts have historically favored U.S. spirits, making share gains key.

• In Building Products: VMC and MLM downgraded to Neutral from Overweight seeing limited upside at current levels as SUM stays top pick saying they see good reasons to pause from their bullish view last December where they called for a strong year ahead. The sector is +21% YTD, outperforming the SPX by 11pp, and +29% since December 2023 and now leaving valuations stretched trading above their 5Y + 1SD average.

• In Hotels: PK was upgraded to Buy from Neutral at Citigroup and raised tgt to $20 from $14 saying it is trading at discounted valuation to peers in terms of core earnings and is set for balance sheet improvement and believes the co’s property results are improving and PK has resilient exposure to resorts.
• In Cruise lines: Stifel said the 2-month run/recovery in shares of CCL/RCL/NCLH has been incredible when you think about where investor sentiment was on those names a year ago. While Stifel does believe there is more upside for the big three cruise operators, it believes the next cruise related names that are poised for a breakout are OSW and LIND saying they could be the next Cinderella stories in cruise industry.

• In Refiners: PBF and VLO both downgraded to Neutral from Buy at Mizuho on valuation, updating its refining models for Q423 updates, the sector has outperformed its expectations on demand optimism and potential short-term supply impacts (E.G., Dangote delay, Russian refining outages etc.).
• In E&P, Pipelines & MLPs: SMLP shares jumped after agreeing to sell its Utica shale position to a unit of MPLX for $625Mm in cash, which follows the culmination of its strategic review process launched in October. China’s Cnooc said Friday it had filed an arbitration claim to establish a right over HES stake in Guyana’s giant offshore oilfield in the event of the U.S. company’s sale to CVX. Cnooc said it filed the arbitration application on March 15.
• In Aerospace & Defense: AIR reported in-line 3Q:23 results driven by commercial aerospace aftermarket strength as airline demand for USM continues to be robust, AIR/FTAI relationship exceeding expectations, Government bookings suggest a turnaround, and with the Triumph acquisition closed, margins have a tailwind.
• In Solar: SEDG was downgraded to Neutral from Buy at Janney Montgomery Scott while they upgraded NOVA to Buy from Neutral with an unchanged fair value estimate of $12 as notes that the several weeks of significant trading weakness following the company’s Q4 report have been generally more acute and pronounced than what they had originally expected in February.

• In Crypto: Bitcoin prices declined as low at $63,000 this morning in a week of selling after hitting a record level near $74,000 last week but has since endured a volatile selloff, dipping as low as the $60,000 zone with that period (down from $67K levels yesterday). Shares of MSTR, COIN, MARA, RIOT, CLSK remain volatile in reaction.
• In Financials Services: FDS was downgraded from Overweight to Equal Weight at Barclay’s and cut tgt to $460 from $480 after FDS guided to ‘lower end’ and both Buy- and Sell-sides do not appear to be improving anytime soon (top-down cost cutting initiatives are targeting data/workflow providers); all while competition is intensifying.
• In Payments: GPN is seeking a buyer for AdvancedMD according to banking and private equity sources, looking for $3 billion for it, but may have to settle for half of that – Fortune https://tinyurl.com/3jjr56jw

• NKTX was downgraded from Buy to Outperform at Raymond James while ups tgt to $16 (from $13) not due to any decrease in confidence in its view of the company, but to better reflect remaining upside given recent strength. NKTX announced the deprioritization of NKX101 in acute myeloid leukemia (AML) after another look at the data (aggregate CR/CRi rate of 5/20 vs 4/6 at the June 2023 announcement).
• PFE downgraded to Hold from Buy at Argus saying as reflected in the 2024 guidance, the company faces near-term headwinds to top-line growth. It is guiding to 3%-5% revenue growth (ex. COVID products/SGEN deal), down from 7% in 2023. Further, the decline in COVID revenue will cause margin compression in gross and operating margins.

• In Internet: the WSJ reported AAPL, which has been exploring using external partners to help accelerate its AI ambitions and held discussions with companies including GOOGL and OpenAI about using their technology to power its mobile features, has held preliminary talks with BIDU about its AI technology https://tinyurl.com/bdudu84v . GOOGL named a new Best Idea at Wedbush as raise tgt to $175 from $160 as believes the perceived structural risks to Google Search are overstated and continue to view Alphabet as a net beneficiary of generative AI.