Closing Recap

Friday, March 18, 2022

Equity Market Recap

·     It was a week to remember for the Bulls as relentless buying pressure allowed major stock averages to post their best weekly return since November 2020 as oil prices eased and beaten up discretionary and technology sectors found renewed buying interest after sharp pullbacks to start the year. Investors embraced signs from the Federal Reserve of confidence in the U.S. economy after the FOMC raised interest rates for the first time since the pandemic by 25 bps Wednesday and provided a path of further hikes as Fed officials express greater concern about the spike in inflation. The reaction however has been slightly surprising, as stocks have pushed/closed at their highs the last few days, squeezing shorts, and taking major averages above key resistance levels. The S&P 500 posted a weekly advance of 5.6%, while the Dow has risen nearly 5% and the Nasdaq Composite has climbed 7.5%. Russia’s invasion of Ukraine drove oil prices above $100 a barrel for the first time since 2014 last week, but prices have slipped since, fueling rebounds in travel and leisure sectors. Over the last few weeks, we have seen gas prices hitting highest levels since 2008, mortgage rates at highest levels since 2009 – while hotels, airlines have not been seeing pushback to this point on rising prices.

·     Stock & Sector movers: FDX rolls after its EPS misses estimates due to lower volumes and the impact of Omicron; GME slumps overnight after reporting a wide quarterly loss vs analysts expecting a profit but surges at the open to go positive, ONON jumps on its beat and raise, CURV rises on its beat and guidance, JOAN tumbles after its mixed quarter; in metals, $X slides after providing Q1 guidance below estimates as the latest steel name to provide an outlook in the past two days (STLD jumped while NUE rolled y’day on their guides); STNE spikes after a strong quarterly report with upbeat guidance and a Citi upgrade on attractive valuation; MRNA leads the S&P after seeking FDA authorization for a second booster dose for all adults to continue its rally this week (shares rose nearly 30% this week); BA green after Reuters reports DAL is close to a deal for 100 737Max jets; banks and defensive sectors lag while tech rises.

Economic Data:

·     Existing Home Sales for February reported at 6.02M unit rate vs. est. 6.10M and below Jan 6.49M; Existing Home Sales -7.2% vs. up 6.6% in January; inventory of homes for sale 870,000 units, 1.7 months’ worth; median home price for existing homes $357,300, +15.0% y/y

Commodities, Currencies & Treasuries

·     Oil prices advanced, rising $1.72 or 1.67% to settle at $104.70 per barrel but down 4% for the week, below their levels of the end of last week and considerably lower than the highs seen earlier in March in another volatile week of trading. Gold prices fell -0.7% or -$13.90 to $1,929.30 an ounce, finishing the week lower by a little less than 3% as investors rotated out of haven assets and into riskier assets with big gains for equities

·     After a week of volatility, Treasury yields were steady most of Friday with the 10-yr yield around 2.15%, but the bigger story was the yield curve inverting by the 3, 5 and 7-year yield against the 10-yr and the 2-yr getting closer (now spread less than 20 bps). Short-term yields have increased, further flattening the curve after the Fed sounded the alarms of a more aggressive rate hike cycle in 2022 after raising rates 25-bps Wednesday.

Sector News Breakdown

Consumer

·     Retailers; GME reported a quarterly EPS loss of ($1.94) vs est. $0.84 profit on sales $2.25B vs est. $2.22B and Wedbush lowered their PT to $30 on skepticism about their NFT marketplace intended to launch in Q2 and kept its Underperform rating as it trades at levels that are completely disconnected from the fundamentals of the business; TSCO upgraded to Outperform at Oppenheimer saying it represents one of the best run, most optimally-positioned, still expanding retail chains, within discretionary; CURV Q4 adj EPS 9c vs est. 8c on revs $313.9M vs est. $306M with Q1 sales guidance below consensus but a full-year forecast for sales $1.3-1.365B above est. $1.27B; JOAN reported a mixed Q4 with adj EPS $1.16 better than est. $1.04 on sales $735.3M shy of est. $749.9M, comps -12.4% vs est. -11.4% and was downgraded to Neutral at Piper who says the YTD +25% rise has come despite a 2022 outlook that has gotten worse as the company faces several headwinds and unfavorable comp trends; ONON Q4 sales increased 53.7% YoY to CHF 191.1M vs est. CHF 179.7M and raised its FY22 guidance for sales to at least CHF 990M from at least CHF 960M (est. CHF 970.1M) and adj EBITDA to CHF 130M from prior CHF 125M that was in-line with consensus; Jefferies initiated Buy ratings on FTCH, REAL, RENT, TDUP and Neutral ratings on BIRD, SFIX, POSH

·     Consumer Staples & Restaurants; ; PFGC initiated at Deutsche with a Buy and $62 PT as they like the industry’s top-line outlook over a multi-year period, though acknowledge a heightened alert for a consumer led restaurant traffic slowdown in the coming months; Piper downgraded NDLS to Neutral as they lower estimates given the current industry cycle that includes factors outside management’s near-term control and double-downgraded WING to UW from OW as they expect resistance to its premium multiple in the face of the broader restaurant cycle; Loop believes there is substantial upside to EPS estimates for TXRH in 2H22; OpCo trimmed its PT on DRI to $175 from $185 and reiterated its OP rating as the stock’s 10% pullback in March is due to reduced 3Q22 print expectations (reports 3/24) with a headlines miss well-understood but they say the transitory headwinds impacting this qtr do not meaningfully impact their FY23 estimates

Energy

·     Energy stock movers: it was a “risk on” day, which meant a rotation into riskier technology stocks as well as beaten up sectors and some selling pressure in 2022 winners such as energy which were mostly lower; The Baker Hughes (BKR) rig count remained flat at 633 after rising over 13 rigs the week prior, as oil rigs slipped but gas rigs rose

·     Pipelines: TRGP upgraded to Buy from Neutral at Mizuho saying operationally, believe both of TRGP’s business segments stand to benefit from Permian production growth and TRGP also remains one of the more leveraged names under coverage; in solar; SEDG 2M share Secondary priced at $295.00, rest of solar space rallied with market

Financials

·     Bank movers; banking stocks have lagged since the Wednesday rate hike and subsequent hawkish outlook for futures hikes, despite banking stocks generally tending to outperform during a rising cycle due to improving lending margins; BK said government sanctions against Russia along with Thursdays to cease new banking business there are expected to result in a $100 million one-time hit to revenue in the first quarter; the flatter yield curve weighing on banks

·     Insurance; ALL was upgraded to Strong Buy at Raymond James and upped tgt to $165 after the company released its February Implemented Auto Rates report and also hosted its first Special Topic Investor Call which focused on auto profitability; AMBC plunged after saying a recent court decision that could affect its Ambac Assurance Corp.’s breach-of-contract cases related to its insured residential mortgage-backed securities (RMBS) transactions.

·     Bitcoin, FinTech & Payments; STNE shares jump as reported strong Q4 results as revenue grew 87% y/y, or 60% ex-Linx, to R$1.87B; MSMB total payment volume (TPV) was R$66.7B, up 87% y/y, driven by strong net addition of clients (Citigroup upgraded to Buy – PAGS rises in sympathy); FTFT said its subsidiary Future Fintech Digital Capital Management launched its first cryptocurrency hedge fund, FTFT Digital Number One US; huge moves this week for FinTech, and BNPL names that have tumbled this year – SQ, AFRM, PYPL

·     Financial Services, Consumer Finance; TRU downgraded to Neutral at Goldman Sachs as see less upside from its recently completed margin-dilutive acquisition of Neustar, a decline in US mortgage origination volumes, and sensitive to macro / geopolitical volatility

Industrials & Materials

·     Industrial, Aerospace & Defense; BA shares edged higher on a Reuters report the company is edging toward an order for up to 100 737 MAX 10 jets from Delta Air Lines (DAL). If a deal is reached, an announcement could come as soon as next month, Reuters said; CMI downgraded to Neutral from Buy at UBS saying with NA trucker profitability expected to peak in 2022, and new emissions regulations starting in 2024 driving a pre-buy, expect NA truck cycle to peak in 2023; industrials were generally weaker CAT, TXT, PCAR, MMM

·     Transports; a tremendous week of returns for Dow transports, with the index coming into the day up 8.8% for the first 4-days of the week, but a little profit taking today after FDX reported FQ3 EPS of $4.59, below the $4.65 consensus on slightly better revs with Omicron-related challenges limiting operating leverage; $350MM profit headwind estimated in FQ3. Despite maintaining its full-year outlook (EPS in a range of $20.50-21.50), shares slipped; Exane BNP Paribas cut price targets at 11 major airlines including AAL, DAL, saying the sector may be hit by rising energy costs and lower consumer spending amid the war in Ukraine.

·     Metals & Materials; nickel prices plunge 12%, “limit down” in early trading after what has been a crazy week of price surges, technical glitches, trading suspensions amid impact of Ukraine conflict on supply; NTR tgt to $117 from $98, MOS tgt to $75 from $65 and CF tgt to $109 from $97 in fertilizer space at Bank America as fertilizer tightness to cut global crop production in 2022; steel producers remain active giving monthly updates with U.S. Steel (X) and SCHN issuing weaker outlooks; SCHN guides Q2 earnings below consensus as sees EPS $1.33-$1.38 vs. est. $1.68 while U.S. Steel (X) overnight sees Q1 adj EBITDA is expected to be about $1.3B, a new all-time-record for Q1 (but below ests of $1.54B) and EPS in range $2.96-$3.00, below est. $3.77

Technology, Media & Telecom

·     Semiconductors; AMBA upgraded to Overweight at Wells Fargo saying would use recent weakness as a buying opportunity as view AMBA as one of the purest ways in the chip sector to play the AI/ML computer vision at the edge, and, one of the purest ways to play growing L2+ ADAS/AV functions in the automotive market; LRCX added to Citigroup U.S. Focus List, noting it has several positives going for it, including an attractive valuation (Buy and $750 tgt), implying some 43% upside from current levels, noted that shares are down 28% YTD; ASML upgraded and added to Conviction Buy list at Goldman Sachs

·     Software movers; MDB upgraded to Buy at UBS and up tgt to $450 from $345 saying databases are increasingly being used for complex use cases requiring "transactional consistency," and that MongoDB’s feature advantages relative to rivals may be widening; GWRE upgraded to Outperform at JMP Securities noting the company serves a large market that is estimated to be ~$18B where it maintains a leading position and market is composed of ~2,000 P&C insurers globally, of which Guidewire currently has nearly 500 as customers; DOCU CEO Daniel Springer bought $5mm worth of company stock according to Form-4 filing overnight (over 66k shares); XMTR reported a strong quarter highlighted by +77% revenue growth, +66% excluding Thomas vs. the original +61% guidance midpoint and consensus at +67%; GRMN upgraded to Buy at Bank America and cut tgt to $140 saying believe GRMN’s unique, differentiated, and new product offerings, coupled with its enthusiast-consumer base will continue to drive growth

·     Internet, Media & Telecom movers; OMC upgraded to Buy from Hold at Argus saying they have a positive view of the company’s investments in high-growth areas such as AI and automation, e-commerce, performance media, data and analytics, gaming, and the Metaverse; UBS update wireless ests as expect the industry to add 1.7M postpaid phones in 1Q, down 6% YoY as some of the last year’s higher activity unwinds. TMUS will likely lead in both postpaid phone and home broadband adds while estimate TMUS/VZ’s total 400K FWA adds to represent 40% industry’s adds in 1Q; rebound again for U.S. listed Chinese stocks (PDD, BABA, BIDU, TCEHY), follow thru from Wednesday news when China pledged new policies to boost financial markets and spur economic growth