Mid-Morning Look

Tuesday, May 30, 2023

U.S. stocks open sharply higher, led by technology stocks “again”, with two big drivers leading major averages. 1) a bipartisan deal to raise the $31.4 trillion U.S. debt ceiling was reached in principle by the White House and the GOP this weekend, while Congress and the Senate are expected to vote in the coming days. 2) Tech leads as the “AI” momentum play picks up steam after semiconductors and anything “AI” jumped last week after strong NVDA earnings and guidance. With today’s advance, NVDA became the first chip company to top $1 trillion in market cap. As remains the case all 2023, tech leading markets higher, while energy leads to the downside this morning, with WTI crude falling more than 3% ahead of the OPEC+ meeting later this week (XLE down nearly -12% YTD). The Technology sector (XLK) is now up 35% YTD and communications (XLC) +29% YTD. Nearly every other S&P sector outside of Consumer Discretionary (XLY +18.55) is down on the year. Treasury yields and the dollar pulled back after last week’s gains following the debt ceiling deal news. After closing above 4,200 for the first time since August 2022, the &P 500 tries to hold above those levels today. NVDA today joined AAPL, AMZN, GOOGL, and MSFT in the $1 trillion mkt cap club.

Economic Data

·     Consumer Confidence index 102.3 above consensus 99.0 and vs April revised 103.7 (previous 101.3); the present situation index 148.6 in May vs April revised 151.8 and the expectations index 71.5 in May vs April revised 71.7 (previous 68.1); jobs hard-to-get index 12.5 in May vs April revised 10.6 (previous 11.1) and 1-year consumer inflation rate expectations 6.1% in May.

·     S&P CoreLogic reported March 20-metro area home prices -1.1% from year ago vs +0.4% in February; March home prices in 20 metro areas +0.5% seasonally adj vs revised -0.1% in February; March 20-metro area home prices non-adjusted +1.5% vs revised +0.3% in February.

·     U.S. FHFA home price index jumped 0.6% to 398.0 in March following the 0.7% bounce in February to 395.5 (was 394.8). It is a third straight monthly increase after unchanged reading through the fall and winter. But the index slowed to a 3.6% y/y clip versus 4.2%.

Sector Movers Today

·     In beverages: Business Beer Daily reported that the latest BUD Light trends showed volumes -29.5% vs. previous week 28.4% (and -27.7% prior) and noted Coors Light +15.2% (v +16.9% prior), Miller Lite up 12.1% (vs +15.1% week prior); in research, RothMKM upgraded SAM to a Buy (raised tgt to $386 from $274) saying they believe Seltzer and Truly will benefit in the summer from Bud Light share losses and gross margin lift from production shift will be realized in 2Q. Firm also upgraded (given inventory days timing) STZ to buy with $270 tgt. Jefferies said that positioned as a health & wellness offering, Prime Hydration has quickly become a disruptive brand in the space, reaching 8% share in the US sports drink category as of April and believes it is very plausible the brand approaches ~$800M in US retail sales and ~10% share in ’23.

·     In Defense sector: implications after debt ceiling deal: Citigroup said President Biden and Speaker McCarthy reached a deal over the weekend that allows for continued near-term growth in defense spending while simultaneously cutting non-defense discretionary and increasing the debt ceiling through early 2025. Citi expects defense stocks to react positively to the news and Congressional approval of the deal in the coming days. Remains buy rated GD, LDOS, LMT, SAIC. BTIG said defense spending should see a ~3% increase next year after the debt ceiling revelations, which is a positive top-line increase and a shift from the 2011 debt ceiling precedent that applied cuts uniformly.

·     In Financial Services: BTIG said INTU, HRB, SOFI are potential debt ceiling winners. Noted, 1) a handshake agreement reducing IRS funding levels should be viewed as a positive for INTU and HRB as it reduces the likelihood of the IRS building an expansive efile competitor; 2) a federal student loan payments are expected to begin again this fall, which should be viewed as directionally positive for SOFI and possibly lead generation platforms as there could be increased demand for student loan refinancing.

Stock GAINERS

·     AAIC +48%; after Mortgage REIT EFC agreed to acquire the other mortgage REIT, in a deal that should increase scale and liquidity, the companies said https://tinyurl.com/3p44yb7b

·     AI +12%; on track for 4th straight day on continued upward momentum “AI” sector strength following NVDA comments/move last week.

·     CHPT +12%; upgraded to Buy from Neutral with a price target of $14, down from $15.50 at Bank America after reassessing line of sight to cash inflection.

·     ETRN +40%; after debt ceiling deal surprisingly contains specific language to essentially fast track the Mountain Valley Pipeline, RBC noted.

·     F +4%; upgraded to Buy from Hold at Jefferies with a price target of $16, up from $13 saying there is something grounded and “back-to-basics” in Ford’s strategy of focusing on its strengths

·     IOVA +14%; said the FDA had accepted lifileucel’s BLA for review, snapping a string of regulatory delays and putting lifileucel on track for a potential 4Q approval (November 25 PDUFA date).

·     NVDA +4%; continues its torrid rise in 2023, now up 170% YTD alone as the market focus on “AI” lifts many technology names; NVDA this weekend announced a new class of large-memory AI supercomputer.

Stock LAGGARDS

·     AMLX -1%; said that a committee for the European medicine’s regulator is “trending toward” a negative opinion on the company’s amyotrophic lateral sclerosis (ALS) drug application seeking conditional approval in the region.

·     AR -5%; along with weakness in other natural gas E&P producers RRC, CHK, CTRA, SWN, as they underperform broader weak energy as neat gas prices slide.

·     BIG -6%; price tgt cut by Bank America and Deutsche Bank after earnings last week; said demand pressure and liquidity concerns remain.

·     CMA -6% worst performer in the S&P 500, underperforms other regional banks.

·     DVN -2%; weakness in energy stocks as oil prices tumble ahead of OPEC+ meeting; HES, EOG, HAL.

·     MRVL -5%; gives back some of last week’s gains after earnings and guidance beat.

·     SKY -7%; following earnings results; Q4 EPS $1.00 vs. est. $0.93; Q4 revs $491.5M vs. est. $528.22M; q4 adjusted EBITDA margin 15.5%; q4 gross margin 28.7%.