Closing Recap

Tuesday, January 18, 2022

Equity Market Recap

·     It was a rough day on Wall Street with another broad-based market sell-off filled with a “sea of red” as decliners outpaced advancers by a margin of over 3 to 1 on weak earnings, softer economic data, rising Treasury yields, rising rate hike expectations and cautious commentary around supply chain impact and inflationary costs impacting co outlooks. Nowhere to hide as high growth technology the top decliner, followed by weakness in retailers/consumer discretionary, a big decline in financials behind weaker Goldman earnings, no safety in industrials or materials, while even defensive consumer staples, utilities and healthcare tumbled. Treasury yields extended last week gains as the 10-year hit highs around 1.87% and the 2-year above 1% for the first time since February 2020 as the Fed has recently ratcheted up its outlook for at least three rate hikes this year (as soon as March meeting) with additional hikes a possibility as Fed members have raised the red flags in recent weeks about inflation prices higher than expected. Overall, markets were in “risk-off” mode following earnings miss by Goldman Sachs and an Empire State manufacturing survey showing halted growth in January, sending the S&P tumbling 2%, the VIX 20% higher and 10-year Treasury yields jumping to 1.865% from 1.771% Friday.

·     Stock & Sector movers: Banks broadly lower after earnings for second consecutive session – GS plunges to lowest levels since May and SI plummets after their EPS miss estimates, SCHW sinks after missing on EPS, revs, and average daily trades, PNC slips despite beat, BK red after in-line quarter; big deal in software as ATVI being acquired by MSFT in $68.7B deal at $95/share, a 45% premium to Friday’s close; EA TTWO among S&P leaders, RBLX UBSFY jump in sympathy; GPS DG stumble on Morgan Stanley downgrades, KSS rises after reports one activist investor is pursuing changes to its board and another has expressed interest in a potential bid in retail; energy stocks continue recent outperformance with CVE, COP, CVX, DVN, EOG, XOM, HAL, MRO, MPC, OXY, PSX, SLB, VLO among several stocks hitting 52-week highs today– XLE ETF now up over 18% in 2022, by far the best of the 11 SPDR ETFs and better than the S&P falling over 3%; DHI, KBH, LEN, MTH homebuilders slide along with other interest rate sensitive sectors on the rising yields; old "meme" stocks AMC, GME, BBBY continue to lose luster, all falling sharply.

Economic Data:

·     NY Fed’s empire state current business conditions index an unexpected negative reading of -0.7 in January (consensus +25.0) vs +31.9 in December – in negative territory for first time since June 2020 as new orders index -5.0 in January vs +27.1 in December and prices paid index +76.7 in January vs +80.2 in December; employment index at +16.1 in January vs +21.4 in December

·     January NAHB Housing market index 83 versus 84 in December while index of current single-family home sales 90 versus 90 in December; the index of home sales over next six months 83 versus revised 85 in December

Commodities

·     Oil prices rose to 7-year highs on Tuesday, outperforming broader stock markets as possible supply disruption after attacks in the Middle East added to an already tight supply outlook. WTI crude gained $1.61 or 1.92% to settle at $85.43 per barrel. Both WTI crude and Brent touched their highest since October 2014. Supply concerns after Yemen’s Houthi group attacked the UAE, escalating hostilities between the Iran-aligned group and a Saudi Arabian-led coalition. Gold prices slipped -$4.10 or 0.2% to settle at $1,812.40 an ounce, pulling back a 3^rd straight session amid a stronger dollar and higher U.S. Treasury yields, as investors turned their attention to next week’s Federal Reserve policy meeting for more signals on its rate hike timeline.

Currencies & Treasuries

·     The U.S. dollar rebounded to one-week highs amid a bounce in Treasury yields as markets brace for higher interest rates in 2022 with the Fed changing the market narrative that has propelled stocks over the last decade (on zero interest rates). The yen steadied after initially sliding as the Bank of Japan said it would stick to its ultra-loose monetary policy. Currency moves came ahead of next week’s FOMC meeting where they are likely to signal, they will raise rates in March after calls from several officials to do so last week. Note fed funds futures have priced in four rate hikes in 2022. The euro hit a one-week low of $1.1325. Treasury yields were broadly higher, with the 10-year topping 1.85% at highs and the 2% above 1% on rising rate hike expectations.

Sector News Breakdown

Consumer

·     Specialty Retailers; The WSJ reported Macellum Advisors GP LLC, which has a roughly 5% stake in KSS, has been urging the company to make changes including altering its board, though Kohl’s has so far rejected Macellum’s request https://on.wsj.com/3tBv4LT; Reuters later reported ACTG, which is backed by activist investor Starboard Value, has reached out to KSS to express its interest in making a bid for the retailer; BMO upgraded UAA to Outperform on compelling risk-reward after its 30% sell-off since mid-November (vs XRT -18%); Morgan Stanley is cautious on Softline, especially mall-based specialty retailers and department stores, downgraded GPS to UW as they prefer off-price and global brands with OW ratings on TJX, ROST, BURLa re-rating opportunity in CPRIand footwear (NKE, SKX, ONON, BIRD) as a particularly bright spot; UBS is bearish on Softlines’ fundamentals while envisioning downward EPS revisions and negative sentiment throughout the year and have Sell ratings on JWN, DDS, Macy’s (M), KSS and are Neutral on VFC, BURL, GOOS as strong businesses with good long-term outlooks, but warn their downside case scenarios could see these names dropping over 30%

·     Hardlines/Broad lines; Morgan Stanley stays in-line given slowing growth offset by a healthy consumer and fair valuations, preferring mega-caps within retail while downgrading DG to EW on balanced risk/reward and upgrading MCW as part of their preference for Services over Retail and the stock’s flattish performance since its mid-2021 IPO; SPWH raised its Q4 adj EPS view to 43-48c from 39-45c but lowered full-year view to $1.66-1.71, said same-store sales for 8 weeks ending Dec. 25 were -6.1%; PTON is hiking prices for its fitness bike and treadmill by $250 and $350 respectively and also reported it is working with McKinsey to review its cost structure; GRMN introduces Epix, a premium multisport smartwatch featuring vibrant AMOLED display and up to 16 days of battery life; WMT filed several trademarks to make and sell virtual goods and also applied to create its own cryptocurrency and NFTs according to a CNBC in an apparent move to enter the metaverse

·     Auto sector; Wells initiated OW ratings on AN with a $135 PT as it trades significantly below its historic valuation range while continued buybacks provide near-term support and its strategy driving long-term growth and LAD with a $354 PT as its omnichannel strategy combining online and brick & mortar provides compelling strategic advantages such as lower logistics costs, leveraging servicing facilities for reconditioning, and better inventory selection; Credit Suisse upped its PT on TSLA to $1,025 from $830 to reflect higher gross margins and increased volumes that could put it on track to be the 6^th largest automaker globally by 2030; BLNK to provide EV chargers to GM dealerships across North America; auto parts suppliers saw weakness (AAP, AN, ORLY, AZO) after GM said today it is launching a new online parts marketplace, making its catalog of 45,000 repair and maintenance parts more convenient for Chevrolet, GMC, Buick and Cadillac owners.

·     Consumer Staples & Restaurants; UL shares fell after saying Monday it would pursue a deal for GSK’s (GSK) consumer business, calling it a "strong strategic fit", but shares slid amid investors doubts about its 50-billion-pound ($68.4 billion) offer; HAIN announces CFO transition and sees decline in Q2 core earnings due to inflation and supply chain issues; EAT downgraded OP to neutral and lower tgt to $42 from $54 at Wedbush as no longer believe that the probability of higher annual top- and bottom-line growth rates going forward relative to EAT’s growth rates pre-COVID is high enough to justify a premium to EAT’s pre-COVID valuation multiples

·     Casinos, Gaming, Lodging & Leisure sector; in lodging, SHO was upgraded to Overweight at Morgan Stanley noting it was the worst performing stock in their Lodging coverage in 2021, up 4% vs. peer avg 28%, while downgraded CHH to underweight after being the strongest performing Lodging stock in 2021, up 46%, benefitting from having the highest leisure mix of the group; Hyatt (H) upgraded to Buy at Truist following the acquisition of Apple Leisure Group (ALG) and inclusive of planned asset dispositions; in leisure, SIX upgraded to Outperform and $54 tgt at Oppenheimer as believe strategy of “premiumization” is the right one; in gaming, LVS and Sands China added to Goldman Sachs conviction list

Energy

·     Energy stock movers; Energy continues recent outperformance with CVE, COP, CVX, DVN, DTE, EOG, XOM, HAL, MRO, MPC, OXY, PSX, SLB, VLO among several stocks hitting 52-week highs today– XLE ETF now up over 18% in 2022, by far the best of the 11 SPDR ETFs and better than the S&P falling over 3%; E&P and Majors; COP upgraded to Buy from Neutral at Goldman Sachs and raise tgt to $101 from $78 as models the upside from the Permian acquisition from Shell, sees leverage to the oil price recovery and projects superior returns on capital; XOM pledged to cut to zero its net carbon emissions from its global operations by 2050; OVV downgraded to Neutral from OW at JPMorgan on price as see a more balanced risk-reward relative to the peer group following a 30%+ move in the shares over the past month

Financials

·     Bank movers; GS weighs on the Dow after saying Q4 profit dropped 13% to $3.94B or $10.81, missing the $11.77 estimate, while revs rose 8% to $12.64B, topping the $12B estimate while saying qtrly net revenues in equities were $2.12B, 11% lower due to significantly lower net revenues in equities intermediation – Trading revs $3.99B missed the $4.27B estimate; PNC Q4 EPS $3.68 tops est. $3.50 as net interest income $2.86 billion, +18% YoY and net interest margin 2.27% vs. 2.32% YoY; BK Q4 EPS $1.01, in-line w ests; Q4 revs $4.02B vs. est. $3.98B; Q4 CET1 capital ratio 11.1%; Q4 tangible book value per share $24.31; qtrly total noninterest expense of $3.0 bln, increased 1%; or 6% excluding notable items; Q4 AUM rose 8.5% YoY to $2.4 tln; SBNY Q4 EPS $4.34 vs. est. $3.95; Q4 book value per share $117.63 and Q4 CET1 capital ratio 9.58%; Q4 total deposits rose $10.57B and NII rose 35.7% or $140.9M; TFC Q4 adj EPS $1.38 vs. est. $1.25; Q4 revs $5.59B vs. est. $5.58B; Q4 CET1 capital ratio 9.6%; Q4 net charge-offs .25%; Q4 NII rose +0.3% and provision for credit losses was a benefit of $103M; SCHW shares drop after EPS and revs fall short of consensus for Q4 ($0.86/$4.71B vs. est. $0.88/$4.79B)

·     FinTech & Payments & Consumer Finance; BAC credit card charge-off rate was 1.35% in Dec 2021 vs 1.24% in Nov 2021; credit card delinquency rate was 0.89% at Dec 2021 end vs 0.92% at Nov 2021 end; SYF said charge-offs for December was 2.10% and delinquencies 1.42%; news reports this weekend confirm that AMZN has backed away from its plan to stop accepting Visa (V) credit cards in the UK on Jan 19; Verifone and AFRM partner to provide more flexible omnichannel payment offerings

·     Bitcoin news; SI Q4 EPS 66c vs. est. 72c; Q4 NII $40.2M vs. $39.0M for 3Q21 and $22.4M for 4Q20; did not record a provision for loan losses for 4Q21, 2Q21; MARA initiated at Buy and $50 tgt at BTIG noting the company currently has hash capacity of ~3.5 EH/s (~33k rigs), which points to ~1.9% of current global hash capacity making it one of the largest publicly traded BTC miners by capacity; COIN and MA partner to revolutionize NFT purchase experience

·     REITs; BRX upgraded to Buy from Hold at Truist and downgraded DRE and BDN to Hold from Buy, while remain positive VICI in gaming – 1) more of a built-in growth pipeline, 2) more CPI based escalators and 3) sizable index fund demand to absorb new M&A-related equity. Some of our favorite Buy rated ideas are: BRX, CHCT, COLD, CPT, KIM, NTST, PDM, PSA, REG, SBRA and VNO

Healthcare

·     Vaccine news: PFE and BNTX shares slip early after a new study this weekend showed a fourth shot of COVID-19 vaccine boosts antibodies to even higher levels than the third jab but it is not enough to prevent Omicron infections, according to a preliminary study in Israel

·     Pharma & Biotech: in research, NBIX downgraded to Sector Perform with lower $90 tgt at RBC Capital as believe recent weakness may be overdone and the LT Ingrezza opportunity remains intact, 2022 is shaping up to be more of an "investment year" with fewer potential upside catalysts; ENDP reaches agreement intended to settle Florida governmental opioid cases and claims; INCY upgraded from Sector Perform to Outperform at RBC Capital as see an improving setup into 2022, as their investments in internal/external programs start to manifest; DNAC active as Palihapitiya’s SPAC to merge with ProKidney in $2.6B deal; CYH posted preliminary Q4 results that topped expectations and gave a bullish forecast for 2022

·     MedTech Equipment; GKOS upgraded to Buy from Neutral at BTIG with a $61 PT based on 8.5x our 12–24-month sales estimate, a slight discount to GKOS’s 3-year avg; SEM cuts guidance over the weekend saying for Q4, experienced a higher-than-expected use of agency clinical staff and higher than expected costs for agency in our hospitals; NURO rises after receives FDA breakthrough device designation for treatment of chronic chemotherapy induced peripheral neuropathy – significant developments

Industrials & Materials

·     Industrials, Aerospace & Defense; Jefferies said 2022 preferred sub-sector ratings are IT Services, Biz Jets, and Commercial Aero. Defense is least preferred. Our top picks into Q4 earnings are TDG, TXT, GD; GNRC shares slip below $300 level, down -2.6% (more than 40% drop off Nov highs); industrial metals stocks saw outperformance, led by FCX in copper

·     Transports; Airline stocks active (AAL, DAL, UAL, LUV) amid further warnings on the impact of 5G networks on aircraft navigation systems after AT and Verizon (VZ) are set to roll out their 5G networks this week, even as the Federal Aviation Administration warns they could interfere with aircraft instruments and impact visibility. AT&T and Verizon have vowed to create ‘buffer zones’ in and around airports to limit disruption. In research, DAL upgraded to Buy from Hold at Argus with $46 tgt saying customers are among the most satisfied of any legacy carrier and have provided the company with sustained pricing power

·     Chemicals weak on guidance as ASH guides issues guidance for Q1 EPS of $0.88 and revenues of $512M, below analyst consensus estimates of $0.92 and $527M, respectively saying continued supply chain and labor shortage challenges hurt its ability to meet strong overall customer demand; AXTA guides Q4 rev growth up 5.8% and 18.2% for 2021, including moderately lower than forecasted foreign exchange tailwinds (guidance was +19% Net Sales growth for FY 2021, including +2% in FX) saying limitations in availability of certain raw materials also resulted in substantial unfulfilled orders during the fourth quarter – guides Q4 adjusted EBIT exp $30 million below the midpoint of the October guidance range of $645-665M; EMN said it plans to in­vest up to $1 bil­lion in a plas­tics-re­cy­cling fa­cil­ity in France, with a num­ber of ma­jor con­sumer-goods brands al­ready signed up to use the plant; SHW was downgraded at Wells Fargo citing raw materials inflation, supply chain availability headwinds and covid-related labor issues

Technology, Media & Telecom

·     Internet; BABA shares slide initially after a Reuters report that the Biden administration is reviewing whether its cloud business poses a risk to U.S. national security, according to three people briefed on the matter; JD inked a strategic partnership with Canada’s SHOP to boost its cross-border business; BTIG lowered price tgts in E-Commerce for UPWK to $50 from $65, our PT on ATER to $9 from $12, our PT on ENJY to $7.50 from $10, our PT on RDBX to $18 from $21, our PT on FTCH to $45 from $50, our PT on SFT to $7 from $12, our PT on MELI to $1,550 from $1,930, our PT on ETSY to $230 from $260, and our PT on UP to $9 from $10

·     Semiconductors; PLXS guides Q1 revs $825M-$865M vs. est. $846M; sees Q1 EPS $0.80-$0.84 vs, est. $1.12 saying unexpected supplier delivery shortfalls in America’s region resulted in rev, Gaap operating margin, Gaap eps and free cash flow shortfall

·     Software movers; big news in the video game industry as MSFT agreed to acquire ATVI for $95.00 per share, in an all-cash transaction valued at $68.7 billion as deal is expected to close in fiscal year 2023 and will be accretive to non-Gaap earnings per share upon close (shares of other game makers EA, TTWO, RBLX jumped in reaction; in other software, CTXS rises after a weekend report that Elliott Investment Management and Vista Equity Partners are in advanced talks to buy the software-maker https://bloom.bg/3nzviiZ ; SNOW upgraded to Outperform at William Blair as believe the various risks that we discussed in our notes are better reflected in the stock today. We remain cautious about increased competition and market pressures long term but believe the company will be able to sustain strong growth over the next few years; TENB, PANW added to the Wedbush Best Ideas List; ZS upgraded to Overweight at Morgan Stanley with a price Target of $325, down from $330 saying checks suggest a strong pipeline of larger deals in 2022; TEAM, JAMF, DDOG, BSY, and FORG named as top five software names to own after pullback at Mizuho

·     Media & Telecom movers; Oppenheimer noted the FCC released winning results for Spectrum Auction 110 (3.45-3.55GHz), known as "Andromeda." While this was the third largest spectrum auction historically, the $22.5B of proceeds ($0.7326 MHz/PoP) is a fraction of $94.1B spent on C-Band ($1.096 MHz/PoP). AT had to bulk its mid-band spectrum portfolio to keep up with Verizon (C-Band) and T-Mobile (Sprint merger). It acquired ~40MHz for $9.1B, which is ~$2B more than we expected. Dish was second highest bidder with ~30 MHz for $7.3B. This affirms our view again that DISH is going to be very aggressive in wireless, and it can create a differentiated go-to-market strategy with AWS.