Closing Recap

Tuesday, December 21, 2021

Equity Market Recap

·     Stock market rip fest! Only time will tell whether today marked the start of a so-called “Santa Claus rally” to end the year or if it was merely a natural bounce following three consecutive red sessions, but stocks screamed higher as investors poured back into risk-on assets and companies tied to the reopen trade. Nike reported a strong quarter last night to provide a boost for other consumer discretionary names, while rebounding oil prices did the same for energy stocks. The flight back to risk pushed bond yields higher with the 10-year approaching 1.5% after touching a low of 1.355% yesterday to boost the financial sector. Meanwhile, defensive staples and utilities underperformed in today’s rotation with General Mills a notable decliner after it posted a disappointing quarterly profit. In Washington, lawmakers are trying to salvage the $1.75T Build Back Better bill after Sen. Joe Manchin rejected the current iteration over the weekend, and optimism reversed yesterday’s selloff in industrials, EVs, and other green energy stocks as they stand to benefit from the bill’s passage.

·     Stock & Sector movers: NKE soars after its quarter comes in ahead of expectations with strong margins as athletic apparel names LULU, FL, SKX, UAA, DKS post strong gains; MU jumps to hit $90 for the first time since April after its beat and strong guidance, KLAC also climbs on a Wells upgrade as semi stocks broadly higher; RAD surges as raised forecasts for FY EPS, EBITDA outweigh a mixed quarter; GIS slides after its adj EPS misses estimates amid weakness in staples to reverse yesterday’s strength KR, K, SJM, CLX; Reopen paces the market with travel CCL, EXPE, UAL, casinos LVS, CZR, and lodging HST, MAR, HLT, LYV outperforming; vaccine names slump again with MRNA, BNTX, NVAX all extending their December declines; CTXS leads the S&P after Bloomberg reported Elliott and Vista were weighing a joint bid for the company; SEDG, BE, RIVN alt energy names rebound from yesterday’s declines on reports the Build Back Better bill is not dead despite Sen. Manchin saying he will not support it over the weekend; FinTech/payments also staging a rally after being pressured in the recent months/much of 2021 (SQ, PYPL, AFRM).

Economic Data:

·     The U.S. current account deficit surged to a 15-year high in Q3 amid a record increase in imports as businesses rushed to replenish depleted inventories to meet strong demand. The Commerce Department said that the current account deficit accelerated 8.3% to $214.8 billion last quarter. That was the largest shortfall since the third quarter of 2006.

Commodities, Currencies & Treasury’s

·     Oil prices rebounded on Tuesday, with WTI crude jumping $2.51, or 3.66% to settle at $71.12 per barrel, while Brent crude gained $2.46, or 3.44% to settle at $73.98 per barrel. The rebound follows a sharp fall in the previous session as investors’ appetite for risk improved, although they remained cautious amid the rapid spread of the Omicron coronavirus variant across the globe.

·     Gold prices slipped -$5.90, or 0.3%, to $1,788.70 an ounce, reversing an earlier gain and falling for a second straight decline, as stocks rebounded in astounding fashion after recent declines. Treasury yields also popped higher, creating a headwind for the precious metal in the near-term. The dollar was flat but holding in positive territory, as measured by the ICE U.S. Dollar Index

·     Treasury yields quietly pushed higher throughout the morning, with the benchmark 10-year hitting highs just shy of 1.5%, rising around 7 bps, while the 30-yr moved back above 1.9% (up 7 bps), and the short-term 2-yr yield climbed 2 bs to 0.67%. The U.S. Treasury yield curve steepened as traders focused on optimistic economic conditions despite the rapidly spreading Omicron variant of the coronavirus. The moves marked a reversal of sentiment from Monday, when the yield on the benchmark 10-year note reached as low as 1.353%, the least since Dec. 3.

Sector News Breakdown

Consumer

·     Retailers; after consumer discretionary stocks led declines over the last week I the S&P, group gets a boost today after Dow component NKE reported a Q2 beat on both the top and bottom-lie just three months after the apparel/footwear giant sounded the alarm on supply chain disruption – Q3 beat primarily driven by gross margin (+280bps YoY vs. consensus +100bps) and the tax rate, as NA was the strongest region (+12% cc vs BTIG +7% est.) helped by strong digital growth (+40%) and improved inventory deliveries during the quarter while China was the weakest (-24% cc vs. BTIG -13% est.) where digital was -27%; large cap broadline/hardline retailers such as WMT, HD, TGT underperformed, while department stores/specialty outperformed (URBN, KSS, LULU, DDS); PLBY said that it launched Centerfold, a creator-driven website that will allow celebrities to interact directly with their fans.

·     Auto sector; rebound in EV space for some a day after following the apparent failure of Biden’s “Build Back Better” plan that includes significant incentives for the growing sectors; TSLA for second day having trouble for direction around the $900 level; NKLA was fined $125 million to settle SEC charges of defrauding investors by misleading them about products, technical advances, commercial prospects

·     Consumer Staples; a general pullback in the defensive sector after a few days of gains as investors rotate back into risker/growth names; in food space, GIS reported Q2 EPS ($0.99 vs. est. $1.05) on better sales ($5.02B vs. est. $4.84B) as operating profit fell 13% to $800M due to inflation and supply chain disruption, while did raise year sales view to full-year organic net sales to rise 4% to 5%, up from previous guidance for a decline of 1% to 3%; CVGW posted a slightly smaller Q4 loss and better revs – delivered a Q4’21 result which showed improved pricing dynamics and the beginning of margin improvement derived from its widespread restructuring efforts; Kellogg (K) says new five-year agreement reached with employees – contract covers approximately 1,400 union-represented employees, all of whom are welcome back to work

Energy

·     Energy stock movers; the cyclical trade resumes upward momentum led by several names in the energy complex as WTI oil prices rebound back near $70 per barrel as the market recoups some of a 5.7% slide over the previous two sessions; in research, Piper upgraded PDS and PTEN to Overweight saying with L-48 rig count approaching 560, they are raising their ’22 rig count forecast to 625, with increasingly strong visibility toward 600 by Mar/Apr & >650 by Q3; today a rebound in renewables and EV stocks a day after the sectors tumbled following the apparent failure of Biden’s “Build Back Better” plan that includes significant incentives for the growing sectors – shares of ENPH, NOVA, RUN, RIVN, BLNK rise early

Financials

·     Banks; Jefferies’ top 2022 picks are WFC, KEY, FITB among large-caps and SBNY, WAL, SIVB in mid-caps with CMA, TCBI, WFC positioned for the most uplift from additional rate hikes; UMBF upgraded to Buy with a $115 price target at Janney; BMO was upgraded to Outperform at RBC but downgraded to Neutral by CIBC and Scotiabank; CMA raised to Neutral by Compass Point

·     Services & Lending; FDS Q1 adj EPS $3.25 vs est. $3.02 on revenue $424.7M vs est. $419.8M and reaffirmed its prior full-year outlook; Cantor initiated OPAD at OW with a $10 target; Jefferies resumed FCFS at Buy with a $105 PT

·     FinTech & Payments; MA acquired MCD’s personalization platform and decision engine company Dynamic Yield; Loop initiated MQ at Hold with a $19 target due to its high customer concentration and current valuation of 18x 2021E sales; Bank of America reiterated AFRM as a Buy, saying last week’s decline on the CFPB’s inquiry into the BNPL industry was overblown, especially given the inquiry is focused on areas that the company does not have much exposure to (Pay-in-4 loans, late/reactivation fees); VCTR announced a $15M share buyback

·     REITs; PEB reported November revenue $76.6M, -33% vs 2019, but expects December to be down less than 30% vs 2019; Stifel’s top picks in retail REITs are KIM, SPG; BTIG reiterated their Buy rating and $29 target on STWD as its 13% pullback over the past month provides an attractive entry point and significant insider buying activity demonstrates confidence in their ability to sustain its dividend despite headwinds and volatility

Healthcare

·     Pharma movers; SNY to acquire privately held Amunix Pharmaceuticals Inc for an upfront payment of about $1 billion, and said that it will also pay Amunix up to $225 million based on certain future development milestones; ALDX shares tumble after saying it did not meet its primary goal for treating ocular redness in the Phase 3 trial of its Tranquility drug; AQST shares drop after saying it was informed by the FDA that it is not ready to take a decision on whether or not to approve co’s anti-seizure medicine, Libervant, by the target date of December 23; ACAD said it plans to resubmit sNDA for Pimavanserin narrowing the proposed indication from dementia-related psychosis to Alzheimer’s disease psychosis; ACAD downgraded to Neutral from Buy at Guggenheim and maintaining our $28PT as continue to believe that a new trial will be needed to support approval in ADP

·     Biotech movers; broad selling pressure in vaccine names with PFE, BNTX, MRNA, NVAX all tumbling as Omicron cases figures surge to new highs daily, raising concerns about effectiveness; DBVT shares slide after the company said it would withdraw its marketing application for the Vlaskin Peanut patch in Europe and plans a new Phase 3 clinical study for a modified patch in children; VIR downgraded to Underperform at Baird with unchanged $36 tgt noting shares have increased about 65% since late November following the first news reports of the omicron variant; CTMX slides after reported prelim data from an ongoing Ph 2 evaluating its conditionally activated CD71-targeted CX-2029 in sqNSCLC and HNSCC patients that Wedbush said doesn’t believe CX-2029 has made a strong case for further clinical development; MNMD slips as the U.S. FDA placed a clinical hold on its application to start a mid-stage trial of its experimental treatment for generalized anxiety disorder; SAVA volatile, rising after the company said it was informed by Neuroscience journal there is no evidence to support claims of data manipulation in a 2005 paper authored by the Company and its scientific collaborators

·     MedTech Equipment; the White House announced it will soon buy 500 million rapid tests for Covid-19 and ship them to Americans for free; Truist raised price targets for BSX, MDT, NVRO, NUVA, KIDS, SPNE, SIBN, VCEL and ZBH saying for 2022 outlook, lean towards higher acuity names with lower COVID exposure in the early part of the year, and continue to focus on ones with unique drivers that can drive growth such as BSX, PEN, and KIDS

·     Healthcare Services; CI and HCA were both downgraded to Neutral from Overweight at JPMorgan saying believe HCA is the best positioned hospital operator in the U.S., with a strong and diversified portfolio, however, we believe other companies in our coverage offer greater near-term upside; while for CI, believe U.S. Medical margins will improve in 2022, partially driven by CI’s pricing strategy…but think this could result in slower membership growth next year; RAD boosted its 2022 adjusted EBITDA view to $500M-$520M from prior $460M-$500M and says it has identified 63 stores it plans to shut in order to cut costs after a mixed Q3; Barclay’s said Healthcare Delivery industry view remains Positive on the several catalysts as see the biggest upside opportunities for PGNY (Top Pick), SGRY, AVAH, DCGO, THC and INNV; biggest risks in AMEH and UHS

Industrials & Materials

·     Aerospace & Defense; Embraer unit Eve, an urban air mobility business, said it is going public via a merger with special-purpose acquisition corporation (SPAC) Zanite Acquisition Corp. (ZNTE) in a deal with an implied enterprise value of about $2.4 billion; UPS said it would purchase nine-teen Boeing (BA) 767 freighters

·     Industrial & Machinery; URI and HRI downgraded to Neutral from outperform at Baird saying each have significantly outperformed a strong market since our June 2020 initiations benefitting from tight equipment supply/demand dynamics in 2021; this benefit likely dissipates as supply chain normalization leads to improved OEM production and higher equipment supply in 2022.

·     Metals & Materials; shares of paper companies GPK, WRK, CLW remained volatile a day after Swedish paper packaging producer BillerudKorsnas AB announced that it is acquiring VRS, North America’s largest producer of coated paper, which is effectively adding paperboard capacity between 2025-2029; rebound in metals stocks (AA, CENX, CLF) a day after tumbling; RIO said it would buy the Rincon lithium project in Argentina for $825 million as the global miner builds its battery materials business.

Technology, Media & Telecom

·     Internet; BABA downgraded to neutral from overweight at Atlantic Securities and cuts tgt to $140 from $185 as remains cautious on improvement of Taobao/Tmall, BABA’s business segment, in near term and adds it is key to co’s sustained stock outperformance

·     Semiconductors; MU a bright spot for tech as reported in-line to slightly better Q1 revs/GM/EPS of $7.7B/47%/$2.16 while guidance for Q2 was well ahead of views at $7.5B/46%/$1.95 (topping the $7.3B/$1.86/45.5% est.) as analysts note benefiting from the stabilization the PC market, which represented a headwind in the November quarter; in research, KLAC was upgraded to Overweight at Wells Fargo and establishing stock as No. 1 top pick for 2022 while raising its price tgt to $500 as believe KLA is well positioned to drive continued WFE outperformance driven by accelerating leading edge Foundry / Logic spend as capital intensity remains elevated

·     Software movers; CTXS rises after Bloomberg reported Elliot Management, which has amassed a stake in the co, has partnered with Vista Equity Partners for a joint bid for the company, https://bit.ly/3yPmppD ; ORCL was downgraded to sector weight from Overweight at KeyBanc saying while we concur the all-cash deal should be accretive to earnings, it would be near-term neutral to top-line growth and dilutive to EBIT margins; BRZE rises after customer engagement platform tops expectations in first qtrly report since going public last month/said Q3 revs increased 63% YoY to $64M, topping the $56M estimate; DM announced its partnership with Korea Institute of Industrial Technology to accelerate the adoption of additive manufacturing (AM) in South Korea.

·     Media & Telecom movers; in telco, UBS said they expect another quarter of strong postpaid phone adds in 4Q driven by promotions, stimulus programs, business growth and continued migration from prepaid to postpaid. We believe AT maintained its momentum in postpaid phone net adds driven by low churn (0.78%, +2 bps YoY) and +15% YoY growth in gross adds, followed by T-Mobile; AT&T (T) to sell advertising marketplace, Xandr to MSFT