Closing Recap

Thursday, January 06, 2022

Equity Market Recap

·     After posting its biggest drop in several weeks, the Nasdaq failed to muster much of a fight today, unable to slowly rebuild the prior day -3.3% drop, but it was gains in energy, staples and financials that helped the S&P 500 stay steady after holding key technical levels earlier. Healthcare weakness (UNH) pressured the Dow a day after its highest intraday level ever. Benchmark 10-year yields rose to 1.7530%, the highest since March 2021, and were last up slightly on the day to 1.728%, while U.S. 2-year yields, which track near-term rate expectations, rose to the highest since early March 2020, at 0.88%. The dollar took a breather in its climb towards a 14-month high. Oil prices jumped and gold prices slumped as commodities were mixed. All eyes on the nonfarm payroll report tomorrow morning with est. for +400K jobs (vs. Nov 210K), private payrolls +365k jobs (vs. Nov 235K), manufacturing +35K (vs. Nov 31K), unemployment to dip to 4.1% (from 4.2% prior) and average hourly earnings to rise +0.4% MoM (rose 0.2% in Nov).

·     Stock & Sector movers: LW surges as the S&P leader after its impressive earnings report, CAG slides on its EPS miss, HELE slightly higher after its beat and raise, STZ hits ATH early after beating estimates but quickly rolls to red in earnings within staples; BBBY spikes as its margin beat outweighs its quarterly miss and weak guide, WBA slips despite initially rising pre-market after its beat, DKS jumps after raising its full-year outlook in retail; MRO DVN HES FANG PA Energy among the S&P leaders again as Crude tops $80/barrel at its morning high; banks SIVB PBCT MTB CFG CMA also outperforming with Treasury yields extending their recent climb; HUM plunges after cutting the midpoint of its membership growth guidance in half, weighing on CI ANTM UNH; Bitcoin tumbles below $42,500 for the first time since September, ETH hits 3-month lows to pressure crypto stocks COIN RIOT MARA SI early, though these pare losses intraday

·     The Federal Reserve could raise interest rates as soon as March and is now in a "good position" to take even more aggressive steps against inflation, as needed, after a policy reset last month, St. Louis Fed President James Bullard said on Thursday. The U.S. central bank in December agreed to end its asset purchases in March and laid the groundwork for the start of rate increases that all policymakers, even the most dovish, now feel will be appropriate in 2022.

Economic Data:

·     Weekly jobless claims rose to 207K in the latest week, above est. 197K, while prior week revised to 200K from 198K; the 4-week moving avg rose to 204,500 in latest week; continued claims rose to 1.754M from 1.718M (est. 1.688M) and the U.S. insured unemployment rate unchanged at 1.3% in latest week

·     November trade deficit was (-$80.17B) vs. est. deficit (-$77.1B) and compared to Oct deficit (-$67.16B), as Nov exports +0.2% vs Oct +8.2% and imports +4.6% vs. oct +1.0%; U.S. Nov exports $224.22 bln vs oct $223.86 bln, imports $304.39 bln vs oct $291.01 bln

·     U.S. services industry activity slowed more than expected in December, as the ISM said its non-manufacturing activity index fell to 62.0 last month from 69.1 in November, which was the highest reading since the series started in 1997, and below ests of 66.9; new orders received dropped to a reading of 61.5, the lowest in 10 months, from a record 69.7 in November; measure of services industry employment fell to a reading of 54.9 from a seven-month high of 56.5

·     Factory Orders MoM actual 1.6% (Forecast 1.5%, Previous 1.0%); U.S. Nov. Factory orders ex trans rise 0.8% from month ago

·     The 30-year mortgage rate rose to 3.22% for the week of Jan. 6, from 3.11% one week prior, the highest level since May 2020, the housing finance giant Freddie Mac said

Commodities, Currencies & Treasury’s

·     Oil prices finish higher, with WTI crude rising $1.61 or 2.07% to settle at $79.46 per barrel, extending a rally from the previous session, on escalating unrest in OPEC+ oil producer Kazakhstan and supply outages in Libya. Oil prices managed to rally despite bearish weekly inventory data the day prior and despite the impact of a rising dollar. Brent crude rises $1.19 or 1.47% to settle at $81.99 per barrel.

·     Gold, silver prices plunge as yesterday’s “hawkish” Fed minutes boosts the dollar, Treasury yields further as gold prices drop 2% or -$36.90 to settle at $1,789.20 an ounce (largest 1-day drop in 6-weeks). Minutes of the Federal Reserve’s December meeting flagged the potential for rate hikes to come sooner than previously expected, lifting the dollar and Treasury yields.

·     The U.S. dollar resumed its climb near a recent 14-month high while U.S. 10-year Treasury yields rise to their highest level since March at 1.74% (touched highs above 1.75%), all buoyed by the overly hawkish view by the Fed Minutes yesterday (from December meeting) that kinda of changed the outlook with tapering happening quicker while rates appear to be moving higher at a faster clip as well (Fed fund futures show strong chance of hike in March meeting). The euro dropped back below the 1.13 level vs. the dollar while the yen was at 115.80 late day. In yields, the 2-year topped 0.88%, while the long-end 30-yr was little changed at 2.09%.

Sector News Breakdown

Consumer

·     Retailers; COST total December sales $22.24B (+16.2% YoY), total comp sales +14.5% vs est. +15.3%, U.S. comps ex-fuel +11.5% vs est. +11.7%; BBWI expects Q4 results to be at the high end of its guidance ranges for EPS $2.10-2.25 and sales increasing mid-high single digits; DKS raised its full year 2021 EPS guidance to $13.70-13.79 from $12.88-13.06, adj EPS to $15.50-15.60 from $14.60-14.80, and same store sales to increase 25.8-26.1% from 24-25% ((shares of ASO, BGFV, HIBB moved in sympathy early); REAL Dec. GMV was ~$153M, +40% YoY and +49% vs. 2019, with avg order value ~$518, +10% YoY and +4% vs 2019; BKE December sales $198.7M (+17.3%), comp sales +17.7%; KIRK holiday comp sales fell -6.4% while they still see 4Q21 EPS lower than prior year, and announced a new $30M buyback program; MAT said that its Barbie brand and French fashion house Balmain are launching a new global ready-to-wear clothing line and accessories as well as an exclusive non-fungible token collection; Wells downgraded DG to EW on concerns about its exposure to low-income consumers given the likely end of monthly child tax credit payments and an estimated 40% decline in Snap that now accounts for a double-digit percentage of sales and TGT to EW as its strong performance during Covid creates a difficult 2022 setup; Barclays upgraded GOOS to OW downgraded VFC to EW; Morgan Stanley upgraded BIRD to OW with a new $17 PT from $23 as its recent pullback creates an attractive entry point;

·     Auto sector; NKLA said trucking company SAIA signed a letter of intent to purchase or lease 100 of its Tre heavy-duty battery electric vehicles (BEVs) following the satisfactory completion of a demonstration program; electric vehicle stocks absolutely crushed again today, led by big declines in RIVN, TSLA, CHPT, BLNK, NIO, QS and others as momentum names slide (share prices rebounded by midday with names closing mixed); GM said a trio of chips from QCOM will power the "Ultra Cruise" driver-assistance feature on a luxury Cadillac sedan next year – Reuters

·     Housing, Home Furnishing, & Building Products; LOW upgrade from In Line to Outperform w/ $280 PT from $265 at Evercore/ISI saying its turnaround was in place pre-COVID, and with Nesting trends cementing themselves, Lowe’s is setting up as a compounder trading at a discount; BBBY rebounds on better margins despite miss and lower guidance as Q3 adj EPS loss (25c) vs est. 0c on sales $1.88B vs est. $1.95B, sees Q4 adj EPS 0-15c vs est. 70c on sales $2.1B vs est. $2.26B, and lowered its FY guidance ranges for adj EPS to (15c)-0c from $0.70-1.10 and sales to $7.9B from $8.1-8.3B; XHB, LEN, TOL, MTH, KBH – homebuilders softer early as U.S. Mortgage rates surge to highest level since May 2020

·     Consumer Staples; in spirits, STZ boosted its 2022 EPS outlook to $10.50-$10.65 from $10.15-$10.45 forecast prior (est. $9.88) after beats Q3 comparable EPS and net sales expectations and also said it struck a deal with KO to launch Fresca-branded ready-to-drink cocktails in the U.S.; in food, CAG said it sees FY organic net sales growth about +3%, above prior about +1%, while Q2 EPS of $0.64 missed the $0.68 est. on slightly better sales of $3.1B; LW Q2 EPS $0.50 topped the $0.32 estimate on in-line sales of $1.01B and better adj Ebitda of $180.9M; SMPL was upgraded to Outperform at Credit Suisse after posted solid F1Q results and raised guidance; Evercore initiated ACI as a Tactical Outperform as they see potential for shares to rise 6-8% with a likely Q3 beat and constructive Q4 outlook in its earnings 1/11; HELE Q3 EPS $3.72 vs. est. $3.11; Q3 revs $624.9M vs. est. $566.5M; raises FY22 adj EPS view to $11.73-$11.93from $11.26-$11.56 (est. $11.21); boosts FY22 revenue view to $2.095B-$2.115B from $2.024B-$2.067B

·     Restaurants; TXRH was upgraded to Buy at UBS while saying CMG, DRI, MCD remain top picks in restaurants noting 2021 saw a solid recovery in sales trends, with peak profitability in 1H21, while 2H21 inflation spikes weighed on margins and earnings. Firm continues to favor higher quality franchised QSRs that should remain consistent compounders even as valuations have expanded; casual dining names were mostly higher on the day

·     Casinos, Gaming, Lodging & Leisure sector; Credit Suisse highlights four best ideas of 2022: MGM, HGV, IGT and SEAS saying there are several names in our coverage that offer asymmetric risk/reward and as such should outperform over the next 12 months; in services, RBC Capital said for ADT wage inflation and higher component costs could weigh on FCF moving forward as they downgrade both to sector perform and cut tgt for ADT to $10 and VVNT to $11; in gaming, DKNG, CZR rally as set to launch mobile sports betting in New York on Saturday

Energy

·     E&P and Majors; energy names the top gainers again in the S&P, off to a good start in 2022 as oil prices climb (APA, MRO, OXY, DVN, FANG); Reuters reported that at least five Nigerian companies are preparing to submit bids this month for Royal Dutch Shell’s (RDS) onshore oilfields in a sale that could fetch $2B-$3B; XOM was upgraded to Hold from Sell at Truist based on updated forecasts and recent company conversations, saying they we are more confident in XOM’s shareholder return strategy while simultaneously paying down debt.; Credit Suisse raises 2022 Brent/WTI oil price forecasts ($/bbl) to $75/$72 (from $69/$66), and raising 2023E to $68/$65 (from $62/$59), as we see tighter S/D fundamentals in the near to medium term

Financials

·     Bank movers; Goldman upgraded MC to Neutral as shares have more than doubled since being added to their sell list due to stronger revenue growth and a larger capital return, HLI to Buy as its acquisition of GCA materially improves its near-term growth profile, and downgraded EVR to Neutral while removing it from its Conviction Buy list with shares +143% since its upgrade to Buy in August 2020; KBW downgraded CS to Underperform, initiated FHB, BANC CVBF, WAFD, HFWA at Outperform and WABC, TCBK, TBNK, GBCI, BANR, BOH at Market Perform; GS was downgraded to Neutral at Bank America as see limited potential for upside surprises in a moderating capital markets backdrop and say although trading at a higher valuation, consider buy-rated MS as more defensible given a diversified revenue mix, rate sensitivity, deal synergies and exposure to higher growth; firm also upgraded CMA to Neutral from Underperform and downgrade ZION to Underperform from Neutral in regional banks

·     Insurance; Evercore upgraded PGR to Outperform with a $118 PT from $90 on more reasonable earnings expectations and stabilizing PIF growth offering another catalyst and downgraded AON to Underperform on its relative valuation, unique challenges, and lack of idiosyncratic drivers

·     Business Services: TASK was upgraded to Buy from Neutral at bank America noting shares have lagged the S&P500 by ~5,000bps and other customer experience (CX) outsourcing peers by ~3,800bps since touching highs on 9/23/21 following the June 2021 IPO; WU was downgraded to Underperform from Buy at Bank America

·     FinTech & Payments; KeyBank said SQ driving durable 30%+ segment growth with a multitude of synergies and crypto initiatives appear underappreciated, COUP’s encouraging mid-market momentum is likely a leading indicator for enterprise activity alongside an attractive long-term Coupa Pay opportunity, MQ is an underappreciated pick-and-shovel play across many facets of FinTech, PYPL’s future growth opportunities are underappreciated, and HOOD will experience growth in waves, with the first leg tied to reshaping the equities market and the next phase focused on democratizing access to banking and crypto with a unique approach; Needham said EEFT is its top FinTech pick in 2022 and believe its diverse portfolio of global payments assets are underappreciated due to the NT concerns about cross-border travel; Deutsche believes that perceived threats to GPN are overblown and see strong fundamentals heading into 2022 with a material discount to historical valuation despite an outlook for accelerated mid-term top and bottom line growth

·     Consumer Finance; FICO was added to Needham’s Conviction List as a top pick for 2022 as they view its Scores business as a premium asset with solid growth potential and best-in-breed margins that is undervalued on a standalone basis, with investors essentially receiving the software business for free

·     Bitcoin news; COIN was upgraded to Buy from Neutral at Bank America citing increasing signs of revenue diversification beyond retail crypto trading, a trend that could accelerate in 2022 and beyond; Bitcoin slumps to touch its lowest level since a December flash crash amid growing expectations of rising borrowing rates as related stocks MARA, RIOT, COIN, MSTR, SI, NCTY also weak

Healthcare

·     Pharma movers; SAGE tgt to $85 from $79 at Needham and keeps a Buy rating on the shares while naming the stock Top Pick for 2022; ZYME announced after market close that co-founder, Chair, and CEO Ali Tehrani will step down by 2/1/2022; STRO shares down sharply after interim data from early stage trial of co’s ovarian cancer drug shows side-effect

·     Biotech movers; NTLA said it now it plans to nominate several new development candidates this year as expects to advance at least two new in vivo candidates by the end of the year; GILD was downgraded to EW form OW at Morgan Stanley on a more balanced risk/reward and update our model to reflect higher remdesivir sales, while also downgraded LEGN to EW and resumed ILMN with an EW and $485 tgt; CYCC said it expects to dose first patient in its third phase 1/2 study evaluating CYC140 across various solid tumors and is also planning its fourth registration-directed trial of CYC140 in hematological malignancies.

·     MedTech Equipment; SYK said it would acquire VCRA, a provider of communication solutions for mobile workers in healthcare, hospitality for $79.25 a share in a deal that represents a total equity value of about $2.97B or $3.09B including convertible notes; BLI tumbles after announced that the company would miss their 4Q guide, while also putting forth a growth forecast for 2022 that puts revenues below consensus ($110M vs. the Street’s $123M) and that Eric Hobbs moving to another internal role, while a new CEO is found; UBS said in tool space that IQV, AVTR, CYRX remains top Picks in Tools/Pharma Services after the recent pullback as see upward bias to results driven by continued strong biotech demand and base recoveries; ANGO reaffirms revenue guidance; revises gross margin and adjusted EPS guidance

·     Healthcare Services; Dow component WBA rises after Q1 EPS $1.68 topped $1.36 est. as sales of $33.9B beats the $33B estimate and raised its full-year forecast from flat to low-single digit growth as demand for Covid-19 vaccines and at-home tests continued – Overall comparable retail sales increased 10.6% compared with the year-ago period, the biggest increase in over 20 years; in managed care, HUM tumbles after lowers net membership growth estimate for individual Medicare Advantage products for the year ended December 31, 2022 to a range of 150K-200K from prior range of 325K-375K (UNH, ANTM, CNC slide in reaction); Wells Fargo upgraded CI and HUM to Overweight saying while increased competition in Med Adv remains a concern, absolute growth should still be strong even assuming some market share loss as it appears legislative risks to Med Advantage reimbursement have receded – firm also downgraded OSCR to equal weight progress w +Oscar business development has bene slower than we anticipated

·     Hospitals; Credit Suisse said HCA remains focus name as the highest quality hospital company with consistent execution, a deep management team, high market share in fast growing urban markets and continued strategic capital deployment, we expect HCA to outperform in 2022. We expect THC and UHS to outperform as well. We see THC’s continued ASC expansion boosting the overall company valuation, while we look for share repurchases and gradual stabilization of psych operating performance at UHS to boost that company’s valuation over the course of 2022.

Industrials & Materials

·     Materials, Industrial & Machinery; in metals, steel names giving back some recent gains after STLC Q4 2021 shipments lower than expected due to unplanned outages and covid as related impacts on demand and production q1 2022 guidance issued at or below Q4; SCHN reported Q1 adj EPS $1.58, missing the $1.76 estimate on revs $798.1M; industrial metals (and precious metals) eased after minutes from the U.S. Federal Reserve’s December meeting indicated that interest rates might rise quicker than expected, dampening risk appetite.

·     Transports; Deutsche upgraded CAR to Hold since shares have declined over 45% since their 11/2 downgrade; Wolfe cut their sector weighting on Trucking to UW with KNX, CVLG, USX, LSTR also being downgraded to Underperform due to their expectations of TL spot rates inflecting negative during 1Q22 and TL capacity rising over the next two years as supply chains improve, and they upgraded CHRW to Outperform as they expect it can be a relative outperformer after lagging their transport index for the past 3 years, while issuing downgrades to Peer Perform on FWRD, TFII after their large gains last year and WAB on continued EPS risk after consensus estimates moved slightly lower last year even as the stock materially increased

Technology, Media & Telecom

·     Internet; SFIX authorized up to $150M in stock buybacks; ETSY was named as Needham’s top e-commerce pick for this year; AKAM downgraded to Neutral from Overweight at Piper and cuts price tgt on NET from $226 to $115 and FSLY tgt lowered $51 to $35 at Piper; SPOT will show clickable in-app ads when they’re mentioned on a podcast; social media names rebound after recent selling pressure (FB, SNAP, TWTR, PINS)

·     Semiconductors; mass volatility in one of the best performing sectors of 2021 (SOX rose over 40%), with investors moving back into recently beaten up names; MU tgt raised to $115 from $105 at UBS saying as we start 2022, we remain confident of an upturn in DRAM pricing starting in CQ2 and potentially extending into mid to late C2023 – two Qs longer than prior expectations

·     Software movers; several analyst playing catch up to price tgt and rating changes after recent sell-off in space and giving 2022 outlooks: 1) Bank America added MSFT to top picks list as a company with significant pricing power and a defensive play. Also, we stick with several long term secular winners that screen well in our 4M framework (market, moat, management and margin): HUBS, BILL, NOW, AVLR and adding GTLB, ESTC, BIGC and ENFN to our top pick list; 2) Wells Fargo upgraded PATH to overweight, tgt $60, see potential tailwind emerging as a result of tightening labor market; SMAR upgraded to overweight tgt $95 believe concerns around Co’s enterprise GTM motion is turning more favorable of late as the market appears to be experiencing tailwinds and CDAY downgraded to equal weight view 2022 set up as challenging given easier comps are set to expire post Q1, see less room for upside to numbers; OKTA initiated with outperforms at Wells Fargo

·     Hardware, Components & Services; HEAR slips after saying its preliminary full year 2021 revenue was about $365M, the low end of its guidance of $365M-4380M; prelim FY 2021 Adjusted EBITDA at lower end of guidance range of $36M-$44M

·     Media & Telecom movers; WSJ reported AT&T’s (T) WarnerMedia unit and VIAC are considering the potential sale of the CW Network, which they own jointly, saying NXST is among the suitors, adding that the most prevalent scenario is Nexstar’s taking a controlling stake in the CW https://on.wsj.com/3eTSweH ; TMUS and CCI signed a new 12-year agreement to support the continued build-out of T-Mobile’s nationwide 5G network with increased access to Crown Castle’s towers and small cell locations.