Closing Recap

Thursday, May 27, 2021

Equity Market Recap

·     U.S. equity markets finished mostly higher, with outperformance again for the Smallcap Russell 2000 after jumping 2% the day prior as investors rally behind better-than-expected jobless claims data and a positive report on first-quarter gross domestic product that showed the economic recovery is increasing. At the same time, rising inflation fears were contained by Treasury Secretary Yellen (former Fed Chair) who said she believes the recent rise in inflation will prove temporary (echoing recent Fed official comments). The weekly jobless claims report remained below 500,000 for three straight weeks, coming in below ests. In Washington, President Joe Biden will unveil his first full budget on Friday, setting the stage for a battle with Republicans who have opposed his plans to spend trillions on infrastructure, childcare, and other public works. A New York Times report said the Biden plan will be a $6-trillion budget for 2022, the largest spending since the second world war, fueling supply concerns.

·     Sector/stock movers; EADSY spikes after laying out a long-term plan to return aircraft production to pre-pandemic levels, boosting BA, HON as the leaders of the Dow, SPR in supplier space; DG gains after reporting beat-and-raise while DLTR slides on weak guidance in discount retailers; WSM, AEO, BURL slip despite each recording beats and BBY rises on its beat-and-raise in other retail earnings; SNOW, OKTA, PLAN, ZUO initially slide in software span following mixed outlooks (but strong quarterly results); auto makers among the best performers in the S&P as Ford hits its highest level since 2015 after RBC upgraded the stock and GM shares get a boost after restarting production at some plants they closed due to the chip shortage; NVDA shares slip despite a beat and raise quarter in semi space, while overall semiconductor index edges higher (up over 3% on the week); AMC, KOSS, BB among the Reddit/WSB names moving higher, along with gains in other higher volatility/momentum related names pushing higher today SPCE, FUBO.

·     U.S. Treasury Secretary Janet Yellen told the House Appropriations Committee she believes the recent rise in inflation will prove temporary (echoing recent Fed official comments) and that there is still slack in the economy, but that the White House, Congress, and Treasury are watching it close and have the tools to address it if needed. "The recent inflation we have seen will be temporary, it’s not something that’s endemic." Yellen also said that President Joe Biden’s fiscal 2022 budget plan will push U.S. debt above the size of the U.S. economy, but will not contribute to inflationary pressures.

Economic Data:

·     U^nd estimate for Q1 GDP was reported at 6.4% vs. est. 6.5%; Consumer spending rose 11.3% vs. 10.7% prior; Q1 business investment +10.8% vs. prior 9.9%, equipment +13.4% vs. prior +16.7%; Q1 home investment +12.7% vs. prior 10.8%; the GDP Deflator 4.3% vs. est. 4.1% and PCE index 3.7% vs. est. 3.5% with core PCE 2.5% vs. est. 2.3% (slightly higher inflation)

·     Weekly jobless claims fell to 406M in latest week, below the 425K estimate and prior week unchanged at 444K; the 4-week moving avg fell to 458,750 from 504,750 prior week (previous 504,750); continued claims fell to 3.642M from 3.738M prior week and the U.S. insured unemployment rate fell to 2.6% from 2.7%

·     Durables orders for April -1.3%, below the +0.7% estimate while March revised higher to 1.3% from 1.1%; Durables ex-transportation orders rose +1.0% vs. est. +0.8% and down from March +3.2%; Durables ex-defense orders unchanged vs March +2.2%; Machinery orders +1.4%, electrical equipment -0.9%, defense aircraft/parts -8.5%

·     Pending home sales index for April fell -4.4% vs. est. +0.8% to 106.2; April pending home sales +51.7% from April 2020

Commodities

·     Oil prices finished higher as WTI crude gains $0.64 or 0.97% to settle at $66.85 per barrel, its 5^th straight day of gains (longest since February) and well off the earlier lows of $65.47. Oil prices initially dipped as concern about demand in India and the potential for a rise in Iranian supplies offset optimism over the U.S and European summer driving season. Oil prices steadied after strong U.S. economic data. Gold prices slip -$5.30 or 0.3% to settle just below the $1,900 an ounce level ($1,898.50 an ounce), pulling back from 5-month highs. Treasury yields slip as investors weigh the White House $6 trillion budget proposal.

Currencies & Treasuries

·     The U.S. Treasury sold $62B in 7-year notes at a yield of 1.285% vs. 1.291% when issued prior, with the bid-to-cover (demand) at 2.41 and indirect bidders awarded 59.57% and directs receiving 20.7%. Treasury yields pulled back slightly immediately following the auction results (the benchmark 10-year had been at session highs around 1.625% into the results before slipping). The dollar index (DXY) was little changed just above the 90 level, while the USD/JPY trades up around the 110 level and euro up at the 1.22 level most of the day.

Sector News Breakdown

Consumer

·     Apparel Retailers; BURL easy beat as Q1 adj EPS $2.59 vs. est. 83c and sales $2.19B vs. est. $1.77B; Q1 comp sales rose 20%; says not providing guidance for 2021; AEO 1Q total sales +17% and GM +550bps vs. F19, while Aerie total sales up an impressive 90% vs. 1Q19 driven by a 50% increase in AUR as per Citi; GCO slides despite beating for Q1 EPS/sales (no guidance issued); CROX will move from the S&P 600 to the S&P 400 effective prior to the opening of trading on 6/2

·     Broadline/Specialty retail; MOV Q1 adj EPS $0.43 on sales $134.8M and sees FY22 sales $650M-$665M and gross profit about 54%-55% of sales and op profit 10%-11% of sales; BBY beat Q1 consensus with adj EPS $2.23 vs est. $1.39 on revs $11.637B vs est. $10.44B, enterprise comps +37.2% (est. +22.1%), guided Q2 enterprise comps +17% and raised FY enterprise comps to +3-6% from (-2%)-1%; in discount stores; DG raises FY21 EPS view to $9.50-$10.20 from $8.80-$9.50 (est. $9.58) and boosts FY21 net sales to range of a 1% decline to an increase of 1%; vs. prior view in the range of a 2% decline to flat; DLTR guidance disappoints – Q1 EPS $1.60 vs est. $1.42 on net sales $6.48B vs est. $6.42B, though FY EPS guidance $5.80-6.05 fell short of expected $6.23

·     Auto sector; Ford (F) upgraded to Outperform from Sector Perform with a price target of $17, up from $13 at RBC saying they have more confidence in the 2023 8% margin target, concerns over BEV strategy were addressed and think Ford F-150 Lightening is likely a watershed moment; CVNA and VRM estimates raised at Truist following analyses data which suggest that 2Q is likely to be driven by better than expected average sale price on largely inline unit sales numbers; GM said it is restarting production in five plants closed due to chip shortage; ATHM reports Q1 revenue in line with consensus and says co-President Zhang resigned for personal reasons

·     Home Furnishing, Housing & Building Products; WSM sales accelerated in 1Q, posting an impressive 40% comp (2-year went to 43% from 33% in 4Q20) with a sequential acceleration in every brand and margins expanded materially due to leverage and improved merchandise margins; AZEK 15M share Secondary priced at $43.50

·     Consumer Staples; ELF reported top and bottom line beat, but guidance weighs- as Q4 adj EPS 16c vs. est. 10c on sales $92.7M vs .est. $82.4M, sees 2022 adj EPS 64c-67c (est. 71c) and revs $343M-$350M (est. $334.3M); SAFM posted Q2 EPS $4.34, doubling consensus $2.17, on revs $1.13B vs est. $1.04B; UVV Q4 EPS $1.58 on revs $617.6M and raised its dividend to 78c from 77c; Argus upgraded CCEP to Buy with a $70 target as they believe the company will report strong revenue and earnings over the next two years given growth in Asia-Pacific and a recovery in Europe; BYND launched a 6-pack of Beyond Burger in Canada

·     Restaurants; CMG was upgraded to Overweight at Stephens and up tgt to $1,700 from $1,600 saying its deep analysis of CMG footprint shows co is very well positioned for growth with excellent demographics, low urban core exposure and strong presence in suburbs

·     Casinos, Gaming, Lodging & Leisure sector; cruise lines active after RCL sets June return for sailing from U.S.; ELY tgt raised to $60 from $50 at Jefferies after DKS posted a strong beat & raise yesterday and notes ELY is a key partner and positive commentary around the sport; TH was upgraded to Buy at Stifel following stronger-than-expected quarter and improved contract visibility with customer commitments; VICI files automatic mixed securities shelf

Energy

·     Energy stock movers; KeyBanc positive on COP on report that the Joe Biden administration defends its Arctic drilling plan originally approved by former President Donald Trump; Goldman upgraded OXY to Buy as they believe the extent of the stock’s recent underperformance vs peers (by about 55% since April 2019 Anadarko acquisition and by 4% YTD) is unwarranted and the company should benefit from higher commodity prices in 2021-22; TELL signed a 10-year agreement with commodity trader Gunvor Singapore Pte Ltd for 3 million tonnes per annum of LNG, which they say represents the equivalent of about $12B in revenue over the 10-year term; Piper upgraded MGY to OW and upped their PT to $16 from $13 as consistent performance in Giddings gives increased confidence in the sustainability of capital return growth and they expect investor confidence in the asset and capital return story to gain momentum as more multi-well pad data becomes available; VTNR surged after agreeing to acquire the Mobile refinery in Alabama from RDS for $75M

·     Utilities & Solar; Mizuho raised their price target on DTE to $146 and continues to recommend the stock ahead of the expected spin-off of its midstream business July 1 as it should then trade at a premium multiple given its balanced regulatory jurisdiction, limited equity needs, and 8% rate base CAGR, and they also lifted estimates and PTs across their gas utility coverage (ATO, NJR, OGS, SJI, SR) given increased appreciation for gas infrastructure in the aftermath of Uri, more detailed ESG plans at each company, and a particularly rich valuation for CNP’s LDC assets; in solar, CSIQ announced a common stock offering

Financials

·     Lending; the automotive finance market saw strong performance during the first quarter, according to Experian’s Q1 2021 State of the Automotive Finance Market report. Total open automotive loan balances increased from $1.168 trillion in Q1 2020 to $1.288 trillion in Q1 2021. Much of the growth was driven by captive lenders, who saw significant growth year-over-year, from 23.82% of the automotive finance market share to 28.02% from Q1 2020 to Q1 2021.

·     Consumer Finance; Acorns Grow Inc said it was going public through a merger with blank-check company Pioneer Merger Corp (PACX) in a deal valuing the savings and investing app at about $2.2 billion; Deutsche Bank initiated SC ($41 tgt) and ALLY ($65 tgt) with Buy ratings, positive on the auto finance companies given the current benign credit environment, elevated auto prices due in part to supply shortages, and continued strong demand amid a secular shift in consumer transportation preferences brought to the forefront by the pandemic

Healthcare

·     Pharma movers; LLY disclosed it received a subpoena from the US DOJ to produce certain documents related to its manufacturing site in Branchburg, NJ; HZNP enrolled the first patient in the ADVANCE trial evaluating the use of KRYSTEXXA with methotrexate for certain people with uncontrolled gout; CNCE announced it has initiated THRIVE-AA2, the second planned Phase 3 clinical trial to evaluate the efficacy and safety of CTP-543, an oral Janus kinase inhibitor, in adult patients with moderate to severe alopecia areata; ORGO rises as it will replace CROX in the S&P SmallCap 600 Index on June 2nd

·     Biotech movers; PDSB establishes partnership with Head and Neck Cancer Alliance which offers both organizations a way to share information about emerging treatment options with clinicians and patients battling HPV-attributed head and neck cancer; VIR received FDA emergency use approval for its antibody treatment co-developed with GSK to treat mild-to-moderate COVID-19 in people aged 12 years and older; ZSAN with clinical data which supported evidence that its drug Qtrypta has potential for being a long-term option for patients with migraines if approved; OMIC 10.2M share IPO priced at $22.00; RZLT shares surged on the day – Oppenheimer initiated with an outperform and $25 tgt this morning

·     Healthcare Services, MedTech Equipment; MDT 4Q adj EPS $1.50 vs. est. $1.42 on revs $8.188B vs. est. $8.14B (cardio revs $2.908B, neuro revs $2.295B, med drug revs $2.338B); guides FY22 organic revs about +9%, adj EPS $5.60-5.75 vs. est. $5.72; LNTH receives FDA approval of pylarify® injection, the first and only commercially available PSMA pet imaging agent for prostate cancer; AFIB receives FDA approval to start U.S. atrial fibrillation IDE trial with the AcQBlate force sensing ablation system; WOOF 22M share Secondary priced at $24.00; DOGZ receives a large follow-on order from pet retailer Petco for its automatic dog and cat feeders across Petco’s 1,600 retail stores

Industrials & Materials

·     Aerospace & Defense; Airbus (EADSY) said it is exploring an almost two-fold increase in output of best-selling single-aisle jets by the middle of the decade from current crisis-depressed levels and has finalized its output plans for the rest of this year; BA rises a 6^th day, buoyed by the positive production update by Airbus citing a strong recovery in aviation from the COVID-19 pandemic (shares of aero suppliers SPR, HXL moved as well); Transports outperformed, rising midday over 1% to above 15,750 (all-time highs remain 16,170) with top gainers FDX, JBHT as logistics, trucking names leading; GE top gainer in the S&P 500, trading at its best levels in 3-years.

Technology, Media & Telecom

·     Internet; GOOGL says retailers on WooCommerce, GDDY and SQ will soon be able to integrate with google easily & for free; SHOP expanding shop pay, fast and secure checkout, to Shopify merchants selling across google surfaces – statement; given strength in industrials, retail, materials early, mega cap tech names saw early selling pressure; RBC Capital initiated 13 names in the space, Outperform rated on ABNB, CVNA, DASH, FVRR, LYFT, RDFN, UBER, WIX and ZG and Sector Perform on ANGI, BKNG, CARG and EXPE, with favorite ideas ZG, UBER, DASH and LYFT with proprietary channel work pertaining to ZG, RDFN, UBER, DASH, ABNB, EXPE and LYFT – said dominant user engagement and bottom or down-funnel execution are critical to equity value creation with this group

·     Semiconductors; NVDA reported a strong AprQ and guided to JulQ rev/EPS of $6.3B/~$4.11 well above views as AprQ data center was up 79% y/y with MLNX and Ampere products driven by hyperscalers, and gaming up 106% y/y with DT/NB RTX 30 Series and crypto, as well as console SoCs – On the guide Crypto is a boost ($250M of the $650M) but the balance is coming from core gaming and DC according to Oppenheimer

·     Software movers; OKTA delivered a strong quarter, outperforming expectations with top-line strength flowing through to FCF upside, though the CFO steps down and Q2 guide weighs on shares; WDAY reported Q1 with normal revenue beats and very strong margins, and raised guidance; SNOW posted beat and raise that included large customer expansion and healthy RPO – but main pushback here is that the FY guide higher was in line to marginally higher than the beat for the Q; ZUO falls despite 1Q earrings ahead of expectations as subscription billings growth accelerated a reported revenue of $80mn vs. cons. $79mn and subscription billings growth that accelerated to 21% y/y from 16% in F4Q and 9% in the year ago period

·     Cowen initiates security software with Outperform ratings on CHKP ($140 tgt), CRWD ($250 tgt), FTNT ($250 tgt), NET ($100 tgt), PANW ($425 tgt), VRNS ($55 tgt) and ZS (225 tgt) saying segment has multiple drivers in the coming years, that support revenue growth estimates of ~9% and highly toxic threat landscape should drive security spending of over $200 bln by FY 2025

·     Hardware, Storage & Components; NTNX reported good 3Q results as all key metrics (ACV, revenue, and EPS) were ahead of consensus and also provided guidance for 4QFY21 ACV that was ahead of consensus and calls for an acceleration of growth; PSTG qtr beats(red/OI), Q2 rev ahead, albeit modestly and below seasonal (Q1 revs $412.71M beats $404M est.); in IT Services & Consulting; PLAN shares tumble as posts wider Q1 EPS loss of (10c) vs. est. loss (9c) and announced its CFO would step down later this year – did issue higher Q2 and year rev outlook

·     Media movers; IAC downgraded to neutral from Buy at BTIG post the VMEO spin given what we see as a reasonable valuation for the remaining assets. Public stakes/cash now account for 73% of IAC’s current value, and we would have to push to uncomfortable levels for other asset value to justify a Buy rating; ROKU signed its first ever "pay-one" window streaming rights deal, coming to an agreement with smaller film distributor Saban Films for some of its 2021 movies.