Mid-Morning Look

Tuesday, December 12, 2023

The path of least resistance remains higher, as investors were unphased by a mixed CPI inflation report, with investor optimism high (almost euphoric) into tomorrow’s FOMC policy meeting. No one expects a rate hike or cut, but for the Fed to hold rates steady. Fed fund futures continue to point to expectations of several rate cuts in 2024 despite the Fed backing that thought process in recent weeks in their commentary. Powell tomorrow will address the outlook on rates at 2:30 PM after their policy decision at 2:00 PM. Today’s CPI report didn’t show much improvement from the prior month, but wasn’t much better, coming in mostly in-line with expectations. Stock market fear remains non-existent with the CBOE Volatility index (VIX) down another 2% to 12.33, the lowest level since Covid times (Jan ’20). Semiconductors have been the leader in tech the last few weeks, making new highs as the SOX tops 3,900, led by a resurgence in shares of AVGO and equipment names. Energy remains better for sale, now down -7% YTD as oil prices tumble, while technology rises 51% YTD. U.S. consumer prices rose 3.1% in the 12 months to November, compared with a rise of 3.2% in October, in line with forecasts. Another melt-up day in store for major averages into tomorrow’s FOMC meeting (PPI data tomorrow AM as well fwiw)? Also, reminder the ECB and BOE interest rate policy meetings later this week too. Early on in today’s trading seeing the 2023 winners moving higher (tech, semis, housing), while 2023 losers underperform (energy, utilities, solar, small caps) – does that theme continue into year end?

Economic Data

·     The Consumer Price Index (CPI) for November headline M/M rose +0.1% vs 0.0% est. and previous 0.0%, while on Y/Y basis rose +3.1% vs est. +3.2% and prior +3.2%. Core CPI (ex: food & energy) rose +0.3% vs. est. +0.3% and prior +0.2% and Y/Y rose +4.0%, in line with prior and consensus. Nov CPI food +0.2%, housing +0.4%, owners’ equivalent rent of primary residence +0.5%. Nov CPI energy -2.3%, gasoline -6.0%, new vehicles -0.1%.

Sector Movers Today

·     In Software research: HUBS upgraded to Overweight and raise tgt to $610 from $515 at Piper and raise ests based on improving data from its 2024 CIO survey coupled with a recovery in website traffic; RNG was downgraded to Hold at Jefferies following CEO recent resignation as views the mgmt. change as a sign of increased execution risk; ZS was upgraded from Neutral to Outperform w/ $231 PT from $166 at Macquarie with bullish thesis is supported by ZS’ Risk360 solution and its positioning at the nexus of cyber threat and SEC reporting requirements trends.

·     In Hardware Components: Berkshire Hathaway cut its stake in HPQ to 5.2% from 9.9% in their Form 4 files Oct 5^th but was also upgraded to overweight at Morgan Stanley as it sees it as an underappreciated play on the PC market recovery that should also benefit from re-accelerating capital returns and operational efficiency. Morgan Stanley also upgraded SONO to Overweight and $20 tgt as believes broader audio market challenges have negatively impacted the stock’s valuation and downgraded CDW to Equal Weight as it sees limited upside to the current valuation with the shares trading 1-2 standard deviations above its pre-COVID average. Lastly, MSCO downgraded GPRO to Underweight with $3 tgt as it believes it has a high bar to achieve in 2024 amidst a model transition and inconsistent execution.

·     In Life Sciences & Tools: Bank America downgraded Agilent (A) to Neutral from Buy as thinks additional upside is likely limited given the lack of visibility across the life sciences tools market; downgraded ILMN to Underperform and cut tgt to $100 from $140 noting Illumina will now have gone through four years of essentially no revenue growth in its core business. Bofa upgraded MRVI to Buy from Neutral saying the stock’s risk/reward has turned positive heading into 2024 and TXG upgraded to Neutral from Underperform with a price target of $54 citing fading headwinds and an “impressive” launch from the Xenium platform and DGX upgraded to Buy from Neutral saying national clinical labs face fewer headwinds in 2024 than most broader Tools.

·     In Insurance: Raymond James upgraded BRP to Strong Buy from Outperform and EVER to Outperform from Market Perform while downgraded AJG to Market Perform from Strong Buy and PGR to Market Perform from Outperform. Firm said they believe the personal lines industry is positioned to report improving underwriting results through 2025 reflecting in part consecutive years of significant rate increases and the potential further moderation in severity trends. Believes ALL and KMPR could report the largest y/y improvements in combined ratios.

Stock GAINERS

·     AVGO +2%; extending yesterday massive gains to highs around $1,050 as momentum in semiconductor stocks boosts the Nasdaq.

·     CCCC +90%; signed an exclusive license deal with MRK to develop degrader-antibody conjugates for cancer.

·     CNC +4%; said it expects to generate over $6.70 in adj EPS, up from prior view of $6.60 and vs. consensus of $6.74; sees FY24 revs $142.5B-$145.5B vs. $142.01B consensus, and the company authorized a $4B increase to its existing stock repurchase program.

·     EGLE +5%; to combine with SBLK in $2.1B merger, creating a leader in dry bulk shipping. Eagle shareholders will receive 2.6211 shares of Star Bulk common stock for each share of Eagle common stock owned; represents a total consideration of approximately $52.60 per share, a 17% premium to Friday. http://tinyurl.com/52957km3

·     HUBS +2%; upgraded to Overweight and raise tgt to $610 from $515 at Piper and raise ests based on improving data from its 2024 CIO survey coupled with a recovery in website traffic.

·     ICVX +49%; as AZN agreed to acquire ICVX for up to $1.1B, paying $15 apiece in cash, plus a non-tradable contingent value right for up to $5 per share in cash http://tinyurl.com/2d9ybrk8

Stock LAGGARDS

·     GO -7%; announced that CFO, Charles Bracher, has decided to step down from his role as CFO effective March 1, 2024.

·     HAS -2%; said it is cutting nearly 20% of its workers, roughly 1,100 jobs, on weak sales of toys and games heading into the holiday sales season.

·     JCI -5%; Q4 adj. EPS of $1.05, missing the consensus estimates of $1.09 as revs of $6.9B missed the $7.09B estimate and guides FY24 EPS $3.65-$3.80 below consensus of $3.96 per share.

·     LCID -9%; after the company announced that Chief Financial Officer Sherry House had resigned.

·     M -4%; after being downgraded to Sell at Citigroup, expressing skepticism that a buyout offer from Arkhouse Management and Brigade Capital Management will materialize.

·     MRNA -4%; announces changes to commercial organization to prepare for multiple product launches in 2024 and 2025; chief commercial officer steps down.

·     ORCL -10%; shares tumble as missed on Q2 revenue partly attributed to lower-than-expected FX tailwind and weaker cloud revenue while EPS beat driven by an op margin beat.