Closing Recap

Friday, January 07, 2022

Equity Market Recap

·     Stocks start year on a sour note. While 2021 ended with strong gains for major U.S. averages, stock markets start 2022 lower, led by weakness in tech as the Nasdaq falls over 4.4% the first 5-days of the year, led by a drop in semi’s (SOX -3.5%) as Treasury yields hit their highest levels since January 2020 as the Fed upped it interest rate rhetoric this week. The S&P 500 index fell -1.6% this week, as gains in energy, staples, utilities, and financials helped somewhat offset the drop in tech and comm services, while the Dow finished the week flat. The Smallcap Russell 2000 declined -2.7% to start the year. Oil prices climb 5%, along with gains in the dollar and Treasury yields (10-yr hit 1.8% today), sending gold lower on the week. Today’s nonfarm payroll report disappointed on headline number, but unemployment rate dropped below 4% and average hourly earnings climbed MoM and YoY. Earnings season around the corner, with bank earnings starting up next Friday (WFC, JPM, Citi), along with key inflation data (CPI).

·     Stock & Sector movers: DISCA surges to lead the S&P after being upgraded to Buy at Wells, also lifting VIAC; another reopen rally with HST, NCLH, AAL, CCL, DAL, UAL among the top S&P gainers; RCL gets a boost as Stifel’s top idea for 2022, sports betting DKNG, CZR, BALY higher ahead of New York launching mobile sports betting tomorrow; GME spikes overnight after the WSJ reports it is launching an NFT division and establishing crypto partnerships, but the stocks fades; TMUS slides after a mixed subscriber growth report in its prelim Q4 report, QDEL opens higher on preliminary Q4 results well above consensus expectations but goes red in the morning; weak day for semis (and for week) as the Philly semi index (SOX) falls over 3% after rising 40% in 2021; Interest rate sensitive names hit with the 10-year hitting the highest since January 2020 at 1.8%, with homebuilders among weakest KBH TOL LEN MTH.

·     In a stunning stat, one tweet noted that the technical definition of a bear market is drop of more than 20% from highs. Currently out of 2628 Nasdaq stocks that trade volume over 100k ,1873 are down more than 20% which is 71%. There are 2514 stocks on the NYSE that trade over 100k. 860 are down 20% from highs which is 34%

·     Fed’s Daly said today “inflation is not as temporary as we once thought, because covid isn’t either”; price-wage spiral is not in data yet, but it is worth watching for; anchored longer-run inflation expectations also make me a little less worried than some others are about an upward inflation spiral; I don’t feel we are at the precipice of a price-wage spiral

·     Europe’s Stoxx 600 down 0.5%, down 0.4% this week; Germany’s DAX down 0.7%; Britain’s FTSE 100 up 0.4%, up 1.3% this week; France’s CAC 40 down 0.6%, Spain’s IBEX down 0.6%; Euro Stoxx index down 0.5%; Euro zone blue chips down 0.5%; European bank stocks best weekly performers, up 6.6%

Economic Data:

·     Headline Jobs data for December disappoints, unemployment rate under 4%, wages jump MoM and YoY: U.S. December Nonfarm payrolls +199K, well below est. +400K, while Nov revised up to 249K from 210K and Oct revised up to 648K from 546K; U.S. December factory jobs +26K below est. 35K and Nov revised up to 35K; private payrolls rose 211K below the 365K est.; the unemployment rate drops to 3.9% from 4.2% prior month; average hourly earnings jump +0.6%, topping the +0.4% estimate and YoY rise 4.7% vs. est. 4.2%

Commodities

·     Oil prices end lower Friday but rise on the week; WTI crude slips -$0.56 or 0.7% to settle at $78.90 per barrel but posts its biggest weekly gains in about a month, rising over 5% as unrest in Kazakhstan and outages in Libya spurred concerns over supply. The rising dollar had little to no impact on oil prices. Gold prices rose $8.20 or 0.5% to settle at $1,797.40 an ounce following a disappointing monthly jobs report, bouncing off 3-week lows, but for the week, prices fell -1.7%, its worst weekly performance since late November as the dollar and treasury yields jump.

·     Treasury yields end the week just off their best levels, rising all 5-days to start the New Year, as the U.S. 5-year yield touches 1.50%, highest since January 2020 and the benchmark U.S. 10-year treasury yields rise to 1.8%, highest since Jan. 2020, before pulling back to around 1.76%; the 2-yr ended around 0.87% and longer-term 30-yr at 2.11%. The move all based on the “hawkish” comments release Wednesday from the FOMC December policy meeting, which showed a more aggressive outlook to rate hikes and asset tapering being done by March.

·     Bitcoin prices fell to 3-month lows this morning of $40,652 and remains more than 40% off its November all-time highs, while Ethereum tumbled to lows of $3,06 before bouncing as crypto assets extend recent declines.

Sector News Breakdown

Consumer

·     Retailers; GME shares rise (finish well off best levels) after the WSJ reported the co is launching a division to develop a marketplace for nonfungible tokens (NFT) and establish cryptocurrency partnerships, having hired more than 20 people to run the unit https://on.wsj.com/3HLK0er ; in research, UBS downgraded shares of KSS to Sell ($38 tgt from $66) believe the series of negative catalysts that we expect to play out for the industry will have a negative effect on Kohl’s stock price, cut ANF to Neutral (tgt to $37 from $68) citing rising inflation the main reason and cut GOOS to Neutral (tgt to $35 from $59) as sees headwinds; BOOT Q3 EPS beats at $2.23 vs. est. $1.92 on revs $485.9M vs. est. $449.7M as same store sales increased approximately 61%, including an increase in retail store same store sales of approximately 59.1%

·     Staples & Restaurants; SBUX downgraded to sector perform from outperform at RBC Capital, saying risk-reward is more balanced and sees less upside in shares in the near-term given current valuation and its margin outlook; trims PT to $122 from $124; Oppenheimer also downgraded SBUX to perform from OP saying the Street already underwrites outsized margin and EPS growth in ’23, while the firm upgraded CMG to Outperform w/ $1,925 PT saying they “pounce” on a buying oppty following CMG’s 17% decline from last year’s highs; KR shares hitting new all-time highs again today having gained more than 7% this week, after climbing 9% in December

·     Casinos, Gaming, Lodging & Leisure sector; other rally in reopen related sectors with gaming, cruise lines (RCL), travel (BKNG) among early S&P leaders; gaming names (DKNG, CZR) another boost as news yest can launch mobile sports betting in New York this Saturday; cruise names strong all week, with Stifel saying today 2022 was going to be known as the "Year of the Cruise!" and shares of RCL was their "top idea for 2022"; Wells Fargo several tgt changes in gaming sector saying for 2022 favor exposure to the Vegas strip, top picks are MGM, CZR and BYD while lower tgts on WYNN to $93 from $101, PENN to $55 from $72

Energy

·     E&P and Majors; RDS said it will distribute the remaining $5.5 billion of proceeds from the sale of its Permian Basin assets in the U.S. through share buybacks which is in addition to the ordinary distributions of 20%-30% of cash flow from operations and also that production from its integrated gas division was hurt by unplanned maintenance in 4Q21; Wells added their top E&P pick CTRA to its Signature Picks portfolio due to its diversification, position to be a leader in cash generation and returns, and attractive risk/reward while reducing DVN; the weekly Baker Hughes rig count (BKR) rises 2 to 588, with oil rigs up 1 to 481 and gas rigs up 1 to 107

·     Pipelines: Morgan Stanley downgraded MMP, DTM to UW and HESM to EW given their full valuations, EPD to EW despite its attractive valuation as more limited incremental return of capital via buybacks appears likely to favor outperformance elsewhere, upgraded ENLC to EW as recent return of capital announcement suggests a potential repeatable catalyst exists given excess FCF, and resumed coverage on ET at OW as its valuation screens the most attractively within their coverage with the lowest EV/EBITDA and highest FCF yield before dividends

·     Refiners: Wolfe upgraded the Refining sector to Market Weight with CVI being raised to Outperform as they think estimates are too low and FCF is significantly higher than the peer average

·     Utilities & Solar; BMO raised their target on XEL to $74 from $72 and reit OP as they roll their valuation year to 2024 and after the company’s settlement with Colorado to raise rates earlier this week; Evercore upgraded FE to Outperform as it still presents an inexpensive opportunity that has not yet fully realized the benefits of transitioning to a purely regulated electric utility with more constructive regulation than not as a result of many disruptions; JPMorgan said current valuation for utilities continue to screen attractive vs historical levels and they upgrade PEG to OW while downgrading DTE to N and AWK, Emera (EMRAF) to UW; Dominion (D) received approval from Virginia regulatory authorities to proceed with the next phase of its 10-year plan to transform the state’s electric distribution grid.

Financials

·     FinTech & Payments; RBC lowered their price targets on AFRM to $127 from $175, LSPD to $62 from $104, FOUR to $86 from $110, PYPL to $230 from $298, and SQ to $203 from $295 given the material multiple contraction broadly across the payment universe and recalibration of growth stock valuations given rising interest rates; Jefferies downgraded MELI to Hold with a new $1,250 PT from $2,000 as its valuation could be held back in the near-term due heightened macro uncertainty in Brazil

·     Consumer Finance; Mizuho downgraded Visa (V) to Neutral as COVID has dramatically and likely permanently shortened the cash-to-card conversion runway, which has driven ~45% of its revenue growth and has historically been the single most important driver of revenue growth, in addition to secular challenges from new competitors increasingly nibbling at its volumes, and also lowered their PT on Buy-rated MA to $400 from $465

·     Bitcoin news; the sell-off that started in December and has carried to January for crypto-assets has continued, as Bitcoin tumbles below $42K and Ethereum drops below $3,200; shares of names levered to Bitcoin MARA, RIOT, MSTR, COIN, SI and others weak

·     REITs; BMO sees another year of double-digit FFO growth and M&A activity reaching new heights and upgraded BXP, NHI, PEB to Outperform and HT to Market Perform, downgraded DEA, DOC, DRE, EQIX, HR to MP, and named AVB BXP, FRT, HST, NSA, SWCHand WELL as their top picks for 2022; BTIG upgraded PMT to Buy on the expectation for the GSEs to re-engage in credit risk transfer transactions with mortgage originators later this year that supports value creation; SMBC Nikko initiated Outperform ratings on HST (PT $20) and PK (PT $21) as they see a path to a re-rating for hotel REITs as COVID-19 fades and business travel and group events come back to life; SQFT announced sponsorship of a $140M SPAC offering through a newly formed wholly-owned subsidiary; Citi remains positive on Timber REITs WY, RYN, CTT given structurally higher lumber prices, strong underlying homebuilding demand, and ESG upside

Healthcare

·     Biotech movers; MRNA CEO said Thursday that people are likely to need a second booster dose in the fall, with front-line workers and those 50 and older a particular priority as antibody levels wane; the FDA said today it shortened the stipulated time between the primary series of the MRNA COVID-19 vaccine and a booster dose by a month to at least five months for people aged 18 or above; CYTK secures long-term capital from RPRX for two of its experimental heart treatments – omecamtiv Mecarbil and aficamten

·     MedTech Equipment; QDEL guides Q4 revs $633M-$637M vs. est. $465.7M; guides year revs $1.695B-$1.699B vs. est. $1.53B; for ABT, as many as 1 million unused Covid-19 rapid test kits expired in a Florida warehouse last month, a top state official said; DXCM was upgraded to Buy at Guggenheim saying shares are down 26% since 11/1 as the stock has sold off along with other growth assets amid the recent rise in interest rates and creates an attractive setup; MDT was downgraded from Overweight to Equal-weight at Morgan Stanley as remains positive l-t, but key pipeline product delays and headwinds in CY21 push out topline contributions; Credit Suisse downgraded CLOV to Underperform predicated on the company continuing to need to raise capital moving forward, a lack of clarity on significantly improving their medical loss ratio (MLR) to reduce cash burn, and an overall re-rating across the tech-enabled MCO sector; ILMN upgraded to Neutral at Bank America as we see less downside risk to our estimates or valuation from current levels, and see a more balanced outlook in 2022

·     Healthcare Services; Credit Suisse upgraded MCK to Outperform and TVTY to Neutral and downgraded TLMD, EHTH to Neutral and GOCO to Underperform based on their relative view of being most bullish on tech-enabled PCP companies and drug distributors in healthcare tech; CSFB also upgraded HSIC to OP on attractive valuation and management’s consistent execution that continues to drive upside to guidance and consensus expectations, slashed their PT on OSCR to $10 from $21 due to the sector re-rating pressuring those currently in a cash burning position and the Omicron variant possibly causing some near-term headwinds on their MLR; BTIG sees the companies most at risk from Omicron are HQY because of delays in return to work and OSH, ONEM because of Medicare claims costs risks while seeing VCRA, OMCL as most likely to benefit, and also expect health-tech to remain hot in regards to deal activity with SHCR, BBLNand EVH trading at very low multiples and believe these are good strategic acquisition targets; UBS initiated CMAX with a Buy rating and $14 PT on their estimate of $1B revenue by 2024 that represents nearly 40% annualized growth that rivals clinic-oriented peers OSH, ONEM, and CANOyet it trades at a notable discount

·     Managed care: Barclays reinstated CNC at OW with a $95 PT after they closed the Magellan Health acquisition on Tuesday, and they believe the company is poised to continue to capture the increasing penetration of managed Medicaid in the overall space, and the most recent investor day instilled confidence in accelerated growth in 2023 and 2024; Mizuho believes yesterday’s -19% selloff in HUM is overdone and reiterates its Buy rating as the underlying market and demand for its Medicare Advantage business remains strong

Industrials & Materials

·     Aerospace & Defense; AIN, HEI, HXL, SPR, TDG, and WWD all upgraded to Buy at Truist saying after remaining on the sidelines for nearly 2.5 years we are upgrading our view of the comm’l aero sector and upgrade six names to BUY. SPR upgrade from Hold to Buy w/ $76 PT (from $39) as boast the most favorable risk/reward profile among our upgrades; TDG upgrade from Hold to Buy w/ $786 PT (from $600) calling it arguably one of the best value creators in the industrial complex, WWD upgrade from Hold to Buy w/ $143 PT (from $110) as believe will gradually see a return to its status as one of the premier suppliers in the industry

·     Industrial & Machinery; HON upgraded to Buy from Neutral and raise tgt to $237 from $229 at UBS citing improving end market driven by capital expend and aero recovery and predicts 11% org growth, up from 4%-6% consensus – says expect an O&G capex cycle akin to the 2016-19 period which should favor stocks such as EMR and HON (which we upgrade to Buy); DOV upgraded to Outperform at Oppenheimer with $205 tgt as believe CEO Rich Tobin and his team have checked all necessary boxes to substantiate DOV as a core mid- to large-cap industrial holding; AYI Q1 EPS $2.46 vs. est. $2.41; Q1 revs $926.1M vs. est. $880.7M; guides Q1 adj EPS $2.85 vs. est. $2.41; delivered sales growth of 17%

·     Transports; DAL upgraded to Buy from Neutral and raise tgt to $48 from $46 and ULCC upgraded to Buy, while MESA and ALGT downgraded to Neutral from Buy in airlines at Bank America; GBX Q1 adj EPS $0.32 vs. est. $0.21; $1 revs $550.7M vs. est. $532.55M; new railcar orders for 6,300 units valued at $685M and deliveries of 4,100 units; LYFT downgraded to Hold at Jefferies as believe it will trail UBER due to: (1) the re-opening focus widening beyond the U.S. to global markets where UBER stands to benefit, (2) catalysts of U.S. recovery and profitability milestone having passed; (3) transition phase due to CFO change; UBER added to Conviction List, named a top pick for 2022 at Needham, saying calling the floor in UBER has been difficult given a reliance on EV/Sales multiples

Technology, Media & Telecom

·     Internet; CARG upgraded to Buy at Jefferies saying CarOffer provides incremental monetization as existing dealership customers adopt the new offering; TTD upgraded to buy from hold at Jefferies, seeing multiple reasons to be optimistic on the stock in 2022; CHWY downgraded to Neutral at Piper, and lowering our PT to $55 (1.8x 2023E EV/S) as the 2022 outlook appears to have headwinds from both a sales and margin standpoint.

·     Semiconductors; Samsung (SSNLF) prelim 4Q21 results came in below expectation, with OP falling 13% QoQ to KRW13.8tn vs. KRW15.2tn Street as a one-time special bonus of around KRW1.0tn was the main reason for the lower OP; STM said it ended Q421 with net revenues above the outlook range and gross margin at or slightly above the high-end of the outlook range, primarily due to better than anticipated operations in an ongoing dynamic market; SIMO said it sees sequential Q4 revenue growth in the upper half of its original guidance of 0%-5% and non-GAAP margin in the upper half of its original 48.5%-50.5% guidance range; in research, Citigroup downgraded TXN to Hold from Buy and cut tgt to $187 from $222 as believe its margins will decline due to increasing depreciation and the acquisition of a fab, while added NVDA to Citi’s catalyst watch list post CES saying mgmt commented strong holiday gaming season, solid data center demand trends, and gaming/networking foundry supply to improve in 2H this year

·     Software movers; AYX entered into a definitive agreement to acquire Trifacta, an award-winning cloud company that leverages scalable data management and machine learning to make data analytics faster and more intuitive for 4400M in cash; MRIN rises after saying it will integrate with Amazon Ads’ demand-side platform to expand Amazon advertising solutions; VEEV downgrade from Overweight to Equal weight w/ $275 PT at Stephens; DCT EPS beat of $0.04 (est. $0.01), revenue growth of 25% (est. 17%), up from growth of 21% last quarter, subscription revenue growth of 28% (est. 24%), down from 35% last quarter, and SaaS ARR growth of 40% (est. 35%)

·     Media & Telecom movers; AT was upgraded to Equal Weight from Underweight at Wells Fargo saying with shares down -11.9% in 2021 (vs. S&P of +27.0%), they think downside risks are more limited, particularly with expectation for sustained strength in its core wireless business; DISCA upgraded to Buy from Neutral at Bank America and raise tgt to $45 from $34 see several areas for potential rev. and cost synergies and are bullish on the potential of a combined HBO Max/discovery+ DTC service; TMUS said it added 844,000 monthly bill phone subscribers in Q4 vs 824,000 adds in the year-ago qtr, while KeyBanc noted commentary around heightened Sprint churn in 2022 and higher CAPEX in 2022 leaves them cautious, given consensus expectations remain too aggressive

·     Hardware, Services and Components; ROKU announces Scott Rosenberg to Step Down as SVP and GM of Platform Business – Rosenberg is committed to ensuring a smooth transition and assisting with the recruitment process, which is underway; SONO rises early as a U.S. trade court barred Google from importing products that infringe home-audio company Sonos’ smart-speaker patents.