Mid-Morning Look

Thursday, August 18, 2022

U.S. stocks open modestly lower as major averages weigh the recent mixed economic data, signs of decelerating inflation (but still historically high), and what it means for the outlook of interest rate hikes by the Fed. Currently, after yesterday July FOMC minutes, there is a 64% of a 50 hike, 36% 75 hike priced in. No policy meeting in August but we get plenty of Fed speakers over the next few weeks, including the Jackson Hole meeting later this month. Solid economic data today as weekly jobless claims fell from 10-month highs, though continuing climbs keep climbing and the Philly Fed Index with a surprise beat as Fed Aug Business Index 6.2 vs July reading of -12.3. The Philly Fed was better than the expected decline to -5.0 – a significant improvement from the Empire State manufacturing data point earlier this week (when it unexpectedly dropped from 11.1 to -31.3). The prices paid portion of Philly Fed also improved from prior month (easing inflation fears). However, another weak housing data point today as July Existing Home sales misses. Strength in Q3 so far, led by Utilities, Industrials, Transports, Banks and Smallcaps in general while Healthcare and Comm Services bit of a drag. Lots of chop the last few days in markets after the S&P 500 hit its 200-day moving average resistance Tuesday around 4,325 and has since pulled back (but not breaking much lower). Big week for earnings and tech retail continued today with CSCO, WOLF, BJ higher on results and KSS sliding on numbers.

Economic Data

·     Weekly Jobless Claims fell to 250K in latest week from 252K prior (and below est. 265K); the 4-week moving average fell to 246,750 in latest week from 249,500; continued claims rose to 1.437M from 1.430M prior week and the insured unemployment rate unchanged at 1.0%

·     Philadelphia Fed Aug Business Index 6.2 vs July reading of -12.3 and better than the expected decline to -5.0; Philly Fed Prices Paid decreased to 43.60 points in Aug from 52.20 points in July; index for current new orders climbed 20 points but remained negative for the third consecutive month at -5.1; future new orders index moved up 4 points but remained negative at -8.3

·     July Existing Home Sales fell -5.9% m/m, well below consensus at 4.81Mn unit rate vs. est. 4.89M and June 5.11M; the inventory of homes for sale 1.31 mln units, 3.3 months’ worth; July national median home price for existing homes $403,800, +10.8% from July 2021

Sector Movers Today

·     Utilities & Solar; Solar rating changes at Morgan Stanley saying the Inflation Reduction Act Is a big deal for US clean tech; increasing growth and price targets as downgrade ARRY to UW from EW while upgrade FSLR from UW to EW – increasing growth rates for solar, wind, energy storage, and clean hydrogen, as well as raising price targets on many clean tech stocks, due to the clean energy support featured in the new IRA legislation. Their favorite US clean tech beneficiaries of the new law are RUN, PLUG ; CSIQ Q2 beat and raise as Q2 EPS $1.07 vs. est. $0.53; Q2 revs $2.31B vs. est. $2.23B; total module shipments recognized as revenues in the second quarter of 2022 were 5.06 GW, up 37% y/y; raises 2022 revenue view $7.5B-$8B from $7B-$7.5B (est. $7.25B); in utilities, for first time since July 2021, every member in S&P 500 Utilities sector is trading above 200d moving average (coming into the day)

·     Insurance; ALL estimated catastrophe losses for month of July of $223 million or $176 million, after-tax; PFG downgraded to Neutral from Outperform on valuation at Credit Suisse noting shares are trading at 10.6x CS estimated 2023 EPS, well ahead of peer average of 8.0x (closest peer by business mix is VOYA which trades at 8.2x); ACT downgraded to Underperform from Neutral at Bank America with a $25 price target as continues to view the business model favorably, but says the stock’s current view valuation is “extended.”

·     Pharma movers; ELAN downgraded to Equal-weight at Morgan Stanley saying the co’s 22 guide cut/medium-term outlook retraction was not surprising, but still left with questions regarding visibility on several factors; TEVA announces US District court upholds validity of QuilliChew ER® patents as TEVA infringes Tris patents; CRIS said the FDA has lifted the partial clinical hold on the TakeAim Lymphoma Phase 1/2 study of emavusertib after reviewing the comprehensive data package submitted by Curis; ALNY to present data from the APOLLO-B Phase 3 study of Patisiran; JAZZ initiates Phase 3 trial of Epidiolex

·     Telecom movers: VZ downgraded to Underperform at MoffettNathanson with $41 tgt noting it has now been more than two years since ATadopted its aggressively promotional stance in wireless. Over that time, AT&T has accelerated its subscriber growth, but at the cost of repeatedly cutting their free cash flow and notes VZ has been the biggest loser of its strategy; according to industry reports, streaming TV viewing (DIS ) passed cable last month (CMCSA ) in industry first

Stock GAINERS

·     BJ +8%; beat and raise as Q2 EPS $1.06/$5.1B tops $0.80/$4.64B estimate, with comps up +19.8% y/y and ups FY22 EPS view to $3.50-$3.60 from $3.25 (est. $3.33)

·     CSCO +5%; tops estimates on revenue and profit and gives optimistic annual sales forecast as product revenue across the core and growth segments drove almost all the upside

·     CSIQ +16%; Q2 beat and raise as Q2 EPS $1.07 vs. est. $0.53; Q2 revs $2.31B vs. est. $2.23B; total module shipments recognized as revenues in the second quarter of 2022 were 5.06 GW, up 37% y/y; raises 2022 revenue view

·     DCP +10%; after PSX submitted a proposal to acquire all common units of DCP Midstream it does not already own for $34.75 per unit; Phillips said the transaction would be structured as a merger of DCP w/an indirect subsidiary of Phillips 66

·     DVN +3%; energy stocks among early leaders (was lone sector higher on Wednesday), with APA, CTRA, XOM, HAL, VLO among top S&P 500 leaders on bounce in oil

·     KEYS +5%; Q3 results were nicely ahead of consensus expectations and guidance was again increased

·     WOLF +28%; FQ4 results and FQ1 revenue outlook were both better, driven by robust Silicon Carbide demand and solid manufacturing execution and raised its FY26 rev outlook by 30-40% 9results helping lift shares of semis, led by ON, IIVI)

Stock LAGGARDS

·     BBBY -16%; Yesterday, activist investor Ryan Cohen, manager of investment firm RC Ventures, submitted a Form 144 signaling his intent to liquidate the entirety of his 11.8% beneficial ownership in BBBY

·     CRMT -19%; reported Q1 adj EPS $2.00 vs $3.57 y/y (est. $3.14) citing industry headwinds of higher vehicle prices due to supply shortages; provision for credit losses of $82.9M up from $54.1M

·     EL 1%; Q4 adj EPS $0.43 vs. est. $0.33; Q4 revs $3.56B vs. est. $3.44B; sees Q1 net sales to decrease between 10% and 8% y/y and Q1 organic net sales to decrease between 6% and 4%; guides year EPS $7.39-$7.54 vs. est. $7.92

·     KSS -6%; following earnings and lower outlook as guided year EPS to $2.80-$3.20, below the Street at $4.04 and prior range of $6.45-$6.85 and now expects fiscal 2022 net sales to decline between 5% and 6%, compared with its previous forecast of flat to 1% growth

·     SQM -9%; reported an almost ten-fold jump in Q2 net profit at $859.3M, but missed the $876.41M analyst estimate; reported Q2 revs of $2.6B

·     TXG -5%; downgraded to Sell from Neutral at Goldman Sachs as expect a materially slower cadence to its 2023/24 sales growth rate vs consensus

·     VZ -2%; downgraded to Underperform at MoffettNathanson calling the telecom giant the biggest loser of recent AT&T aggressive promotions