Closing Recap

Friday, November 12, 2021

Equity Market Recap

·     Stocks finish the day near the highs, with the Nasdaq rising around 1% but it wasn’t enough to extend the weekly winning streak for major averages to six. The word of the week was “inflation” with CPI hitting its highest level in 30-years and both PPI and University of Michigan sentiment data showed elevated pricing as well, denting investor optimism. Still, Treasury yields refuse to move higher (10-yr still below 1.6%) and stocks climb ahead of a busy week of earnings in the retail space (though the majority of earnings season is behind us). Europe closes week higher as the Stoxx 600 up 0.3%, up 0.7% in sixth straight week of gains, while Germany’s Dax up 0.1%, Britain’s FTSE 100 down 0.5%, France’s Cac 40 up 0.5% at record high, Spain’s ibex down 0.3% on the day. Coming up next week, President Biden and Chinese President Xi Jinping will hold a virtual summit on Monday, the White House said, as the two leading world economies pledge to work together on climate change but remain at odds over Taiwan and other fronts.

·     Stock & Sector movers: Dow component JNJ rises after announcing it will split into two separate companies (consumer health and pharmaceutical and medical device businesses); EVs at the forefront again with BLNK leading after its earnings beat and Roth upgrade to lift other charging names CHPT (also init at Neutral by Piper) VLTA, RIVN extends its rise in its 1st week of trading, HYZN soars while BEEM rolls off early gains after their results, RIDE slides after its results and delaying its new pickup truck delivery timeline; TSLA among worst S&P fallers after Elon Musk sold an additional $700M in shares; TM gains after saying it will start making up for lost production next month with Japanese factories returning to normal for the first time in seven months to boost some other auto names HMC, BWA, GM, MGA; memory names outperform with STX soaring to record highs and WDC, MU also among S&P leaders; HPE sinks as the worst S&P performer after Goldman downgraded it to Sell; retailers WMT, TGT, HD, LOW, BJ, KSS, M, TJX, VSCO, BBWI, PLCE, WOOF, ROST, FL highlight next week’s earnings.

Economic Data:

·     University of Michigan Sentiment data a big miss at 66.8 for Nov-P, a big miss and surprise below the consensus 72.4 (and final Oct 71.7); current conditions index prelim Nov 73.2 (consensus 80.0) vs final Oct 77.7 and consumers expectations index prelim Nov 62.8 (consensus 70.0)

·     U opening declined -191k to 10,438k in September after dropping -469k to 10,629k (was 10,439k) in August from the 11,098 all-time high from July which was the first time ever with an 11-handle. This is the second monthly decline of the year.

Commodities, Currencies & Treasuries

·     Oil prices fell on Friday, with WTI crude down -$0.80 or 0.98% to settle at $80.79, wiping out gains from the previous session as the dollar continued to firm on expectations that the U.S. Fed will bring forward an increase to interest rates to tame inflation. Oil recorded its longest run of weekly losses since March as President Biden is weighing moves including a release of oil from the Strategic Petroleum Reserve to try to bring down the cost of gasoline at the pump, which has hit a seven-year high.

·     Gold prices edge higher for a 7^th straight session on Friday, rising $4.60 to settle at $1,868.50 an ounce and ending the week higher by roughly 2.8% (best week since May). prices got a boost this week as a hedge against rising inflation following CPI, PPI, and UoM data points, rising to 5-month highs. Gold rallied despite a surge to 16-month highs for the U.S. dollar on rising bets the Fed may need to push the timeframe of rate hikes up. The dollar with a strong week rising sharply vs. the euro, yen, and British Pound on higher inflation readings.

Sector News Breakdown

Consumer

·     Retailers; huge week of earnings coming for retail space: WMT, TGT, HD, LOW, BJ, KSS, M, TJX, VSCO, BBWI, PLCE, WOOF, ROST, FL highlight next week’s earnings; FTCH rises after the co confirmed that they are in discussions with Richemont in relation to a potential expansion of their existing Luxury New Retail strategic partnership. The parties are discussing a few possible options; GOOS launches its first-ever Footwear Collection, debuting two innovative styles for men and women; CPNG slides as Q3 EPS loss wider than expected ($0.19) vs est. ($0.16) and revenue of $4.64B missed consensus $4.82B

·     Auto sector; RIDE slides after posting narrower Q3 EPS loss but the EV company said commercial production and deliveries of its Endurance pickup will be delayed until Q3 of 2022, citing component and material shortages, along with other supply chain challenges (downgraded to Neutral at BTIG on delay); Toyota Motor Corp (TM) said it would begin making up for production lost from supply shortages in December, with factories at home in Japan returning to normal for the first time in seven months; EV Charging station co BLNK reported a Q3 rev beat, and gross margins were strong, while EPS missed due to higher Opex tied to hiring; RIVN rises, extending the surge for the EV maker seen since its IPO this week, sending its market value over $100B; HYZN reported Q3 earnings, which included revenue of $962K and a cash balance of $498M at the end of the quarter and reaffirmed its forecast for 85 vehicles shipped before year-end.

·     Housing & Building Products; in home improvement retail, Raymond James said they remain selective in which ones to own (Strong Buy on TSCO, outperform on HD, and Market Perform on LOW) as they raised F3Q/F4Q outlook as channel checks indicate continuing strength in in-store traffic as consumers are increasingly willing to get out and spend and the majority of inflation headwinds appear to be offset by corresponding pricing actions.

·     Restaurants, Consumer Staples; FLO Q3 EPS $0.30 vs consensus $0.25 and revenue $1.03B vs consensus $1.01B; net sales +3.9% – Pricing/mix +6.4% and volume (2.5%); EBITDA $118.5M vs consensus $104.4M – raises year revs $4.30B-$4.344B vs prior $4.256B-$4.30B and consensus $4.28B; KRUS surges as forecast FY sales above estimates, after beating expectations for Q4 results; FRGI Q3 EPS ($0.09) vs consensus $0.02 and revenue $88.6M vs consensus $88M; EBITDA $3.7M vs consensus $7M; Pollo Tropical comps +13.8% y/y and +0.9% vs 3Q19; SPB Q4 EPS $1.11 vs consensus $0.80; EPS from cont. ops. $0.38; revenue $1.16B vs consensus $1.10

·     Casinos, Gaming, Lodging & Leisure sector; in casinos, PENN upgraded to hold from Sell ay Deutsche bank but much lower tgt of $31; CZR was initiated with a Buy and Street high $191 tgt at B Riley; in gyms/fitness, XPOF tgt raised to $32 at Piper following strong Q3 results and raised 2021 guidance, while Guggenheim, Baird and Raymond James also upped tgts; FXLV shares slipped initially as reports Q3 EPS ($1.52) vs. est. loss (5c), sees FY21 revenue $132M-$137M, consensus $134.82M

Energy

·     E&P and Majors; PBR agrees to sell its SIX shale industrialization unit to Canada’s Forbes & Manhattan Resources for $33M; After earnings, RBC kept BKR, SLB, HP, PSI, SES as their top E&P ideas as few oilfield service providers managed to "beat and raise" during 3Q but they remain relatively constructive on FY22 and forecast improving revenue and margins as the year progresses; weekly Baker Hughes (BKR) rig count showed the total rig count rose 6 to 556 with oil rigs up 4 to 454 and gas rigs up 2 to 102.

·     Utilities & Solar; ARRY reported Q3 EPS (24c) wider than est. (5c) on revs $192.1M that also missed est. $203.5M, and it will acquire STI Norlan for approx. EUR 570M that is expected to be significantly accretive to margins and EPS before synergies

Financials

·     Bank movers; SCHW Core net new assets brought by new and existing clients $36.8B, net new assets excluding mutual fund clearing $35.9B, total AUM at end of October $7.98T, a 5% increase from September and 36% from October 2020; Goldman removed BAM from its Conviction Buy List; Morgan Stanley believes accelerating securities investment should drive sizable EPS upside across the banks, led by SBNY, CFR, and CMA, which could see 31-36% higher EPS when they redeploy their cash

·     FinTech & Payments; WU, MA expanded their global partnership to increase choice and convenience for their global customer base; Following its earnings miss yesterday, PSFE was downgraded to Market Perform at Cowen who cut their PT to $7 from $14 and to In-Line at Evercore who lowered their PT to $4 from $15, and several other analysts also cut their respective price targets

·     Bitcoin news; Bloomberg reported mid-morning that the SEC rejects the VanEck spot bitcoin ETF, saying the commission said the ETF failed to show it’s consistent with rules; NCTY subsidiary, NBTC Limited, and Compute North entered an agreement as Computer North to provide over 32MW of capacity for 10,000 Bitmain S19j miners to NBTC; BKKT shares slide after the newly public cryptocurrency exchange posts a Q3 net loss of $28.8M, wider than the $18.0M loss recorded a year ago, though Q3 adj EBITDA of ~$24.1M nearly doubled from -$12.3M a year ago.

·     REITs; CONE jumped mid-afternoon after the WSJ reported the company nears deal to be sold to private equity; RBC’s takeaways from NAREIT included industrial, life science, and residential REITs continuing to benefit from accelerating demand combined with limited supply and they currently favor sectors/names that are best positioned to thrive in the new post-COVID environment such as industrial (FR), towers (SBAC), life science (ARE), seniors housing (VTR), and single family (AMH, INVH, TCN), but are also encouraged by other opportunistic names such as MPWCiti hosted the CEOs of WY, RYN CTT at NAREIT’s REITworld conference this week and said the Timber REITs could be big winners in the quest for carbon neutrality and offer ESG upside

Healthcare

·     Pharma movers; JNJ said it plans to split into two companies, separating its consumer health division that sells Band-Aids and Baby Powder from its pharmaceuticals and medical devices business; AZN Q3 core Ebit of $2.28 billion was 14% below consensus, reflecting a lower gross margin while sales were 1% below consensus, with many key growth drivers shy of expectations; ACIU said its Alzheimer’s vaccine candidate, ACI-35.030, showed immune response in an early-to-mid stage trial

·     Biotech movers; BIIB said late-stage studies found that its Alzheimer’s drug Aduhelm significantly lowered blood levels of an abnormal form of the protein Tau (Tau forms toxic tangles of nerve fibers associated with the mind-wasting disease and is a target of experimental Alzheimer’s drugs); CBIO plunges after announced a strategic decision to halt the clinical development of MarzAA, report data to date, and seek a buyer for its hemophilia assets. Catalyst plans to focus its resources on its complement therapeutics and protease medicines platform; VIR and partner GSK said their antibody-based COVID-19 therapy met the main goal of a late-state study

·     MedTech Equipment; AFIB was downgraded to Underweight at JPMorgan as the co noted Acutus posted another softer than expected quarter as meaningfully lower AcQMap placements and procedure pull-through led to a miss and lower; CODX rises early on earnings and guidance; BDX laid out its plans with a goal of achieving a long-term compound annual revenue growth of 5.5% or more.

·     Healthcare Services; LH and SYNH shares active after Bloomberg reported LabCorp is in talks to merge some of its assets with Syneos Heath Inc., e discussing a deal in which part of LH’s Covance clinical research division will merge with Syneos; BHG downgraded to EW from OW at Morgan Stanley while the firm lowers price tgts on AMWL, OSH, OSCR, CI saying the last week of Q3 earning season was a tumultuous one, with Covid still wreaking havoc on costs and leading to significant sell-offs in stocks. We reduce PTs to reflect multiple contraction seen across healthcare disruptors

Industrials & Materials

·     Aerospace & Defense; CIR Q3 adj EPS 50c and revenue $190.8M missed consensus 55c and $205.5M, sees Q4 adj EPS 60-65c below est. 97c, and lowered FY guidance for adj EPS to $1.69-1.74 from $2.10-2.30 and organic rev growth to +0-2% from +2-4%; ASTR Q3 EPS (6c) was better than est. (16c), adj EBITDA ($32.9M) vs est. ($33.5M), said it is preparing to perform a test launch for the SpaceForce in coming week or so

·     Industrial & Machinery; MMM shares and other industrial conglomerates seeing strength as more companies announcing “splits” of companies (follows JNJ, GE and Toshiba this week); Morgan Stanley upgraded CGNX to EW despite seeing tempered 2022 growth as their UW thesis has played out; ROLL Q2 adj EPS $0.89 vs est. $1.05 on revenue $160.9M vs est. $159.5M, sees Q3 sales $245-255M; HYFM Q3 EPS 37c topped est. 25c on revs $123.8M vs

·     Metals & Materials; GEF was downgraded from Outperform to Market Perform at BMO Capital saying the key issue is valuation – although not expensive, we view shares as reasonably valued at 7.7x our FY22 EBITDA estimate; FSM downgraded to Market Perform from Outperform at BMO Capital saying adjusted earnings were a bit weaker than expected, mostly as a result of gold sales lagging production (FSM was also downgraded at Canaccord)

Technology, Media & Telecom

·     Semiconductors; AAPL supplier Foxconn, cautioned that the global semiconductor shortage could last well into the second half of next year. Foxconn, which posted stronger-than-expected profits of $1.33 billion for Q3, said the ongoing shortage would mean revenues would likely fall 15% from 2020 levels over the final months of the year; SMIC said it will contribute $3.655 billion to set up a joint venture in Shanghai to manufacture integrated circuit wafers; NVDA was downgraded at Wedbush solely on valuation; memory/hard-disk drive names jump (MU, STX, WDC) few possibilities for strength include: 1) headlines earlier from WSJ that U.S. firms are increasing investment in China semiconductor companies, 2) Hallum was positive on $WDC, and 3) Digitimes noting Winbond to allocate more capacity for specialty DRAM

·     Hardware, Software movers; U.S. videogame sales (EA, TTWO, ATVI) hit October record of $4.4B, rising 16% YoY and the highest ever for a month while October U.S. console/handheld software sales were roughly $226 million, up 19% year-over-year (above Wedbush est. of $218 million); HPE downgrade from Neutral to Sell at Goldman Sachs with $14 tgt as prefer CSCO and DELL, while noting a declining DRAM pricing environment which has historically been negative for Server Average Unit Price (AUP); LIDR hares drop as reported a wider Q4 loss driven by a two-fold jump in operating expenses, as the company spent 345% on sales and marketing; JAMF tumbled following earnings and guidance