Closing Recap

Monday, November 15, 2021

Equity Market Recap

·     U.S. stocks finish the day mixed as Treasury yields jump to 3-week highs on rising inflation expectations, buoyed by comments from former Federal Reserve Bank of New York leader William Dudley who said he believes the Fed will have to raise its short-term target rate range from near zero levels to between 3% and 4%. Dudley said in a Bloomberg TV interview that he believes the Fed will start raising rates by next June and "they’re going to go faster than what people think and to a higher rate peak than what people think. The comments pushed the 10-year to highs above 1.6% while stocks initially slipped, and the dollar rebounded. Most of quarterly earnings are behind us but focus this week will be on earnings reports from several major retailers including WMT, TGT, HD, LOW and Macy’s. An overall quiet day to start the week as markets awaited President Biden to sign the $1 trillion bipartisan infrastructure bill, unlocking hundreds of billions of dollars for transportation, broadband and utilities improvements.

·     Stock and Sector movers: OTLY plunges to record lows after missing quarterly revenue estimates and cutting its full-year revenue outlook; DLTR surges to record highs after the WSJ reported activist Mantle Ridge had a $1.8B stake after Friday’s close, with analysts generally positive on the news; SPLK plummets after announcing its CEO is stepping down and preliminary Q3 results and CRWD also tumbles in software after Morgan Stanley initiated at Underweight; data REIT sector active with two deals announced as AMT acquired COR for $170 per share in a $10.1B deal, and CONE being acquired by KKR, GIP for $90.50 per share in a $15B deal; other deals today include QSR acquired Firehouse Subs for $1B in cash, and CSPR acquired by Durational Capital Management for $6.90 per share; TTWO drops after its GTA Trilogy received a 0.5/10 user score on Metacritic and EA also suffers after its Battlefield 2042 game received overwhelmingly negative reviews; BA soars to lead the Dow after saying it is getting close to resuming deliveries of its 787 Dreamliner; ARCH, BTU, TECK, CEIX, HCC – coal stocks hit hard today after the U.N. COP26 summit in Glasgow concluded on Saturday with a deal calling for action on coal use and fossil fuel subsidies for the first time.

Economic Data

·     Empire State Manufacturing Index jumped to 30.9 vs. 22.7 consensus and 19.8 prior month; new Orders Index: 28.8 vs. 24.3 prior; shipments Index: 28.2 vs. 8.9 prior and the number of employees Index: 26.0 vs. 17.1 prior

Commodities, Currencies & Treasuries

·     Oil prices recover off morning lows as WTI crude rises $0.09 to 0.11% to settle at $80.88 per barrel (off earlier lows $79.30), while natural gas prices rise over 4.5% back above the $5.00 per mln btu level. Prices had been lower amid concerns over a potential release of oil from the U.S. Strategic Petroleum Reserve (SPR). Gold prices fall -$1.90 or 0.1% to settle at $1,866.60 an ounce (snapping a 7-day win streak) but holding not far off the 5-month highs it hit last week when investors fled to safety of precious metals as a hedge against inflation. Bitcoin and Ethereum prices pulled back off earlier highs as crypto assets also saw some modest profit taking.

·     The U.S. dollar index (DXY) rebounded off early losses to hit fresh 16-month highs (95.44) amid rising interest rate increase fears after former NY Fed President Dudley, in a Bloomberg interview said he believes the Fed will have to raise its short-term target rate range from near zero levels to between 3% and 4%. Initially, the buck eased against its major peers, but rising inflation concerns keeps the currency stronger. The dollar got a boost on Wednesday when data showed U.S. consumer prices rose last month at the fastest annual pace since 1990, casting doubt on the Federal Reserve’s view that price pressures will be transitory. Demand for the greenback softened on Friday when data showed consumer sentiment dropped to its lowest in a decade.

·     Treasury yields broadly higher; the 10-year Treasury note yield pushes up to almost 1.62% in Monday morning trading, rebounding from last week’s low of 1.42% and 1.58% on Friday as higher inflation readings last week (CPI, PPI) and “hawkish” comments from for Fed President Dudley today lifted yields across the board (30-yr back above 2%). The slip in bond prices also came after November’s Empire State Manufacturing Index came in much stronger than expected, to 30.9 from the 22.7 consensus and 19.8 in October.

Sector News Breakdown

Consumer

·     Retailers; huge week for retailer earnings with WMT, TGT, HD, LOW, BJ, KSS, M, TJX, VSCO, BBWI, PLCE, WOOF, ROST, FL among those expected to report; CSPR to be acquired by Durational Capital Management for $6.90 per share purchase price which delivers substantial 94% premium; LESL files for offering of 56.6M shares of co by selling stockholders; DLTR was upgraded from Hold to Buy with $148 tgt at Deutsche Bank as now see improved risk/reward through potential operational and profitability improvements at Family Dollar (FDO) given a greater sense of urgency with Mantle Ridge’s influence (note late Friday, filings showed Mantle Ridge took a 6% stake in the retailer); Wayfair (W) downgraded from Buy to Hold at Argus saying they expect Wayfair to benefit over time as more consumers purchase home goods online, but believe the share price depends in part on continued revenue growth, and revenue has now fallen for two straight quarters.

·     Auto sector; TSLA was in the news again due to Elon Musk’s comments about selling his shares after he responded to a Bernie Sanders tweet by saying “Want me to sell more stock, Bernie? Just say the word,” and Michael Burry tweeted “Lets face it…. He [Musk] doesn’t need cash. He just wants to sell $TSLA”; Wedbush maintained their Outperform rating and $85 target on GM but said the stock could hit $100 over the next 12-18 months as they believe its EV transformation story is starting to drive a re-rating; HC Wainwright upgraded BLNK to Buy with a $50 PT based on several positive developments; EVGO was downgraded to Neutral at Credit Suisse who raised their target to $17 from $11 as its recent rally appears to have priced in the benefits of the infrastructure bill and expanded partnerships with GM and Uber and cut to Underweight at Bank of America after shares doubled over the last 10 trading days to levels that are not appropriately pricing in risks; CHPT was initiated at Evercore with an Outperform rating and $34 PT and at JPMorgan with a Neutral rating and $26 PT; KXIN said Henan Yujie Times Automobile, which it plans to buy, saw a jump in EV sales in October; LCID’s Lucid Air was named the 2022 Motor Trend Car of the Year

·     Consumer Staples; OTLY tumbles after guiding FY21 revs to exceed $635M, below its previous outlook of exceeding of $690M saying it is currently investigating a quality issue at one of its production facilities that will likely result in the destruction of inventory and lost sales (posted Q3 sales $171M which missed the $185M estimate); TSN tops consensus marks with its Q3 earnings report and sets favorable guidance as recorded a record performance in its beef segment during the quarter and experienced share gains in the retail core business lines; COCO was initiated coverage by several analysts after recent IPO, with Buy equivalent ratings from Bank America ($18 tgt), Piper ($17 tgt), Wells ($18 tgt), CSFB ($18 tgt), William Blair and Goldman ($22 tgt) among them; ZVIA was downgraded to Wells Fargo citing slowing tracked channel sales, inflation concerns and less confidence around protecting margins

·     Restaurants; QSR agreed to acquire Firehouse Subs, a sub sandwich chain for $1 billion in cash, funded through cash-on-hand and debt. The acquisition is expected to be earnings accretive immediately. Restaurant Brands’ existing chains include Burger King, Tim Hortons and Popeyes; Cowen said top 3 names exiting earnings season are Outperform-rated CMG, MCD and WING while we are most cautious on Market Perform rated SHAK, QSR and WEN

·     Casinos, Gaming, Lodging & Leisure sector; BMO raised their target on PLNT to $96 from $80 as they continue to see a runway to capture share within the pandemic-affected fitness landscape, and believe its price and convenience offers a long-term outperforming proposition; SEAT rises after reporting Q3 revenue $139.5M vs est. $91.65M, guiding FY revenue $420M-$435M above est. $334.3M; Wells said they would be buying MGM, RRR, CZR then BYD, and would look for more substantive development on concession renewals before turning positive on LVS and WYNN after management meetings as they see robust LV Strip demand that should be on solid footing by 2H22 and return to 2019 levels in 2023; Goldman raised estimates on LYV and their PT to $130 from $112 given positive Covid developments, Q3 results, and strong underlying business trends heading into 2022; SIX jumps as appoints a new CEO

Energy

·     Energy stock movers; UBS raises 2022 and 2023 Brent forecasts to $81/bbl and $80/bbl from $62 and $60, respectively saying the shape of the physical market is playing out as they have forecast and continue to see recovery to 2019 demand levels around 2H22; CVX upgraded from Neutral to Buy at UBS and raise tgt to $125 pt from $110 saying in addition to attractive earnings/CFFO leverage, CVX has built real credibility in managing capital for shareholder value. The key in this respect in operating through cycle in a consistent fashion; RDS said that it will abandon its dual-share structure in favor of a single class of shares to eliminate the complexity of its current system, and that it will move its tax residence from the Netherlands to the U.K.;

·     Utilities & Solar; coal stocks hit hard (ARCH, BTU, TECK) after the U.N. COP26 summit in Glasgow concluded on Saturday with a deal calling for action on coal use and fossil fuel subsidies for the first time in the UN climate conference’s history; RWE said it plans to invest 50 billion euros ($57 billion) through 2030 to double its green energy capacity to 50 gigawatts (GW), as Germany’s largest power producer outlined its plan to become a global renewables heavyweight; NETI upgraded to Buy at Stifel with $20 tgt saying they really do like the outlook for offshore wind development, and believe those deploying capital to take advantage of the opportunity should be able to generate good returns, although not without risk; SR was reiterated Buy at Guggenheim but lower estimates to reflect the final order in this rate case and lowering our PT to $72 from $84

·     Pipelines; Evercore upgraded TRGP to Outperform as the crisis has forced the entire sector to focus on returns vs. growth that has generally translated into slashed budgets and cancelled projects but the company now has the assets to now drive outsized FCF, and they also upgraded PAA to Outperform

Financials

·     Insurance; ROOT downgraded from Equal-weight to Underweight at Barclays and cut its tgt to $3 from $5 saying they have seen ROOT shift its strategy to be less growth orientated, highlighting the growing pains and secular auto loss cost headwinds ROOT is facing, which we view will slow the disruptive nature of its business model; VOYA said it sees adjusted operating EPS annual growth rate of up to 17% through 2024

·     Bitcoin, FinTech & Payments; MARA receives subpoena tied to Hardin Data Center, cites SEC inquiry in form 10-q filing; PYPL holds recent lows post earnings decline, rebounds a second day; BITF said it receives and installs 1.5K more Bitmain S19j Pro miners in November, increasing its hashrate to more than 2 Exahash per second.

·     Consumer Finance; monthly credit card data out: COF reported charge-offs for Oct. of 1.04% vs. 3.11% YoY; Oct. delinquencies 2.06% vs. 2.19% YoY; DFS credit card charge-off rate 0.98% at October end vs 1.01% at September end while credit card delinquency rate 0.98% at October end vs 0.95% at September end; ADS delinquencies for Oct. of 3.9% vs 3.8% in September, Oct. charge-offs 4.1% vs 3.5% in Sept; BAC credit card charge-off rate was 1.14%% in October vs 1.28% in september and credit card delinquency rate was 0.93% at October end vs 0.90% at september end; Citigroup (C) credit card charge-offs 1.00 % in October vs 1.21% in september and credit card delinquency rate 0.79% at October end vs 0.80% at september end

·     REITs; AMT is acquiring COR in a $10.1B deal for $170/share in cash that is expected to close by the end of 2021 or shortly thereafter; CONE is being acquired by KKR and Global Infrastructure Partners in a $15B with CONE shareholders receiving $90.50/share in cash; Evercore downgraded SHO to In-Line and removed it from their SMID Long-Term Core Ideas list due to relative valuation and greater uncertainty accompanying the company’s ongoing management transition and the future portfolio composition / impact to NAV resulting from an anticipated increase in future transaction activity; MNR Q4 adj FFO 20c vs est. 21c on revenue $39.9M vs est. $49.1M; LXP received an open letter from shareholder Land & Buildings detailing why its board needs new, independent voices with input from shareholders to help reverse its track record of consistent underperformance; WE said occupancy in its offices, which cater to both individual and corporate members, was at 59% as of Sept. 30, up 9% from a year earlier

Healthcare

·     Cannabis; cannabis sector (CRLBF, CURLF, TCNNF, GTBIF, TLRY, CGC, MSOS) seeing strength early (extending last week gains) on reports that legislation that would decriminalize marijuana and establish a tax on cannabis sales was being developed by Republican Representative Nancy Mace with the goal of introducing it in the U.S. House of Representatives later this month, according to media reports. Marijuana Moment reported that the bill attempts to mark a compromise measure that would not be as far-reaching as more comprehensive bills others in Congress have been seeking.

·     Pharma sector; EYPT shares surge after the co announced positive interim Phase I DAVIO data (n=17) for EYP-1901 (a potential twice-yearly sustained delivery anti-VEGF treatment) in wet AMD at AAO on Saturday – interim six-month results show positive safety data, no dose limiting toxicities, no ocular serious adverse events (SAEs), and no drug-related systemic SAEs- 76% and 53% of patients were rescue-free up to four and six months, respectively; RCKT shares tumble after the company disclosed its plans not to pursue a high-dose cohort in Phase 1 clinical trial for RP-A501 in adult and adolescent patients with Danon Disease.

·     Biotech movers; MRNA announces positive data from phase 2 study of mRNA VEGF-A therapeutic in patients undergoing coronary artery bypass grafting surgery saying the study met the primary endpoint of safety and tolerability; REGN announces $3B share buyback plan; BTAI was double downgraded to Sell at Goldman Sachs and cut tgt to $24 saying consensus estimates do not reflect the complexity of new drug launches in the hospital setting; NVAX submits application to market its COVID-19 vaccine candidate to South Korea’s Ministry of Food and Drug Safety; SAVA slides after disclosing in its latest 10-Q filing that certain government agencies have asked the company to provide them with corporate information and documents.

·     Healthcare Services; MPLN ruled out allegations made by short-sellers that the company was at the risk of losing its contract with UNH Citing sworn testimony, the Health Tech company says that its relationship with the insurer was intact, and the claims of short-sellers were false. https://bit.ly/3FhJW4D

Industrials & Materials

·     Aerospace & Defense; BA paces gains in space after saying it is "getting close" to resuming deliveries of the 787 Dreamliner, after suspending them to deal with production issues, and following reports that China’s aviation regulator may be close to lifting the country’s flight ban on the 737 MAX; bog story this week is the Dubai Airshow while both BWXT (Tues) and MTU (Thurs) host investor days and both TDG (Tues) and WWD (Thurs) report Q4; Bloomberg reported this weekend that Airbus SE (EADSY) is in talks with AL on a significant aircraft order involving a mix of narrow- and wide-body jets, which could include the European plane maker’s coming A350 freighter; DLKAY was upgraded to Neutral from Sell at UBS saying progress for Lufthansa in Q3 have improved forecasts, while adding that the balance sheet is well on its way to restoration and that debt levels have likely peaked for Lufthansa; UAVS reported earnings

·     Transports; The Baltic Exchange’s dry bulk sea freight index dipped 48 points, or 1.7%, to 2,759, to its lowest in a week amid declines in the larger Capesize and Panamax vessel segments. The Capesize index fell 84 points, or 2.2%, to 3,752, its lowest level since Nov. 9. The panamax index fell 80 points, or 2.7%, to a five-month trough of 2,850; CAR pt raised from $140 to $170 at Morgan Stanley, but maintains Underweight as they acknowledge the highly volatile trading environment and potential that the stock could detach itself from intrinsic value.

·     Metals & Materials; in paper/containerboard, GPK upgraded to Buy at UBS as they estimate the current boxboard inflection is not priced in – said GPK is growing its exposure to the faster growing European market with the recently closed AR Packaging acquisition, increasing Europe’s revenue contribution to 26% in 2022 from 12% in 2019 on our estimates

Technology, Media & Telecom

·     Internet; AKAM downgrade from Outperform to Perform at Oppenheimer as now see difficult year-over-year comparisons on all three metrics (Ebitda margins, growth and valuation) due to increased competition from well-funded and disruptive startups (NET, FSLY); SHOP was downgraded to Hold at Loop Capital citing valuation

·     Semiconductors; LSSC acquired all outstanding shares of Mirametrix common stock for $66.9 mln in an all-cash transaction; STX tgt raised to $130 from $110 at Loop Capital as believe investors could be starting to relate to STX more aligned with our view; NVDA tgt raised to $350 from $230 at UBS as see Oct Q results and Jan Q guidance biased meaningfully higher and we raise estimates; AVGO tgt raised to $620 at Argus saying at its investor event, Broadcom stated that customers are using its software for "modernizing, optimizing, and protecting the world’s most complex hybrid IT environments; CCMP upgraded to Buy at Goldman Sachs with $192 tgt; ON was added to Bank of America U.S. 1 list

·     Software movers; TLS plunges as 3Q revenue $70.1M misses the $76.8M estimate and cuts year sales view to $240M-$245M from prior $283M-$295M; SPLK announces CEO transition as Doug Merritt steps down with Graham Smith, Splunk’s Chair, named interim, while guides Q3 revs about $660M vs. est. $641M; CRWD was initiated with an underweight and $247 tgt at Morgan Stanley saying the potential for decelerating revenue growth creates an unfavorable risk-reward at ~26X CY23 sales; WDAY tgt raised to $340 from $285 at Oppenheimer saying combined with installed-base spending intentions suggesting significant adoption of analytics, core HR and employee experience, they see Workday as well positioned to reaccelerate HCM growth and capture a large upsell opportunity; SNOW tgt raised to $425 from $340 at Mizuho; CTXS approved a restructuring program which will include, among other things, elimination of full-time positions, termination of certain contracts; DMRC said to acquire the product cloud company, EVRYTHNG Limited in a stock transaction

·     Hardware, Components & Services; RDWR downgraded to Perform at Oppenheimer saying shares have had a great run, +40% over the last year (vs. the S&P’s +30%) on strong demand for enterprise security and they see more difficult comparisons; GLOB agreed to acquire Navint, a lead-to-revenue transformation company and Salesforce partner; TTWO, EA shares slide as TTWO-owned Rockstar Games’ "Grand Theft Auto: The Trilogy – The Definitive Edition" criticized on major social media sites, with users citing issues with gameplay and graphics – online review platform Metacritic, the game holds a user score of 0.5 out of 10

·     Media & Telecom movers; DISH and SBGI have come to a multi-year carriage deal for Sinclair stations, ending a string of quick-fix short-term extensions since summer. The deal ensures that Sinclair’s 144 owned local stations in 86 markets will stay on Dish TV, and the Tennis Channel will remain on Dish TV and Sling TV; WMG falls after posted Q4 EPS of 5c missing the 15c estimate saying COVID-19 impacted rev streams in the quarter and Q4 was also hurt by higher expenses related to restructuring and other initiatives – Q3 digital revs only +19% vs 29% q/q; VVNT rises as raises FY Ebitda and revs to $650M-$660M, from $640.0M-$655M and $1.44B-$1.46B from $1.38B-$1.42B respectively