Closing Recap

Tuesday, October 19, 2021

Equity Market Recap

·     Stocks surge again, as the S&P 500 index rallies for a 5^th straight day, moving to within less than 1% of its all-time highs (of 4,545.82 on Sept 2^nd) heading into the heart of earnings season (72 names this week and busiest week of quarter coming up next week), with major averages posting a slow, steady climb throughout the entire trading day. Commodity complex continues to power higher with oil, metals advancing and Bitcoin making a run at all-time highs as BITO ETF debuts today. Major averages again powered by upward momentum, as investors set aside any concerns about inflation, rising energy prices, Fed tapering concerns, shipping bottlenecks (inventory), and the debt ceiling (as funding lasts thru December 3^rd) – which had sunk stocks just 2-weeks ago. Lone piece of economic data in the U.S. a miss as Housing Starts and Building Permits fall short of consensus. Better earnings from Dow components JNJ and TRV helped boost the index as the busy week of earnings continues tonight with NFLX results and tomorrow from ABT, ANTM BIIB, VZ. Fear remaining non-existent as the CBOE Volatility index (VIX) tumbles further.

·     Stock & Sector movers: Towers outperform after Credit Suisse upgraded SBAC, CCI, and Wells and Cowen were both positive on the sector ahead of earnings; in financials earnings, TRV rises in insurance, SYF hits ATH among gainers; losers include SI falling over 10% at lows, SBNY, BK, PACW; healthcare among top sectors as JNJ EPS beat and guidance raise, lifting PFE; other vaccine names MRNA, NVAX, BNTX also open strong on reports the FDA was set to approve mix-and-match booster shots, but these names give up early gains; staples underperform with PM slipping after its narrower FY EPS guidance range, PG falling on lower quarterly margins; ULTA was the worst performer in the S&P after setting long-term financial targets and forecasting slower comp sales (weigh on EL, COTY in the beauty segment); COIN soars above $300 for the first time on over 5 months after FB chooses it as its custody partner for its new digital wallet; solar ENPH, FSLR, SPWR continues run higher as the global energy crisis pushes investors to alt energy, and MedTech another sector outperforming on the day with BSX, SYK, EW among S&P leaders; NFLX, UAL lower into their quarterly earnings reports tonight.

Economic Data:

·     U.S. Sept housing starts fell -1.6% to 1.555M unit rate, below consensus of 1.62M and vs Aug +1.2% (previous +3.9%); September single-family starts unchanged to 1.080 mln unit rate; multifamily -5.0% to 475,000-unit rate. Building Permits fell -7.7% vs. Aug to 1.589M unit rate, below the est. 1.68M and Aug figure of 1.731M

Commodities, Currencies & Treasuries

·     Oil prices were volatile again, as WTI crude rises $0.52 or 0.63% to settle at $82.96 per barrel (highs $83.74 and lows $81.80), driven by supply/demand balance. With today’s gains, oil prices with another settlement at their highest in about seven years. Russia indicated that it may not provide additional natural gas to European consumers amid an energy crunch in the region, unless it gets regulatory approval to start shipments through the Nord Stream 2 pipeline, Bloomberg reported. Gold prices rise $4.80 or 0.3% to settle at $1,770.50 an ounce, its first advance in three-trading days, getting a small boost from a slightly weaker dollar, as investors continue rotation into commodity prices. November natural gas added 10 cents, or 2%, to settle at $5.088 per million British thermal units after losing 7.8% on Monday.

·     The U.S. Treasury yield topped 1.64%, its highest levels since June 4^th, but still not denting optimism in stock markets about rising inflation concerns. Yields rose on the long-end as the 30-yr rises 5 bps to 2.068%, though shorter-term yields dipped with the 5-yr down at 1.15% and 2-yr down 2 bps below 0.4%. Bitcoin prices also remain key interest to investors as bitcoin (BTC) surged to as high as $64.6K, just about 2% off its all-time high of $65.5K, before giving up some gains to around $62.5K. Guggenheim Partners CIO Scott Minerd said today he believes 70% are "garbage" and will fail, much like the large basket of losers from the dot-com boom in the late 1990s, he told Bloomberg Television in an interview (noteworthy he said in June bitcoin would fall to $15K). The U.S. dollar slipped vs. the euro and British pound after recently touching multi-year highs on rising inflation and rate expectations.

Sector News Breakdown

Consumer

·     Retailers; ULTA slides off all-time highs after saying it is targeting 3% to 5% annual same-store sales growth from 2022 to 2024 and net sales is projected to grow at 5% to 7% CAGR with the target of opening net 50 new stores every year (guidance ahead of analyst day event); WMT added to Goldman Sachs conviction Buy list (up tgt to $196 from $184) following significant YTD underperformance and as believe prior investments into ecommerce and its supply chain should support higher EBIT and market share. Goldman removes Buy-rated TGT from the CL but remain constructive on fundamentals. Raise 12m target to $308 (from $281); SKX was upgraded from Hold to Buy at Williams Trading saying the co will continue to overcome supply chain constraints better than almost every company in the footwear space; CROX said that Lori Foglia was hired as Senior Vice President and Chief Product and Merchandising Officer (comes from Victoria Secret); ASO initiated Outperform and $50 tgt at OPCO

·     Housing & Building Products; ahead of earnings season, JPMorgan said long/short ideas this earnings season for the homebuilders feature PHM and CCS as longs and NVR and MTH as short ideas. Among the building product names, we highlight AZEK, TREX and MHK as longs and BECN and JELD as short ideas; ZG downgraded to Neutral from Outperform at Wedbush after Zillow confirmed that it will temporarily pause its Zillow Offers purchases as it hits "operational capacity." OPEN shares rallied yesterday after the ZG announcement, as OPCO said they view the announcement as positive for OPEN and expect the stock to march higher

·     Consumer Staples; PG slipped after topping FQ1 results though a decrease in gross margin during the quarter was driven almost entirely by commodity cost increases – organic sales +4% vs consensus +1.4% – Beauty +2% vs consensus +2.8%, GM 49.0% vs consensus 50.1%, OM 24.7% vs consensus 25.2%; reaffirms FY EPS +3%-6%; in tobacco, PM sees adjusted eps $6.01-$6.06, up from prior $5.97-$6.07, but below estimate $6.08 after Q3 EPS and sales beat as Q4 total cigarette and heated tobacco unit shipment volume increase ~1%-2%, net revenue growth of ~6.5%-7% on an organic basis (vs prior 6%-7%); LW said to issue $835M of senior notes due 2030 and $835M of senior notes due 2032 in a private offering.

·     Casinos, Gaming, Lodging & Leisure sector; in gaming, Berenberg initiates CHDN with a Buy and $294 tgt, PENN Buy and $95 tgt, IGT Buy and $35 tgt calling it “undervalued”, SGMS Buy and $98 tgt and FUBO with a Buy and $50 tgt; In lodging, Evercore/ISI downgraded MAR to in-line and upgraded DRH to in-line with accompanying estimate revisions, and also noting that hotel stocks have seen a nice outperformance streak over the past 30-60 days

Energy

·     E&P, Majors, and Oil services; KeyBanc raises 2021 WTI oil price forecast by 1.5% to $69/Bbl and our 2021 Brent forecast by 2% to $72/Bbl on a successful rollout of Covid-19 vaccines in the U.S. and Europe, leading to a quicker than expected recovery and better visibility on 4Q21 oil demand growth. We are also raising our 2022 WTI oil price forecast by 7% to $75/Bbl; HAL slips as posted its third consecutive quarterly profit, as a jump in oil prices and drilling activity boosted demand for its services and equipment but was only in-line w ests while revenue of $3.86B was slightly under consensus expectations of $3.912B est.; Morgan Stanley said with commodity prices rising, downstream margins improving, and spending holding steady, FCF is set to rise sharply for the US Majors and Canadian Energy – off of an already strong base. We see the potential for CVE to boost cash returns along with 3Q results

·     Pipelines & MLPs: KMI earnings tonight after the close kicking off MLP earnings season; Barclay’s upgraded SHLX to overweight and downgraded HEP to equal-weight saying with this quarter’s earnings, they expect ATO, LNG, NS and UGI to provide 2022 guidance and ests DCP, DTM, ENLC, ETRN, KMI, NS, TRGP, and WMB are tracking above guidance; Wolfe Research downgraded EPD to Peer Perform from OP w $24 tgt saying EPD is cash rich with significant FCF to come in 2022, but think it’s unlikely they are more aggressive on capital return near term as they may want to hold dry powder to 1) grow the business through acquisitions or new investment; and 2) preserve cushion for legislative uncertainty; Wolfe also downgraded WMB to Peer Perform from OP on valuation noting midstream has outperformed the S&P 500 by 18% over the past 2 months following the run-up in commodities.

·     Utilities & Solar; Dominion (D) reached a settlement late yesterday with Virginia in its pending triennial base rate case that includes a one-time $330M refund to customers, $50M ongoing rate reduction, utilization of $309M in revenue offsets to support offshore wind and smart meters, and a 9.35% ROE from current 9.2%, and the company reaffirmed its existing guidance after the settlement, with BMO, JPMorgan, and Mizuho all coming out positive on the result saying it de-risks the company’s outlook and removes an overhang from the stock; Mizuho lowered their PT on SRE to $139 from $154 ahead of earnings but continues to recommend the stock as shares look attractive given their capex opportunities at Oncor and above-average rate base growth in both its California and Texas utilities; Goldman is selective on solar stocks into earnings and say ENPH, SEDG are best positioned with NOVA having guidance upside amidst a favorable residential growth upside, and remain cautious on JKS, CSIQ given margin pressures; KeyBank is cautious on quarterly outlooks for DTE, CMS, ETR as they expect storm-related expenses to impact them more than current consensus and AVA, POR given the impact of rapid power price increases in the West especially with their sub-optimal energy cost recovery mechanism, but they are more optimistic on WEC given favorable weather in their region, CNP due to investment growth and lack of adverse impacts, OTTR on the above consensus view of its manufacturing and plastics segments, and SRE given their earnings model above consensus; Wolfe upgraded WEC to Peer-Perform and downgraded FTS to Underperform; Morgan Stanley upgraded ES to EW; coal stocks fall (BTU, HCC, ARCH) after China said it was reviewing plans to intervene in coal prices as costs surge.

Financials

·     Bank movers; BK Q2 EPS $1.04 vs est. $0.99 on revs $4B vs est. $3.95B, AUM $2.3T (+13%), provision for credit losses $45M vs est. recovery $17M; CBSH posted Q3 eps $1.05 vs est. $0.99 on revenue $351.54M vs est. $349.85M; FITB Q3 EPS 97c vs. est. 91c, NII $1.19B vs est. $1.17B, raised dividend to 30c from 27c; SNV Q3 adj EPS $1.20 vs. est. $1.08 on revenue $499.9M vs est. $489.6M, net charge-off ratio declined 6 bps from prior quarter to 0.22%; PACW posted Q3 EPS $1.17 vs est. $1.03, NII $279.8M vs est. $278.4M, revenue $327.1M vs est. $317M; SFBS reported in-line Q3 EPS $0.96 and revenue $104.3M, total loans grew $163.1M, or 8% annualized; ZION reported Q3 EPS $1.45 vs est. $1.33 on revs $694M vs est. $707.3M, loan growth ex-PPP +5.6% annualized, deposit growth +9.3% annualized; ONB Q3 adj EPS 43c vs est. 37c, NII $151.6M from $149.9M in Q2, commercial loan growth +7% annualized; FMBI Q3 adj EPS 46c vs est. 42c on revs $190.4M vs est. $189.8M; FBK Q3 adj EPS 89c vs est. 81c, on total rev $147.5M vs est. $137.9M; FNB Q3 EPS 34c vs est. 30c on revs $321.3M vs est. 307M; SBNY reported Q3 EPS $3.88 vs est. $3.69 on revs $512.2M vs est. $513.4M, NII $480.9M, provision for credit losses $4M, total deposits grew $10B in the quarter to $95.57B

·     Insurance; Dow component TRV posted Q3 core eps $2.60, topping the $1.89 estimate and revs rose 6.4% YoY to $8.81B, topping the $8.61B est. as net premiums written $8.32 billion, +7.1% y/y, vs. estimate $8.17B and catastrophe losses $501M, +26% y/y, but below estimate $577.4M; EVER shares slide after reported soft preliminary 3Q21 results, announcing that revenue, EBITDA, and VMM would all fall short of the prior guide due to advertising budget cuts with key carriers; PFG said as of september 30, the AUM by asset manager were $535.4B for principal global investors and $152.7B for other entities of principal financial group

·     Finance, Lending, FinTech & Payments; SYF NII came in much better than expected ($3.66bn vs. consensus of $3.57bn) driven by both higher loan yields and lower funding costs. Average loans were slightly weaker although its outlook calls for improvement; BHLB partnered with UPST to improve access to affordable credit while reducing the risk and costs of lending; SQ enters partnership with France’s Station F startup incubator

·     Bitcoin news; COIN rises after saying Facebook has chosen Coinbase as its custody partner for its pilot of Novi, a new digital wallet (the partnership sends shares of WU lower); Crypto stocks (COIN, MARA, RIOT, MSTR) in the spotlight as Bitcoin continued its climb toward all-time highs (last above $62K), bolstered by optimism over the launch of the first Bitcoin futures exchange-traded fund in the U.S. on Tuesday; SI average digital currency customer deposits grew to a record $11.2B during Q3, compared with $9.9B in Q2, Q3 EPS of $0.88 rose from $0.80 in Q2, beating the consensus estimate of $0.71 on better revs $51.7M and said digital currency customers grew to 1,305 in Q3 from 1,224 in Q2 and 928 in Q2 a year ago; RIOT announces first industrial-scale immersion-cooled bitcoin mining operation

Healthcare

·     Pharma movers; Dow component JNJ beat and raise as Q3 adj EPS $2.60 vs. est. $2.35, revs $23.34B vs. est. $23.72B; maintained its 2021 sales forecast for its COVID-19 vaccine at $2.5B and reported $502M in sales of the single-dose shot in Q3; raises FY21 adjusted EPS view to $9.65-$9.70 from $9.50-$9.60 and boosts FY21 revenue view to $94.1B-$94.6B from $93.8B-$94.6B; ETTX reported positive topline data for its Ph 3 ATTACK study of sulbactam-durlobactam (SUL-DUR) vs. colistin in patients with carbapenem-resistant Acinetobacter (CRAB) patients; the FDA intends to allow Americans to get a different COVID-19 vaccine as a booster from the one that originally had, The New York Times’ reported, which could reduce the appeal of JNJ vaccine and provide flexibility to doctors and other vaccinators

·     Biotech movers; SAGE and BIIB announce plans to submit a new drug application (NDA) for Zuranolone to the U.S. FDA in the second half of 2022 with rolling submission expected to start in early 2022 (later than the expected end-of-year); AVIR tumbles after saying the Phase II Moonsong trial evaluating AT-527 didn’t meet the primary endpoint in the overall population of patients with mild or moderate Covid-19, who were mostly low-risk with mild symptoms; CALA is acquiring two clinical-stage compounds from TAK to bolster its precision oncology pipeline in a cash and stock deal, paying $10M upfront cash and $35M in Calithera preferred stock; GRTX tumbled after saying the primary endpoint of reduction in incidence of severe oral mucositis was not met/trial demonstrated relative reduction in all key SOM endpoints, including more than halving the median duration

·     MedTech Equipment; Citigroup is establishing Positive Catalyst watches on DGX and LH ahead of 3Q21 results, and conclusion of LH’s strategic review by the end of the calendar year; in ortho space, Canaccord expects orthopedic medical device companies to post softer-than-expected Q3 results due to the COVID-19 Delta variant dampening recovery trends. Suggested buying the stocks of device companies SYK, SNN, GMED and SPNE on a pullback; ISRG released earnings midday (was supposed to be after the close) with Q3 EPS in-line in better revs of $1.4B

Industrials & Materials

·     Aerospace & Defense; UAVS entered into a definitive agreement to buy Sensefly from Parrot at a valuation of $23M in cash and stock; SPCE tgt cut to $17 from $25 at Morgan Stanley as they no longer assume Inspire will be built, along with a push to the right of Delta’s entry into service to 2026; Cowen raised price tgts for TDG, ASLE, LHX, NOC in Aerospace & Defense saying rate overhang a Q3 issue and qtrly results are expected to be mostly in line with cautiously upbeat demand commentary, and focus on production rates for F-35, 737, and possibly 787; CACI said that the U.S. Air Force Research Laboratory at Wright-Patterson Air Force Base, Ohio (AFRL) awarded CACI a 15-month, $4.9 million program

·     Industrial & Machinery; Stifel lowered estimates for Machinery coverage (ASTE, MSA, TEX) due to concerns regarding supply chain challenges, raw material increases (particularly steel), and increased challenges regarding labor (recent strike at DE a notable example) – said they believe price/cost pressures will be most pronounced for our longer-cycle, backlog-driven names (ASTE, MTW, TEX); ECOL downgrade from Buy to Hold at Stifel saying 2021 has proven less predictable with one and likely another cut in guidance possible; DOV mixed Q2 results as EPS beat and revs miss ests while raises year EPS view to $7.45-$7.50 from $7.30-$7.40

·     Transports: KSU Q3 profit fell as operating expenses rose, and revenue rose due to higher fuel surcharge and the strengthening of the Mexican peso against the U.S. dollar (Q3 EPS $2.02 vs. est. $2.04, revs $744M from $659.6M and op expenses rose to $492.1M from $388.1M) – other rail stocks (CSX, NSC, UNP) active as KSU also said suspending previously provided guidance due to lack of visibility on impact of auto plant shutdowns; in airlines, UAL expected to report earnings after the close tonight

·     Metals & Materials; ALB upgraded to Outperform at RBC Capital & raises PT to $280 based on a) better-than-expected lithium volume growth underpinned by strong global demand and increased OEM commitments, continued upward lithium price growth and the continued recovery in Bromine and Catalysts; in steel, STLD Q3 adj EPS $4.96 vs. est. $4.57; Q3 revs $5.1B vs. est. $4.98B; believe shipments could be in range of 2.0 mln tons to 2.2 mln tons in 2022; silver stocks outperform as silver prices hit one-month highs above $24 an ounce (WPM, CDE, SLV)

Technology, Media & Telecom

·     Internet; NFLX to kick off Internet earnings tonight after the close, with lots of optimism given its success of “Squid Games”; BILL named a new Buy at Deutsche Bank with Buy and 4360 tgt; U.S. listed Chinese stocks saw a bounce on reports XI Jinping is facing "overwhelming" negative feedback on his property tax plan within the CCP; HSBC downgraded BILI to Hold and lowered their price target to $76 from $127; GOOGL introduced the new pixel 6 and pixel pro; SNAP announced at the Pixel Fall Launch event a new feature on Google’s Pixel 6 called "Quick Tap to Snap," launching later this year.

·     Semiconductors: MU remains weak after Digitimes reported Commodity DRAM prices likely to fall 15-20% in 1Q22. Following peak shipments in the second and third quarters, the memory sector has entered a period of correction in the fourth quarter of 2021 that may last for 1-2 quarters, and commodity DRAM prices will face higher downward pressure

·     Hardware & Software movers; VMW announces record date for conditional special dividend – record date for $11.5b conditional special dividend is October 29, 2021; earnings coming up as Cowen saying they are more bullish on the video game space (PLTK top pick along with ZNGA, SONY, EA, TTWO) now than they have been in at least 5 years based on valuations that are attractive both on an absolute and relative basis, as underlying video game fundamentals remain strong; in the Security sector, Cowen raised its tgt on NET to $200 from $135, while for CRWD said checks detect no slowdown and FTNT notes that upside to our estimates is still highly feasible; SPLK and ACN to establish a business group to help accelerate technology investments and create new solutions for enterprises; WATT shares surge after receives U.S. Federal Communications Commission’s equipment authorization for wireless power transfer

·     Tower stocks: CCI, SBAC upgraded to Outperform at Credit Suisse saying significantly improved carrier capex spend is going to drive towers’ growth higher in their view as project spend to peak in 2022 at $39.6 billion, with 2023 coming in closely behind at $37.6 billion. Wells Fargo said recent sector underperformance (AMT, CCI, SBAC) creates a more favorable risk/reward into Q3 earnings, in our view. The 3-tower cos have pulled back -4.7% on a WTD avg. basis since Q3 (vs. S&P of +3.9%). Cowen said remain positive on the towers and expect CCI to guide to 2022 tower net organic growth of ~6% which they think will be viewed positively.

·     Telecom & Media: Loop Capital said they are fine-tuning telco estimates ahead of the Q3 Communications earnings season, which will kick-off with VZ’s BMO print on 10/20. Overall, estimate revisions are mixed, with T moving down, TMUS remaining unchanged, and VZ moving up. Higher level, we expect a relatively uneventful earnings season for the wireless companies, with few surprises given the commentary provided at recent investor conferences (9/13-9/15 and 9/21-9/23) was so close to quarter-end; Morgan Stanley said the risk/reward on cable shares has improved with the recent 15-20% pull-back since September 1st., with OW CMCSA trading below their bear case and OW CHTR at a 5.5% FCF yield. Separately, Liberty’s investor day approaches as does its 80% ownership in SiriusXM, reiterate OW on LSXMK