Mid-Morning Look

Wednesday, June 22, 2022

Volatility and choppiness continue as U.S. stock markets extend Monday gains. U.S. stocks tumbled overnight before rebounding and turning higher (impressive 200-point bounce for Nasdaq and 50-point move for S&P) as Fed Chair Jerome Powell reiterated in his semi-annual Monetary Policy Report to Congress that “ongoing rate increases will be appropriate” and the pace of those changes will depend on incoming data as the central bank tightens policy to tame inflation. Many of his comments echo last week’s FOMC policy meeting where they raised rates by 75-bps and have build into market expectations for another 50 or 75-bps hike at its July meeting to fight inflation, though in testimony, Powell noted Fed hikes will not bring down the price of food or gas prices. Overnight, UK inflation hit new 40-year highs as soaring food prices pushed British consumer price inflation (CPI) to 9.1% last month, up from 9.0% in April and matched economist consensus. Also in Europe, Czech central bank’s board raised its main interest rate by 125-bps to 7.00%, extending a year-long policy tightening.

Energy stocks leading the S&P decline after WTI crude oil fell over 7% to lows around $101.50 per barrel (has since pared losses). Commodity prices and stocks volatile amid recession fears, with copper hitting 16-month lows (FCX, TECK tumble), along with weakness in steels, and aluminum. U.S. Treasury yields fell to almost two-week lows as commodity prices softened and as fears that the Federal Reserve will cause a recession by tightening monetary policy boosted demand for the U.S. bonds. The yield on the 10-year has fallen 35 bps (from 3.5% to 3.15%) since last Tuesday’s high. In a Bloomberg opinion piece, Former New York Fed President Bill Dudley writes “If you’re still holding out hope that the Federal Reserve will be able to engineer a soft landing in the US economy, abandon it. A recession is inevitable within the next 12 to 18 months.” Note with just seven trading days left until the end of June, the S&P 500 is down 21% since the beginning of 2021.

Sector Movers Today

·     Auto sector; TM lowered its global production plan for July by about 50,000 units, citing its decision to extend the suspension of operations at some plants and production lines; production volume for July is expected to be roughly 800,000 units; CHPT remains fav name in EV at Stifel and adjusting TPs on BLNK ($19 from $30); CHPT ($26 from $32); WBX ($24 from $29); Wells Fargo said GM remain underweight, but bullish on OW-rated e-powertrain suppliers like BWA, MGA & recently upgraded LEA in autos; LOTZ closes 50% of its stores to strategically focus on path to profitability; closures will result in an estimated workforce reduction of 25% to 30%; estimates an additional savings of $7.5M-$8.5M

·     Retailers: NKE downgraded to Neutral from Buy at Seaport Global not on the quarter or guidance but reflects their broader view that there’s a disconnect between sentiment and reality. Sentiment isn’t exactly great, seeing how NKE’s shares are down 39% from their 52-week high, but that’s better than the company’s average peer, which is down 46% on average; LZB posted a top and bottom line beat for Q1 on better guidance – 4Q adj EPS $1.07 vs est. $0.92 on sales $685Mm; guides 1Q sales +7-10% vs est. +5.6% and adj op margin 6.5-7.5%; BURL downgraded to MP from OP at Cowen and cut tgt to $175 noting shares are down over 50% from its peak and don’t think it’s cheap enough to defend here; BBBY slides after several analysts cut their price tgt ahead of earnings next week as sees downside risk to the home goods chain’s sales (Telsey cuts tgt to $6 from $15, Wedbush to $7 from $14, UBS to $5 from $12 and Bofa to $3

·     Housing & Building Products; Weekly U.S. mortgage market index rises 4.2%, purchase index rises 7.9% and refinancing index falls 3.1% according to MBA as the average 30-year fixed rate jumped 33 bps to 5.98%, highest since Nov 2008; tgt changes at Gordon Haskett in home improvement retail as FND PT cut from $90 to $75, LOW PT cut from $225 to $190, and HD PT trim from $330 to $315, maintains Accumulate on all; RBC Capital with several changes in homebuilders and building products, downgrading JELD (tgt to $12 from $20), BECN (tgt to $58 from $70) to Sector Perform and GMS (tgt to $46 from $73), IBP (tgt to $71 from $91) to Underperform in products as still see NT risks on downward earnings revisions and deteriorating data. For homebuilders, TMHC upgrade from Sector Perform to Outperform and downgraded PHM

Stock GAINERS

·     ANIP +3%; receives FDA approval for abbreviated new drug application for clorazepate dipotassium tablets

·     CHEF +3%; raised its year sales view to $2.325b-$2.425B from prior view $2.13B-$2.23B (est. $2.243B) and upped its year Ebitda outlook

·     KHC +3%; upgraded to Outperform at BMO Capital with a $46 Target as KHC’s strategic evolution, which continues to be overlooked by the market, creates a compelling investment opportunity

·     LZB +4%; posted a top and bottom line beat for Q1 on better guidance – 4Q adj EPS $1.07 vs est. $0.92 on sales $685Mm; guides 1Q sales +7-10% vs est. +5.6% and adj op margin 6.5-7.5%

·     NEWR +3%; after the close last night, Jana Partners entered cooperation pact with new company as per 13D saying agreed nominees were appointed to its board

·     XXII +25%; gets a boost after WSJ reported the FDA is preparing to order Juul Labs Inc. to take its e-cigarettes off the U.S. market

·     ZM +4%; rises over 3% for a 3rd straight day and up 5 of last 6-days overall as tops its 100-day MA resistance this week of $113.50

Stock LAGGARDS

·     ATHA -65%; as topline results from its exploratory Phase II study of fosgonimeton in patients with mild-to-moderate Alzheimer’s disease didn’t meet the primary endpoint, though was generally well-tolerated, with a favorable safety profile

·     BBBY ; several analysts cut their price tgt ahead of earnings next week as sees downside risk to the home goods chain’s sales (Telsey cuts tgt to $6 from $15, Wedbush to $7 from $14, UBS to $5 from $12 and Bofa to $3)

·     CENT -1%; says 2022 GAAP EPS now expected to be at or above prior year of $2.75 (estimate $3.11) saying lower outlook driven primarily by poor garden season; is confident in central to home strategy and long-term profitable growth in pet and garden

·     COIN -2%; after Binance.US starts zero-fee trading for bitcoins in pricing war; overall crypto space pulls back after modest bounce yesterday, with bitcoin down around $20,500, but off the Saturday lows of $17,787

·     FCX -6%; as copper hits 16-month lows, recession fears hitting metals

·     GNRC -4%; pressured after known short-seller SprucePoint Capital issued a “Strong Sell” report on the company and sees 40%-50% downside

·     MO -9%; the WSJ reported the FDA is preparing to order Juul Labs Inc. to take its e-cigarettes off the U.S. market, saying the FDA could announce its decision as early as Wednesday https://on.wsj.com/3tUn7AL

·     MRO -5%; heavy selling pressure in oil and energy stocks (APA, COP, HES, PXD, SLB) as WTI crude oil fell over 6% to lows around $102.50 per barrel