Mid-Morning Look

Monday, December 19, 2022

U.S. stocks extend last week’s declines, with the biggest pullbacks in growth sectors such as technology and communications, while defensive Consumer Staples, as well as Industrials and Energy minimize losses in the Dow and S&P. Recession fears following the FOMC meeting last week continue to plague US markets. Bespoke Investment noted at -5.93%, this is the 2nd worst start to December (13 trading days in) for the S&P since 1953 when the 5-day trading week began. Only 2018 was worse with a 10.6% drop at this point in the month. Separately, Morgan Stanley’s Mike Wilson continues cautious view on the stock market, warning the coming earnings recession could prove similar to the 2008/2009 downturn, while in 2023, “price declines for equities will be much worse than what most investors are expecting. In the lone piece of economic data, the U.S. December NAHB Housing market index 31 versus 33 in November (12^th straight month of declines and lowest reading since 2012 – but smallest drop in 6-months) as current single-family home sales 36 versus 39 in November and the index of home sales over next six months 35 versus 31 in November. Homebuilder sentiment from NAHB fell to 31 this month, which is just 1 point above its low of 30 seen in April 2020. Treasury yields moving to highs, with the 10-yr up about 9-bps to 3.58, while 2-yr up less. Gold prices slip along with the dollar and crypto (Bitcoin).

Sector Movers Today

·     Industrial & Machinery: TEX announces $150M share buyback; in research, PNR upgraded to Buy from Hold at Stifel and raise tgt to $57 from $46 as expect investor focus to turn to the transformation savings coming over the next 3 years; WM was downgraded to Hold from Buy at Stifel to account for the accelerated capital spending for recycling modernization and renewable natural gas; XYL was downgraded to Hold from Buy at Stifel saying the demand prospects remain strong for most of Xylem’s businesses and the more cyclical ones in industrial and commercial are likely to be less cyclical than people think; overall though, industrials outperformed today

·     Metals & Materials: CLW cuts Q4 adjusted EBITDA view to $28M-$34M from $38M-$48M citing higher-than-expected major maintenance related costs at the company’s Lewiston, Idaho mill, and other operational issues, the company now expects lower Ebitda; in paper stocks (IP, WRK, PKG), Jefferies notes containerboard prices fall another $20, Linerboard prices are down $40/ton in two months, relative to the $220 increase experienced in 17 months, due to soft demand and elevated inventory – said absent of several large mill closures, see further pricing pressure, noting prices in past downturns fell $110-120 / ton and every $50 decline translating to a 20-30% headwind to EPS for IP, PKG, and WRK (remain Underperform on IP & PKG).

·     Media, Internet & Telecom: DIS ‘Avatar: The Way of Water’ failed to live up to box office expectations on its opening weekend, as Disney cut its forecast from above $150 million to between $130M and $150M; the European Commission has closed its antitrust investigation into GOOGL and META for online display advertising services, it announced on Monday; AT downgraded to Underperform from Market Perform by MoffettNathanson, while the firm upgraded VZ to Market Perform after underperformance; Fortnite video game maker epic games to pay more than half a billion dollars over FTC allegations of privacy violations and unwanted charges

Stock GAINERS

·     CERE +23%; said it saw positive results from a Phase 1 trial studying the effect of emraclidine on 24-hour ambulatory blood pressure over an eight-week period in people living with schizophrenia

·     FSLR +3%; big bounce early in solar related stocks (ENPH)

·     LIAN +11%; as PFE opts to develop and commercialize the co’s sisunatovir, a respiratory syncytial virus (RSV) therapeutic candidate, in Mainland China, Hong Kong, Macau

·     MDGL +255%; said its experimental drug Resmetirom treating Nonalcoholic Steatohepatitis (NASH) met both main goals in late-stage study as the drug was safe and well-tolerated; achieved clinically meaningful effects at 80 and 100 mg once a day dosing vs placebo – shares of VKTX and TERN rally in sympathy while AKRO and ETNB slide in reaction)

·     TSLA +1%; after CEO Elon Musk polled users on Twitter over whether he should step down as head of the social media company, with the result so far leaning toward yes

·     VKTX +70%; STAT News Adam Feuerstein said its NASH drug is in the same class as Madrigal’s (MDGL) drug – Still in mid-stage studies, but there’s hope!

·     ZYME +11%; reports positive data from mid-stage stage trial of antibody Zanidatamab as monotherapy in treating biliary tract cancer as antibody’s safety profile is consistent with prior studies

Stock LAGGARDS

·     ARDX -8%; said that the FDA may need up to a few more weeks to finalize its response to the company’s appeal over the complete response letter for its new drug application for its kidney disease therapy XPHOZAH

·     CTLT -2%; downgraded to Sector Weight from OW at KeyBanc

·     DIS -2%; ‘Avatar: The Way of Water’ failed to live up to box office expectations on its opening weekend, as Disney cut its forecast from above $150 million to between $130M and $150M

·     ETNB -31%; declines in reaction to positive study results from competing drug MDGL (also weakness in rival NASH drug companies AKRO, ICPT, ALT)

·     META -2%; after the EU warned the co that it is breaching EU antitrust laws by distorting competition in markets for online classified advertising and abusing its dominant position

·     VRTX -3%; downgraded to Hold from Buy at Jefferies and removes from Franchise Pick List on valuation after having a strong +40% YTD vs XBI -27%

·     WYNN -4%; weakness in leisure related stocks and sectors (Cruise, casinos)