Closing Recap

Tuesday, October 17, 2023

Index	Up/Down	%	Last
DJ Industrials	13.44	0.04%	33,997
S&P 500	-0.42	0.01%	4,373
Nasdaq	-34.24	0.25%	13,533
Russell 2000	19.19	1.10%	1,766

 

 

 

 

 

 

 

 

 

U.S. stocks were volatile on Tuesday but the S&P ended little changed. US futures opened lower initially as stronger than expected monthly Retail Sales/Industrial Production data raised prospects for future rate hikes by the Fed, while tech fell as the White House said is tightening restrictions on China’s ability to buy advanced semiconductors, as the Commerce Department said it would significantly constrict exports of artificial intelligence chips (weighed on NVDA, AMD, INTC). Stocks recovered as the S&P 500 turned positive and traded above yesterday’s highs on upward momentum in Energy, Materials, and Financials while Technology remained a laggard. U.S. equities proceeded to give back those gains as Treasury yields surged to new highs this afternoon as the 2-year yield rose 13bp to 5.225%, highest since 2006 while the benchmark 10-yr rose 14.5 bps to 4.855%, while headlines out of the Middle East also added to market uneasiness. The Russell 2000 Smallcap outperformed large caps, rising firmly over 1% amid gains in energy, materials, and financials. There were a few M&A stories today (see below), as well as key earnings (GS, BK, JNJ) and more tonight (UAL, JBHT, OMC) before things pick up steam tomorrow night.

 

Economic Data

·     Retail Sales for September rose +0.7% M/M vs. +0.3% expected and +0.8% in August (revised from +0.6%) while core Retail Sales rose +0.2% M/M, in line with expected and vs. +0.9% in August (revised from +0.6%). Ex-Auto & Gas: +0.6% M/M vs. +0.1% expected and +0.3% prior.

·     Industrial output rose +0.3% vs. est. unchanged and vs. Aug unchanged (vs. previous +0.4%) as Sept capacity use rate 79.7% (consensus 79.6%) vs Sug 79.5%.

·     NAHB Housing market index for October reported at 40 (below consensus 44) and below the revised 44 in September; index of home sales over next six months 44 versus 49 in September and index of prospective buyers 26 versus 30 in September.

·     Business Inventories for August rose +0.4% to $2,548.7B vs. +0.3% expected and +0.1% in July (revised from 0.0%) and Business sales +1.3% vs July +0.8% (prev +0.6%); the Aug inventory/sales ratio 1.37 months’ worth vs July 1.39 months.

 

Commodities, Currencies and Treasuries

·     Oil prices settled at $86.66 a barrel, flat on the day, while Brent edged higher $0.25 to $89.90 per barrel. Gold prices edged slightly higher, rising $1.40 to settle at $1,935.70 an ounce (off highs $1,944.50), up despite a spike in Treasury yields and a rise in the dollar. Natural gas prices -0.96% at $3.079/MMBtu, falling a 5th straight day after having risen for six straight sessions through last Tuesday and ended that day at a nearly nine-month closing high of $3.382/MMBtu. Treasury 2-year yield rises 10bp to 5.199%, highest since 2006 (and 10-yr off near highs at 4.85%).

 

 

Macro	Up/Down	Last
WTI Crude	0.00	86.66
Brent	0.25	89.90
Gold	1.40	1,935.70
EUR/USD	0.0015	1.0573
JPY/USD	0.29	149.79
10-Year Note	0.148	4.858%

 

 

Sector News Breakdown

Consumer

Retail, Consumer Staples & Restaurants:

·     Goldman Sachs a few changes: BJ was downgraded from Buy to Neutral at Goldman Sachs given it sees limited earnings upside to consensus estimates for FY24, while noting a full valuation with the stock trading at 17.2x NTM P/E. DLTR was upgraded from Neutral to Buy at Goldman as it sees strong earnings growth potential supported by continued market share gains, lower freight costs and the multi-year turnaround efforts. Lastly, OLLI was upgraded from Neutral to Buy and raise tgt to $83 as expects tailwinds from the favorable closeout environment to remain n-t.

·     In Food & Grocers: ACI Q2 net income fell to $266.9M from $342.7M y/y and said continues to see decline in demand for COVID-19 vaccination and at-home testing kits, which would cause $75M headwind to its adj EBITDA for rest of 2023; Q2 EPS beats, and comp store sales rose 2.9%. Cocoa prices rose to the highest ever as the March cocoa contract hit a peak of 3,155 pounds per metric ton, the highest price since cocoa futures started trading there in 1920 (HSY).

·     Adidas (ADDYY) boosted its 2023 operating outlook to loss of EUR 100M from EUR 450M, reporting currency-neutral revenues increased 1% versus the prior year level. In euro terms, the company’s revenues declined 6% to EUR 5.999B from EUR 6.408B last year; the headlines helped boost footwear apparel names/sectors NKE, UAA.

·     VFC shares spiked after The Wall Street Journal reported that activist investor Engaged Capital has built a “big” stake in the parent of retail brands including Vans and The North Face https://tinyurl.com/2kuds85h

 

Leisure, Gaming & Lodging:

·     In lodging: CHH proposes to buy WH for $90.00 per share in cash-and-stock transaction, which would be a 30% premium to latest closing price, in a total deal valued at about $7.8B (would pay $49.50 cash and 0.324 shares) – https://tinyurl.com/33rftmsc .

·     In Casinos/Gaming: CHDN positive mention by JMP Securities saying a state ban on electronic “skill games” is back in effect after the Virginia Supreme Court reversed a lower court decision allowing slot machine-like games to operate across the state and is positive for CHDN. Wells Fargo previewed the gaming sector saying they like CZR and WYNN, as sees upside to Street est’s (+2-3%), and potential for upbeat commentary on LV Strip and Macau.

·     In Autos: LCID produced 32% less vehicles in Q3 than a year ago – produced 1,550 vehicles and delivered 1,457 units in the quarter, compared with the 2,173 vehicles it made and 1,404 delivered in the three months to June. The National Highway Traffic Safety Administration (NHTSA) said in a filing that it had opened a safety-defect probe into nearly 600 driverless cars operated by GM’s Cruise unit.

 

Homebuilders, Building Products, Home Furnishing:

·     In Homebuilders: Wells Fargo initiates coverage of U.S. Homebuilding & Building Products, with DHI, LEN, MAS, PHM at Overweight and Equal weigh on KBH, FERG and an Underweight rating on MHK saying recent volatility presents opportunity.

·     In Building products: Truist lowered ests and targets for several names, moving from mid to high-single-digit unit growth too low to mid-single-digit unit increases next year. Stocks with reduced 2024 estimates reduced include AZEK, BECN, LEG, MAS, PRPL, SITE, TPX, TREX. Truist has also lowered its 2023 views on FND and JELD, while MHK 4Q23 is below the Street.

 

Energy

·     In Solar sector: Two analysts out with several changes: 1) NOVA was upgraded from Neutral to Buy at Citigroup but lower tgt to $14 as change based entirely on valuation (-55% since 7/19), while they downgraded SPWR from Neutral to Sell with $4.50 tgt from $10 as believes forward estimates need to come down, strategic initiatives will take longer to implement. 2) Morgan Stanley with changes as well, upgrading ARRY from Underweight to Equal Weight as expects to benefit from strong growth in the utility-scale solar market, which so far, is proving to be a more resilient sub-sector of clean tech. They also downgraded SPWR from Equal Weight to Underweight with $5 tgt on several near-term dynamics. HASI was upgraded to OW from EW as believes the sell-off is overdone and incongruous with business fundamentals. Lastly, MSCO said FSLR, ARRY, SHLS favorable near-term setups while SEDG, ENPH skew negatively.

·     In Oil E&P and Equipment: Bernstein downgraded shares of E&P names APA, EOG, DVN, KOS to market perform from Outperform. In Equipment, NOV was downgraded from Equal Weight to Underweight at Barclays as views the co at a structural disadvantage this cycle as service companies restrains CAPEX and drilling contractors consolidate. In the Natural gas E&P producing space, Reuters reported late day that CHK has approached SWN to express interest in an acquisition https://tinyurl.com/yc5wn77c , sending SWN shares higher.

 

Financials

Banks, Brokers, Asset Managers:

·     In Banks: 1) BAC bank posts Q3 EPS $0.90 topping $0.81 est. as investment banking/trading fared better than expected, while higher borrowing costs boosted its NII; reported unrealized losses of $131.6B on securities held until maturity in Q3, growing from nearly $106B in paper losses in Q2; 2) Dow component GS reported Q3 EPS $5.47 topping consensus $5.31 on better revs $11.82B vs. est. $11.19B; posts Q3 FICC net revenue $3.38B, down 6% y/y; 3) CFB EPS better than expected with an EPS beat, a PPNR beat, an in-line NIM, low-single-digit core loan and deposit growth, and low NCOs; 4) SFBS Q3 EPS $0.98 vs est. $0.95 on NII $99.698Mm vs est. $102.55Mm, loss provision $4.282Mm; Loans grew 3%, while total deposits came in at $13.1B.

·     USB shares jumped midday on headlines that the bank is no longer required to submit quarterly implementation plans for complying with requirements associated with category ii banking organization. The Fed will not require the company to meet category II requirements by Dec ’24.

·     In Trust banks: BK beat this quarter on better NII – reports Q3 adjusted profit of $1.27, beating average analysts’ estimate of $1.15 as net interest revenue jumped nearly 10% to $1.02B vs. $926M y/y; Total average deposits decreased 5.5%, in line with guidance, however non-IB deposit runoff was greater than expected.

 

Bitcoin, FinTech, Payments:

·     In FinTech preview: Truist sees continued strength from FinTech leader’s MA and GPN and is constructive on Digital disruptors AFRM, SOFI and MQ. The firm raises AFRM PT to $28, from $24 – Lowering SQ PT to $70, from $85, EEFT to $90 from $120, GDOT to $17 from $24, FI to $120 from $130, PYPL to $70 from $85, RPAY to $10 from $12, FOUR to $75 from $87.

·     Wolfe Research also with changes in FinTech: FIS upgraded from Peer Perform to Outperform saying its sale of Worldpay to GTCR is pending a 1Q24 close and FIS will return to its roots; DXC downgraded from Peer Perform to Underperform as believe shares may remain challenged pending greater line-of site to an inflection in revenue growth. BR upgraded from Underperform to Peer Perform saying position growth trends have remained stable, growing in the M/HSD range, with ICS recurring revenues also growing at a similar rate. Lastly, WEX upgraded from Peer Perform to Outperform saying signs are emerging that earnings growth should reaccelerate.

 

Healthcare

Biotech & Pharma:

·     JNJ Q3 adj EPS $2.66 vs. est. $2.51; Q3 revs $21.4B vs. est. $21.04B; boosts FY23 adjusted EPS to $10.07-$10.13 from $10.00-$10.10 (est. $10.03) and raises FY23 revenue view to $83.6B-$84B from $83.2B-$84B (est. $84.53).

·     APLS said it would present Phase 2 NOBLE Results of Pegcetacoplan in post-Transplant recurrence of primary IC-MPGN and C3G at Kidney Week.

·     AZN and partner Daiichi Sankyo Co.’s experimental drug helped stave off worsening of both lung and breast cancers for patients with few other options in a pair of highly anticipated studies. 

·     CRSP and EDIT both downgraded to Neutral from Overweight in transfer of coverage in gene editing sector and initiated BLUE with a Neutral.

·     EVLO said it is reviewing strategic alternatives after its Phase 2 clinical trial of EDP2939 for the treatment of moderate psoriasis failed to meet its primary endpoint.

·     GMDA announced prelim results from the multi-center Phase 1 trial evaluating Natural Killer cell therapy GDA-201 in combination with rituximab in patients with non-Hodgkin Lymphoma; results demonstrated preliminary anti-tumor activity (tumor shrinkage) that appeared to be dose-dependent in 5/10 patients, including two patients with a complete response.

·     GILD and ASMB entered a 12-year partnership to advance the research and development of novel antiviral therapies, with an initial focus in Assembly Bio’s established areas of herpesviruses, hepatitis B virus (HBV) and hepatitis D virus (HDV).

·     NKTX announces FDA clearance of IND application for NKX019 in lupus nephritis, cost reduction actions, updates on other programs.

·     NUVL 5.36M share Spot Secondary priced at $56.00.

 

Healthcare Services & MedTech movers:

·     In MedTech: TMO said it will acquire Sweden based OLK for $26.00 per common share in cash, representing $26.00 per ADRs in cash in a deal valued at ~$3.1B, including a net cash of ~$143M, a 74% premium to yesterday close. https://tinyurl.com/yaxx6xhx

 

Industrials & Materials

·     In Industrials: LII was upgraded to Buy at Mizuho in HVAC and raise tgt to $460 from $340 saying the EPS potential too pronounced to ignore, internal momentum and execution strong, and sees upward tension on earnings estimates driven by self-help and U.S. regs in ’24 and ’25.

·     In Defense: LMT the first to report earnings in the space with better-than-expected Q3 revenue and profit, raises dividend and boosts stock buyback, while reaffirms year operating profit view and cash from operations.

 

Technology

Hardware & Software movers:

·     Could Software: VMW shares tumbled amid a report about China’s review of the firm’s more than $60 billion sale to AVGO. The timing of the China antitrust regulator’s deal approval appears to now depend on the macro environment, https://tinyurl.com/287aaazm

·     In Cyber Security: CYBR upgraded from Neutral to Overweight at JP Morgan with positive catalyst watch and raised $200 tgt calling it one of the best positioned Security Software vendors to benefit from accelerating demand. Oppenheimer raises price target for CRWD (from $175 to $215), ESTC (from $80 to $95), PANW (from $290 to $310) and ZS (from $190 to $220) and says sees a balanced setup for the upcoming September/October quarter.

·     In Comm & Networking: VSAT was upgraded from Neutral to Overweight at JP Morgan noting last week the company provided an update on its plans for the VS-3 F1 Satellite and confirmed that the company does not plan to construct a replacement. NTCT tumbles as cuts FY24 EPS view to $2.00-$2.20 from $2.20-$2.32 (est. $2.26) and lowered FY24 revenue view to $840M-$860M from $915M-$945M (est. $926.3M) after guiding Q3 revs $195M-$197M vs. est. $223.6M.

 

Semiconductors:

·     NVDA shares slide after the White House is tightening restrictions on China’s ability to buy advanced semiconductors, as the Commerce Department said it would significantly constrict exports of artificial-intelligence chips, making it tougher for U.S. companies Nvidia and INTC to sell existing products in China — or to introduce new chips to circumvent the rules.

·     TSM said it cancels its planned 1.4nm chip plant in Taoyuan due to protests; Economic Daily News reports because of the need to find another piece of land for factory construction, the original layout plan of 1.4nm production capacity may be delayed.

·     WDC shares declined amid report SK Hynix doesn’t agree with Kioxia integration plan – Nikkei reported https://tinyurl.com/5n966btd

·     Raymond James initiated semi-equipment names with a Strong Buy on ASML and Outperforms on AMAT, KLAC, LRCX as believes cyclical correction in Semicaps is largely behind and that risk/reward is attractive despite YTD stock moves. The firm expects wafer fab equipment (WFE) spending to bottom in 2H23 and see enough drivers for high-single-digit growth longer term.