Mid-Morning Look

Tuesday, January 03, 2023

U.S. stocks looked strong overnight, opening sharply higher led by the beaten-up sectors of 2022 such as communications, technology, REITs, and financial services, while energy (the 2022 lone sector winner) slipped on the open. Markets stayed higher for about 15 minutes before a bounce to 3,900 and fail on S&P futures opened the flood gates to selling pressure, led by a roll in AAPL (falls below $2 trillion mkt cap) and TSLA. S&P futures took out overnight lows of 3,842.75 as markets remain volatile the first day of 2023. The 10-yr yield hit lows below 3.74%, down about 9 bps to start the year before bouncing while gold and the US dollar both bounce in a bit of a disconnect. Macro news includes SBF to enter not guilty plea in FTX fraud case, Republican U.S. House to open in uncertainty as McCarthy seeks to be House speaker, but seeing resistance within the GOP, and Ukraine strikes against Russia over the weekend. A new year, but same market uncertainty early amid recession fears and a slowing economy.

Economic Data

·     S&P global December final manufacturing PMI at 46.2 (vs flash 46.2)

·     Construction Spending for November rose +0.2% vs. est. (-0.4%) to $1.808 trln, vs Oct (-0.2%); Nov private construction spending +0.3% pct, public spending (-0.1%)

Sector Movers Today

·     Auto sector: monthly delivery data released in the electric vehicle sector, with TSLA disappointing as delivered 405,278 vehicles to customers in the last three months, short of the roughly 420K forecast, while Q4 production of 439,701 vehicles, was up +4%; in China EV space, NIO said it delivered 15,815 vehicles in December, representing an increase of 50.8% y/y and delivered 40,052 vehicles in Q4, representing an increase of 60.0% y/y; XPEV said it delivered 11,292 Smart EVs to customers in December, representing a 94% increase m/m; LI said it delivered 21,233 vehicles in December 2022, representing an increase of 50.7% y/y and total deliveries in 2022 increased by 47.2% year over year to 133,246

·     Healthcare Services: California revised its 5-year Medi-Cal contract award published 8/25/22 with Cowen noting the most significant change is that CNC will lose only half its LA County enrollment to MOH instead of the entire contract (says change should impact CNC annualized EPS by +3%/(-8%), respectively); CVS downgraded from Outperform to In Line at Evercore/ISI and cut tgt to $100 from $120 citing highly competitive AEP, an unclear outlook regarding 2024 operating profit, and valuation; Evercore/ISI also downgraded HCAT from Outperform to In Line; CI was downgraded to EW from OW in Managed Care at Wells Fargo saying the outlook for the group is now more balanced than it was for 2021 / 2022 and favor companies they perceive to have differentiated growth stories (ELV, UNH, HUM); in Healthcare facilities, Wells Fargo said think pacing and magnitude of improvement in labor market for 2023 remains an area of low visibility, think risk/reward is fully balanced here as they upgraded UHS to equal weight

·     Bank movers: Two analysts kick off the year with bank outlooks as Barclays said despite a slowing economy and possible recession, large-cap U.S. banks can overcome hurdles and grow earnings in 2023. Barclays upgraded KEY to Equal Weight and downgraded MTB to Equal Weight after making several target changes in the group. Wedbush said they remain cautious on the bank group heading into 2023 given mounting headwinds saying the inflation genie is out of the bottle and the Fed is scrambling to get it back in by continuing its rate hiking crusade. Wedbush upgraded MTB to Outperform as view it as a defensive haven from a credit quality standpoint and downgraded CFG to Neutral mostly based on our expectation for increasing credit costs in a recessionary environment.

·     Consumer Staples: RBC Capital downgraded REYN (as shares at price Target), COOK (expecting further EPS reductions), and MDLZ (also at price Target) all to Sector Perform from Outperform saying they are most cautious on the Packaged Food sector given current valuations and discomfort with pricing making up over 100% of top line growth; in beverages, Wells Fargo said they are well below Street EPS as see too much risk to EPS and downgrade to Underweight; also at Wells, they initiate MDLZ at overweight tgt $75, GIS Equal weight tgt $88, KHC Equal Weight tgt $43 and HSY underweight tgt $220 in food space. Firm also said for Staples: 2023 preview, believe EPS may prove resilient, we would own multinationals, like KO on EPS upside and MDLZ for relative value vs growth, Own relative value KDP stand out, Growth they like MNST, Recovery names CHD, Cautious on EPS ramp stories CLX

Stock GAINERS

·     ACMR +27%; reaffirms 2022 revenue outlook and provides initial outlook for 2023 revenue

·     BX +2%; after its real estate fund receives $4 bln investment from University of California

·     CMMB +27%; said its investigational drug meets goals in mid-stage study in non-alcoholic steatohepatitis (NASH) patients as appear safe and was well-tolerated

·     IDCC +10%; after signed an HEVC and VVC patent license with LG Electronics and increases share buyback authorization to $400 million

·     NEM +3%; strength early in gold miners as precious metal starts 2023 higher despite a bounce in the US dollar

·     PLL +5%; said it amended its agreement with TSLA to supply the electric vehicle maker with spodumene concentrate, or SC6, from North American Lithium. Piedmont will now deliver about 125,000 metric tons of SC6 to Tesla, starting in the second half of 2023 through the end of 2025

·     PYPL +3%; upgraded to Buy from Hold at Truist as sees resurgent growth in e-commerce business, supporting revenue growth in PYPL (raised tgt to $95 from $75)

·     WYNN +2%; upgraded to Overweight from Equal Weight at Wells Fargo and raise PT to $101 from $74 saying it has a viable path to recapturing most/all its 2019 VIP EBITDA

Stock LAGGARDS

·     AAPL -2%; extending 2022 losses, rolling to start the year

·     ETR -5%; downgraded to Neutral at Bank America primarily due to unfavorable developments at the meeting of the Louisiana Public Service Commission in December

·     MOH -4%; California revised its 5-year Medi-Cal contract award published 8/25/22 with Cowen noting the most significant change is that CNC will lose only half its LA County enrollment to MOH instead of the entire contract

·     PBR -8%; among Brazil stocks tumbling after Brazil markets sink as traders Mull Lula’s plan to beef up state Petrobras

·     TAP 5%; in beverages, Wells Fargo said they are well below Street EPS on TAP as see too much risk to EPS and downgrade to Underweight

·     TSLA -9%; monthly delivery data released in the electric vehicle sector, with TSLA disappointing as delivered 405,278 vehicles to customers in the last three months, short of the 420K forecast