Mid-Morning Look

Friday, November 11, 2022

U.S. stocks in rally mode, continuing higher after yesterdays improved CPI inflation report, boosted by a further tumble in the US dollar, which is pushing commodity prices early. Three of the biggest potential positives in the market have all materialized within the last 24 hours with: 1) yesterday’s CPI showing decelerating inflation, 2) China overnight easing quarantine rules and pulling back on testing in significant recalibration of Zero COVID policy, and 3) Russia’s withdrawal from Kherson. The confluence of events, coupled with earnings season behind us (retailers report next week though), historically bullish seasonal patterns into holiday if giving investors some hope into year end. A wide range of stocks, from gaming and casino to travel and consumer, are rising as China made a significant calibration of its Covid-Zero policy to reduce the amount of time travelers and close contacts must spend in quarantine and pull back on testing. Crude prices jumped by more than 3% after the measure, lifting the energy sector while defensive healthcare stocks CI, MCK, HUM, MOH, BMY among the biggest losers in sector rotation (they were biggest winners when stock markets were falling – sector rotation). The Russell 2000 index +1.3% to 1,892, topping its 200-day moving average resistance of 1,875 today. Dow Transports +2.1% at 14,550, extending gains above its 200-day MA reached yesterday of 14,225 – all 20 names in index are higher. The dollar index (DXY) adding to yesterday sharp 2.25% decline, down another -1.25% at 106.85 to lowest levels since August on easing inflation concerns; the Euro up about 1% above 1.03 and dollar falls 1.25% vs. yen to 139.25; sterling back near 1.18. Bitcoin, Ethereum and the crypto space tumbled this morning after FTX Group commenced voluntary chapter 11 proceedings in united states according to press release saying Sam Bankman-Fried has resigned his role as CEO and will remain to assist in orderly transition while John J. Ray iii appointed CEO.

Economic Data

·     University of Michigan surveys of consumers 1-year inflation outlook prelim November 5.1% vs final October 5.0% and the 5-year inflation outlook prelim November 3.0% vs final October 2.9. The headline University of Michigan surveys of consumers sentiment prelim Nov 54.7 vs. consensus 59.5 and final Oct 59.9; current conditions index prelim Nov 57.8 vs final Oct 65.6 and expectations index prelim Nov 52.7 vs final Oct 56.2

Sector Movers Today

·     Aerospace & Defense: LHX downgraded to Neutral from Buy at Bank America while cut tgt to $250 from $285, calling it the prime most impacted by the supply chain; SPR downgraded to Underperform from Buy at Bank America and HII downgraded to Underperform saying shipbuilding will grow at 3% annually into the outyears which they find “underwhelming” in light of the enormity of funding funneling into the U.S. Navy and fleet modernization; Cowen said they believe TDG is the best way, in large cap, to express a long aero aftermarket view – as HON, GE, RTX etc. have a lot of non-aero a/m profits, and HEI trades at over 30x EBITDA vs TDG’s 18x

·     Transports, Industrial & Machinery: Dow Transports extending gains above its 200-day MA reached yesterday of 14,225 – all 20 names in index are higher; truckers HTLD, WERN, and SNDR all upgraded to Buy from Neutral at UBS and reiterating Buy on KNX saying they move slightly ahead of spot rates and their analysis indicates we are close to a bottom in rates. As spot rates stabilize, we expect P/E valuation to support upside for the truckload names.

·     Casinos, Gaming, Lodging & Leisure sector: casino stocks with exposure to Macau saw an early jump (MGM, WYNN, LVS) after reports overnight that China eased pandemic controls, as the country’s leaders seek to lessen the pain of a stringent zero-Covid policy; SIX was downgraded to market perform at William Blair following earnings; IMAX added to the Best Ideas List at Wedbush as view it the best way to play the upcoming theatrical rebound, and is the best positioned to gain from consumers’ ongoing shift toward premium theatrical amenities

Stock GAINERS

·     DOCS +29%; reported a top- and bottom-line beat, with adj. EBITDA of $46.0M also beating consensus of $40.1M, with lower Q3 guide, but reiterated year

·     FREY +6%; after the WSJ reported Koch and Freyr to build batteries for power-grid storage to aid renewables buildout

·     JD +7%; strength in several US listed Chinese names after reports China overnight easing quarantine rules and pulling back on testing in significant recalibration of Zero COVID policy

·     LZ +10%; reported Q3 results above ests and forecasts FY22 revenue in the range of $617M-$619, the midpoint being higher than their prior revenue est. of $614M

·     MTTR +20%; as revenue above the high end of its guidance range and above Street estimates, partially driven by better-than-expected subscription and services growth

·     SOFI +8%; along with strength in NAVI after earlier reports a federal judge from Texas ruled against student loan program

·     TOST +3%; delivered another quality print, beating nicely on revenue and EBITDA, with 4Q guidance modestly above prior consensus

·     WYNN +6%; casinos with exposure to China’s Macau rebound on the Covid easing rules

Stock LAGGARDS

·     APRN %; files to sell $30M in common stock

·     CI -7%; defensive healthcare stocks CI, MCK, HUM, MOH, BMY among the biggest losers in sector rotation

·     FIGS -4%; as beat on top and bottom-line but 4Q revenue guide is about 10% below consensus and EBITDA margins 100 bps below

·     GSK -6%; downgraded to Sell at UBS saying at face value GSK trades on c9x ’23E PE for near double-digit EPS CAGR to ’26 and compared to the EU peer group that may not seem demanding, but they think it is

·     LHX -6%; downgraded to Neutral from Buy at Bank America while cut tgt to $250 from $285, calling it the prime most impacted by the supply chain

·     RYAN -20%; 3Q adj EPS came in line driven by a better-than-expected adjusted EBITDAC margin of 28.4% vs 28% consensus offset by worse than expected organic growth at 13.7%