Closing Recap

Friday, May 21, 2021

Equity Market Recap

·     U.S. stocks finish the day mixed, with the Nasdaq slipping into the bell, though managed to snap its 4-week losing streak, while the S&P 500 ended little changed. The Dow Jones Industrial Average ended higher on Friday but still closed the week with modest losses. Today’s moves were on light volumes heading into the weekend with oil prices rising (though down for week), and gold slipping on the day (but up for the week), but the talk of the week was crypto currencies as Bitcoin, Ethereum, Litecoin and others came under significant pressure (more detail below). Economic data was mixed as strong U.S. factory and services activity surveys were offset by a slight miss on housing data (though average selling prices rose a record high). Retailers outperformed behind good earnings results from FL, DECK, and ROST, while energy stocks rebound. Earnings season has begun to wind down, with attention moving back to macro stories.

·     Philadelphia Fed Bank President Patrick Harker said today that Federal Reserve officials should start talking about the best way to reduce their asset purchases "sooner rather than later." "It is something that, in my mind, we should start to have a conversation about sooner rather than later," Harker said. The policymaker said unwinding the central bank’s asset purchases from the current pace of $120 billion a month would be the "first step" in removing the support the Fed is offering the economy. If the recovery continues to progress, officials would then look at raising interest rates at the "appropriate time." (joins Kaplan in taper comments).

Economic Data:

·     Markit May flash services PMI at 70.1 highest in series history (vs 64.7 in April), May flash composite PMI at 68.1 (vs 63.5 in April); manufacturing sector flash PMI for May at 61.5, highest in series history, (consensus 60.2) vs. April final 60.5.

·     Existing home sales fell -2.7% for April 5.85M unit rate vs. est. 6.09M; the national median home price for existing homes $341,600, +19.1% from April 2020; U.S. April inventory of homes for sale 1.16 mln units, 2.4 months’ worth.

Commodities, Treasuries and Currencies

·     Oil prices gained $1.64 or 2.65% to settle at $63.58 per barrel, snapping its 3-day losing streak but fell roughly 2.7% on the week, while Brent crude rose $1.33, or 2.04% to settle at $66.44. Oil prices dipped this week on inventory fears as investors braced for the return of Iranian crude supplies after officials said Iran and world powers made progress a nuclear deal.

·     Gold prices slip -$5.20 or 0.3% to settle at $1,876.70 an ounce, pulling back from 4-month highs, but still end the week higher by just over 2% amid a weaker dollar and declining Treasury yields (and possible rotation out of crypto and into precious metals as hedge vs. inflation). Gold dipped on the day as the dollar rebounded after robust U.S. manufacturing data.

·     The U.S. dollar rose 0.3% against rivals, perking up in the wake of the improved flash manufacturing and services PMIs while benchmark 10-year Treasury yields slipped below 1.63%, down from Wednesdays near one-week high of 1.69%. Treasury yields have failed to meaningfully rally despite signs of economic growth as the dovish stance by the Fed on rates and additional asset purchases keeps bonds well bid. Minutes from the meeting of Fed policymakers released on Wednesday revealed a contingent within the U.S. central bank that feels a discussion may start sooner rather than later about pulling back its accommodative monetary policy.

Crypto Currencies

·     Crypto currencies fall: it was a tough week in general for Bitcoin, Ethereum, etc., capped by more negative news today: 1) China’s vice premier Liu said they will crack down on bitcoin mining and trading activities; Liu he says to crack down illegal securities activities, and severely punish financial illegal activities, 2) on Thursday, the U.S. Treasury Department called for new rules that would require large cryptocurrency transfers to be reported to the Internal Revenue Service. The proposal came one day after a brutal sell-off on concerns over tighter regulation in China and unease over the extent of leveraged positions among investors; 3) earlier in week, Elon Musk said Tesla will not accept the currency due to environmental concerns, 4) as well as a JPM note that institutional investors have reversed course and are now transitioning back to traditional gold.

Sector News Breakdown

Consumer

·     Retailers; FL Q1 comparable sales jumped +80.3% vs. topping the +61.9% estimate as EPS of $1.96 topped the $1.09 estimates; Q1 sales $2.15B vs. est. $1.88B and is not providing an outlook for the year; VFC shares disappoint as the maker of “Vans” posts Q4 adj EPS of 27c, missing the 29c estimate, though guidance for FY22 comes in slightly above estimates; DECK FQ4 results top views across the board with revenue/EPS of +50%/$1.18 easily beating estimates led by strength in UGG (+53%) and HOKA (+74%) sales – issues upbeat guidance for FY22 revs of $2.95B-$3B (+16%-18%) and EPS of $14.05-$14.65 (+4%-9%); ROST reported solid 1Q21 results as EPS and revs topped views ($1.34/$4.5B vs. est. $0.88/$3.87B) and comp sales grew 13% (1Q21 vs. 1Q19); this compares to Marmaxx’s comp of +16% (1Q21 vs. 1Q19) – though guidance was weaker; BKE Q1 EPS $1.16 tops consensus 43c as net sales more than doubled to $299.1M YoY/online sales was up 67.3% to $53.7M for Q1 from a year earlier; PLCE was upgraded to Neutral at Citi from sell after a blowout 1Q with total sales +6% vs. 1Q19 and a record 1Q EBIT margin of 16.0%

·     Auto sector; TSLA tgt cut to $700 from $900 at Bank America as sees TSLA utilizing its stock to raise capital through low-cost equity offerings to accelerate aggressive capacity buildout plans globally, which in turn will help TSLA further cement its status as the dominant EV automaker; LAD was upgraded to Buy from neutral at Bank America, while raising KAR to Buy (from underperform) saying the recent appointment of a new CEO could catalyze a broader turnaround effort (firm also lowered tgts on FSR, APTV, MGA, VC, VLDR, VNE, TSLA (to 700 from 900) and raised tgts on ADNT, AXL, BWA, DAN, GNTX, LAZR, ABG, AN, GPI, LAD, PAG and KAR

·     Consumer Staples; FLO Q1 revs fall -3.5% to $1.30B hurt by the pandemic, which was below the $1.33B estimate while Q1 branded retail sales fell 3.3% to $861.4M as volume declined in some areas; LW upgraded to Buy from Hold at Stifel as look forward to a period of robust revenue and profit growth for the company in relation to a valuation level that we believe does not fully account for the rebuilding of growth in sales and EBITDA; COTY said that Simona Cattaneo is to step down from her role as President, Luxury Brands, after five years at company; Byron Allen files $10B lawsuit against MCD’s alleging ad-budget discrimination; HSY, MDLZ record highs

·     Casinos, Gaming, Lodging & Leisure sector; WWE said returns to live events with 25-city tour beginning July 16; in cruise lines, CCL announced late yesterday its cruise brands Princess Cruises, Holland America Line and Carnival Cruise plan to resume trips starting with Alaska sailings in July; SIX tgt to $59 from $57 on increased EBITDA estimates at Stifel as believe visitation/spending patterns should continue to accelerate from current levels and show strength over the next four months; IGT tgt raised to $32 from $28 as left recent mgmt meetings incrementally positive as the recent Italy B2C sale has simplified the story moving into a post-COVID operating env’t

Energy

·     Oil stocks track gains in crude after three days of losses but were on track for a weekly fall with oil down just under 3% this week. Investors braced for the return of Iranian crude supplies after officials said Iran and world powers made progress a nuclear deal. The weekly Baker Hughes (BKR) rig count gained 2 to 455, the 23rd increase in the past 26 weeks, while U.S. rigs targeting crude oil rose by 4 to 356, while gas rigs dropped by 1 to 99; in E&P and Majors; FANG upgraded to Outperform from Sector Perform at Scotia with a price target of $95, up from $86 noting shares have declined 3% since mid-April, while a group of 12 large cap E&P peer companies has increased 9%; OAS said it entered into a series of definitive agreements to sell its entire Permian Basin position for a total gross potential consideration of $481M; in solar, MAXN shares fell as Q1 revs of $165.4M topped the est. $160.3M, but was well below the $227.6M a year ago (general pullback in solar shares after 2-days of massive outperformance (SEDG, FSLR, ENPH).

Financials

·     Bank movers; banks were generally higher in a quiet day of news; WTFC was upgraded to Buy from hold at Truist saying after underperforming by 15% YTD, we believe WTFC will outperform as loan growth will likely outperform peers and the company’s asset sensitive balance sheet could lead to multiple expansion and positive earnings revisions in a higher interest rate environment; Consumer Finance; MGI reported that the company and Ripple Labs have agreed to terminate the securities purchase agreement, dated June 17, 2019, between the parties

·     Services, insurance; LPLA downgraded to Neutral at Credit Suisse saying the company’s valuation already reflects its strong organic growth while still expects LPLA’s organic growth to reach record levels in 2021; SLQT positive mention by Piper saying they believe the 30%+ move down in shares since the end of April is unwarranted and are taking a deeper look at net tail adjustments, cash collection performance by vintage, and sizing early Population Health Solutions.

Healthcare

·     Pharma movers; ONTX said the first patient has been dosed in the U.S. Phase 1 clinical trial of ON 123300, the company’s proprietary, novel multi-kinase inhibitor; MYOV said the European Medicines Agency’s Committee for Medicinal Products for Human Use recommended approval of its Ryeqo relugolix combination tablets for the treatment of moderate to severe symptoms of uterine fibroids in women of reproductive age; RYTM receives positive CHMP opinion for setmelanotide for treatment of obesity and control of hunger

·     Biotech movers; BIIB and Ginkgo Bioworks announce a gene therapy collaboration with an aim to develop a next-generation adeno-associated virus (AAV)-based production platform/Ginkgo will receive an upfront payment of $5M and is eligible for milestone payments of up to $115M; BLUE receives positive CHMP opinion for SKYSONA gene therapy for patients less than 18 years of ge with Early Cerebral Adrenoleukodystrophy (CALD)

·     MedTech Equipment; INSP announced last night ATHM will provide coverage for the company’s Inspire therapy, effective May 20; RMD was upgraded to Overweight at JPMorgan following a review of the success of ResMed’s last major device launch in 2014 and update forecasts to reflect a more optimistic view of the likely boost from the newly announced AirSense 11 platform

·     Healthcare Services; UNH tgt raised to $480 from $450 at Truist following upbeat management meetings which highlighted UNH’s highly complementary, synergistic growth platforms, meaningful ongoing opportunity around value based care, unique collection of assets and robust IT capabilities; in the dental industry, Credit Suisse said improving equipment sales highlights the broader dental market recovery, as practitioners invest across their practices considering more optimistic business outlooks (raises estimates for XRAY, NVST, ALGN)

Industrials & Materials

·     Aerospace & Defense; Reuters reported BA has drawn up preliminary plans for a fresh sprint in 737 MAX output to as many as 42 jets a month in fall 2022; BAH reported higher earnings for Q4 (net income $199.2M up from $138.9M), while revs of $1.98B revs missed est. of $2.02B/sets FY22 guidance at revenue growth of 7% to 10% and adjusted EPS of $4.10-$4.30; SPCE upgraded to Buy with $36 tgt at UBS as remain positive on the fundamentals of the VG offering as well as the scarcity of the experience provided to customers that they laid out in our initiation

·     Industrial & Machinery; DE with Q1 EPS and sales beat while raised its full-year net income forecast to be between $5.3B-$5.7B from prior forecast of $4.6B-$5.0B; ROLL Q4 adj EPS $1.08 vs est. $1.05 on revs $160.3M vs est. $158.8M and sees Q1 net sales $154-158M; ENS Q4 preliminary adj EPS $1.30 vs. est. $1.29 on sales $813.5M vs. est. $801M

·     Transports; KSU said it would combine with CNI in a roughly $30 billion deal after deeming the offer as superior to the agreement it had struck with CP/the deal has an enterprise value of $33.6 billion, including the assumption of about $3.8 billion in Kansas City Southern’s debt; Deutsche called yesterday’s earnings-related selloff in SBLK a gift and said it offers a rare buying opportunity, and reiterated their Buy rating and $40 pt on the stock; DSX Q1 EPS (3c) loss was narrower than est. (7c) loss on revs $41.1M vs est. $37.7M; FDX announced price increases

Technology, Media & Telecom

·     Internet; NFLX is looking to hire an executive to oversee an expansion into videogames, a sign it is stepping up its efforts to grow beyond traditional filmed entertainment, according to a report in the Information; YALA announced a $150M share buyback and responded to the “three” short reports published in the past 2 days as containing distorted, misleading, and unsubstantiated claims; SNAP to acquire WaveOptics, which supplies the augmented reality displays in its new Spectacles glasses, for more than $500M

·     Semiconductors; AMAT reported a solid AprQ, with Rev/EPS of $5.6B/$1.63, above consensus of $5.4B/$1.51, and guided to a strong JulQ at $5.9B/$1.76 (topline ~7% above consensus $5.5B/$1.56), while noted 2021 WFE is now expected up ~28% y/y to the high-$70B range vs. prior low-$70B, with industry capital intensity running at 14% vs. historical 12%; STX downgraded to Market Perform at Northland as estimate that cryptocurrency is roughly 3% of HDD demand this quarter as STX shares have started to trade in sympathy with cryptocurrencies; NVDA announced a 4 for 1 stock split pending shareholder approval

·     Hardware, Software & Storage movers; DDOG was upgraded to Overweight at Morgan Stanley with shares trading 25% off highs and at a discount to SaaS peers on a growth-adjusted basis; SPLK upgraded to Buy at UBS with $125 tgt with shares down 45% since the weak 3QF21/Oct print in early Dec 2020 and given profoundly weak investor sentiment, saying shares look washed out; PANW 3Q results were strong highlighted by an acceleration in billings growth to 27% (28% normalizing for annual billings) vs 22% expectations; ASAN upgraded to Overweight at Keybanc as see well positioned to execute in the $32B Collaboration; PSTG upgrade to Buy to Stifel given clear indications of increasing on-prem spending by customers and positive commentary from PSTG channel partners’ recent reports, as well as an unwarranted sell-off from its 2/12/2021 high

·     Media movers; AT received two analyst upgrades as UB raised to Buy from Neutral and raise target to $35 from $32 saying they see a favorable risk-reward at the current valuation given a more simplified set of connectivity-based assets, lower dividend payout (~40% vs. ~60% post DTV deal), better visibility into EBITDA growth and lower leverage (New Street also upgraded shares); NLSN downgraded to neutral at Citigroup saying while believe Nielsen can hit its medium-term targets set forth at its investor day in December 2020, at prevailing levels we no longer view the risk-reward as overly compelling