Mid-Morning Look

Monday, January 29, 2024

U.S. stocks open the day mostly higher with large caps posting modest gains (Smallcaps lag initially), as the S&P 500 (SPX) flirts with the 4,900 level yet again after major averages record their 12^th winning week in their last 13 on Friday as interest rate expectations from the Fed grow by the day and investors pile into large cap tech. The narrative has been the same, buy on dips for the last few months with Technology (XLK) Communications (XLC) remaining the market leaders (after leading in 2023), alongside gains in financials (XLF), while most other sectors have remained weak in 2024. Investors prepare for earnings results in some of the biggest mkt cap companies in the world this week, including AAPL, AMZN, GOOGL, META and MSFT in big tech, as roughly 38% of the NDX reporting within tech alone and 20% of the SPX due this week (including those from BA, CVX, XOM, PFE, QCOM and others). No major economic data today in the U.S., the dollar index (DXY) extends gains, while Treasury yields slip. So far this month, the S&P 500 has notched an intraday record high for four sessions and its fifth all-time closing high. Crucial job reports including JOLTS, the ADP National Employment and Nonfarm payrolls are this week. US listed China stocks fall after Chinese property developer Evergrande was ordered to liquidate by a Hong Kong court after failing to agree on a restructuring plan with creditors. Today seems more a waiting game ahead of big weekly catalysts.

Sector Movers Today

·     In Lithium sector: TD Cowen downgraded shares of ALB, PLL and LYC to Market Perform from Outperform, but remain Outperform on top pick, ALTM, LAC, LAAC, and MP in lithium/rare earths saying they continue to favor ALTM given the advantageous risk/reward setup amongst a murky macro backdrop. With spot lithium pricing down 80% from one year ago, the firm expects further estimate/guidance revisions and as a result lower its pricing forecasts. Also lowered price tgts for ALB to $130 from $220, ALTM $10 from $12, LAAC $6 from $14, LAC $8 from $13), MP to $22 from $26, and PLL to $20 from $55.

·     In Oil Equipment & Services: BE downgraded from Neutral to Underperform at Bank America and cut tgt to $10 from $16 with an expectation that 2023-2025 revenues will be approximately flat versus accelerating previously. BKR was downgraded from Outperform to Peer Perform at Wolfe. BOOM said they are considering a sale of its DynaEnergetics and NobelClad businesses, which account for more than half of the company’s sales. The firm said they will explore various strategic, business, and financial alternatives for the units, including a sale, merger, or other business combo.

·     In Software: ADBE shares hit all-time highs; PANW was downgraded to Hold from Buy at Westpark Capital on valuation and changing market trends saying for investors, buying Palo Alto shares at the current $340-$345 price range offers a far less attractive risk/reward opportunity at this stage. RPD was upgraded to Buy at UBS and raised tgt to $70 from $53 saying the firm sees ~4pts of additional Operating margin expansion in CY24E to mid-teens following the 7pts+ in CY23E. Notes RPD has already executed well on the Q3 restructuring and UBS expects the company to meet the CY24 FCF target with high single digit opex growth. ZI upgraded from Neutral to Buy at Bank America and raise tgt to $25 from $20 citing three reasons to get bullish.

Stock GAINERS

·     BOOM +4%; after saying they are considering a sale of its DynaEnergetics and NobelClad businesses, which account for more than half of the company’s sales. The firm said they will explore various strategic, business, and financial alternatives for the units, including a sale, merger, or other business combination.

·     MGRC +9%; WSC said it will acquire MGRC in a deal with an enterprise value of $3.8 billion, confirming an earlier report by The Wall Street Journal; cash-and-stock deal will provide McGrath RentCorp investors with $123 a share or about 2.8 shares of WSC. http://tinyurl.com/3nvuuda2 .

·     SOFI +15%; Q4 EPS $0.02/revs $594.2M top consensus, while guides Q1 revs $550-560M below consensus around $580M and targets FY23-26 rev CAGR 20-25%, beyond FY26 EPS CAGR 20-25%; said total members 7.5M, +44% y/y.

·     WDC +3%; after reports Bain Capital is in talks with SK Hynix to restart negotiations to merge memory chip makers Western Digital and Japan’s Kioxia Holdings, Kyodo newswire reported Saturday.

·     ZIM +10%; to buy from hold at Jefferies saying the script has flipped as the shipping firm’s cash burn shifts to significant cash generation.

Stock LAGGARDS

·     BAYRY -5%; was ordered to pay $2.25B in damages in its legal battle over its Roundup weed killer; Bayer confirmed that a jury in a Philadelphia court on Friday sided with a plaintiff and ordered it to pay $250M in compensatory damages and $2B in punitive damages.

·     BFB -2%; downgraded to Equal Weight from Overweight at Morgan Stanley and cut tgt to $58 from $68 saying while continues to view it as an attractive LT growth story, it no longer sees a catalyst for ST outperformance due to much weaker than expected spirits industry demand.

·     CDNA -6%; shares extend Friday losses after reports that CareDx was found by a jury trial in Delaware to have infringed on one patent from NTRA where the damages were awarded very late last Friday, whereby the jury ordered CDNA to pay NTRA $96M in total.

·     IRBT -14%; shares tumbled after announced with AMZN that they have entered into a mutual agreement to terminate their previously announced acquisition agreement, originally signed on August 4, 2022, where Amazon would have acquired iRobot for cash consideration; IRBT to layoff 31% of workforce.

·     PHG -8%; mixed Q4 23 results; revenue growth broadly in line, margin miss but strong FCF generation; Q4 comparable revenue growth declined by -0.6% in Q4 23, or +2.6% excluding the impact of provisions charged to sales in the quarter; reached an agreement with the FDA on the terms of a settlement linked to recall of its Respironics ventilators used to treat sleep apnea; PHG said it booked a 363M-euro ($394M) provision in Q4.

·     RVNC -3%; downgraded to Neutral from Buy at Mizuho and cut tgt to $9 from $16 saying with the stock trading at ~$6, Mizuho sees limited downside, but it also sees limited upside in the near term.

·     WBD -2%; downgraded to equal weight from overweight at Wells Fargo saying it expects a flattish multiple and cuts estimates for 2024.