Closing Recap

Wednesday, March 30, 2022

Equity Market Recap

·     Stocks took a small breather following a record run over the last 2-weeks, as Moscow downplayed hopes that a breakthrough in the latest peace talks with Ukraine had been achieved as they boosted their ground and air assaults. Kremlin spokesman Dmitry Peskov dispelled the idea that Tuesday’s talks in Turkey between Ukrainian and Russian delegates had represented a turning point – which was enough to pare recent market gains, lift oil prices and resume upward momentum in commodity related assets. Treasury yields slumped, pressuring financials as stock markets solely moving on the macro global picture, with all eyes on Europe as the aggressive Fed interest rate hike outlook fails to dent optimism. Since March 15th, the S&P is up 11%, rising 9 of the last 11 trading days and closing at or near the highs on all 9 of those days as the S&P and Dow came into the day with a 4-day win streak (snapped today). AAPL also snapped its 11-day winning streak, its best since 2003, but remains up 16% from its 2022 lows – so a slight pullback was not to be unexpected, at least in the short-term.

·     Sector and stock movers: Active day in retail – LULU soars to highest levels since the start of the year after its EPS beat and upbeat guidance while PVH sinks as weak guidance overshadows a big quarterly beat, and RH FIVE roll on sales misses; in ecommerce, CHWY plunges on weaker quarterly revenue and disappointing guidance and $W slides on a Loop downgrade; MU jumps overnight after a beat with guidance ahead of estimates but shares fade; BNTX climbs on a after reporting qtrly and full-year revenue with a share buyback program and reaffirmed vaccine revs guidance; rotation back into gainers during the Russia-Ukraine invasion after yesterday’s reversal; energy VLO PSX MPC, fertilizers FMC CF MOS, defense LHX NOC among S&P leaders; LAC LTHM ALB SQM PLL lithium names pop after Biden said the US is poised to use cold-war powers to develop battery metals.

Economic Data:

·     ADP Employment Change Actual 455k slightly above forecast 450k but below previous 475k

·     Gross Domestic Product (GDP) Q4-Final reported at +6.9% vs. +7.1% consensus and prior estimate of +7.0%. in Q3, GDP rose 2.3%; Q4 final core PCE price index +5.0% vs prelim +5.0% and Q4 final PCE price index +6.4% vs prelim +6.3%

Commodities

·     Oil prices rise $3.58 or 3.43% to settle at $107.82 per barrel, rebounding after yesterday’s decline as another weekly U.S. crude stock drawdown indicated tight supplies and investors remain worried about possible new Western sanctions against Russia. U.S. crude stockpiles fell by a bigger-than-expected 3.4 million barrels last week, cutting inventories to 410 million barrels, their lowest since September 2018, government data showed. Gold prices gain $21.00 or 1.1% to end the day at $1,939 an ounce as precious metals were higher, rising for the first time in 4-days.

Currencies & Treasuries

·     The U.S. dollar dropped again after a 2-week surge, with the dollar index (DXY) dropping below the 98 level, down over -0.5%, as the euro moved above the 1.11 level. All eyes remain on Fed and the aggressive rate hike cycle which took the buck to multi-year highs this month. Treasury yields pulled back further after topping out at 3-year highs this week, with the 10-year down at 2.36% from highs above 2.54% this week. The spread between the 2 and 10 widened to 3 bps after going flat yesterday (inverted curve yield tends to raise recession fears). U.S. government bonds are about to complete one of their worst quarters for total returns in the past 157 years, citing data stretching back to the U.S. Civil War. Thursday will Mark the end of what’s set to be the worst quarter for the 10-year U.S. Treasury since the early 1980s, as per Deutsche Bank.

Sector News Breakdown

Consumer

·     Retailers; LULU 4Q adj EPS of $3.37 came in ahead of expectations (Street $3.27) driven by better-than-expected GPM and lower expenses, while sales were roughly in line with the Street (up 23% YOY and up 23% on a 2-year CAGR basis) and better guidance; specialty retailer CHWY slumps as guided to revenue between $2.40b to $2.43b, below consensus at $2.52b and 2022 sales guidance was initiated at $10.2b to $10.4b, below consensus at $10.6b on weaker Ebit margin outlook; PVH Q4 EPS $2.84 topped est. $2 on sales $2.43B vs est. $2.375B, sees Q1 EPS $1.90-1.95 below est. $2.09 but sales +4% vs est. +3.1% and FY sales +6-7% vs est. +4.4%; FIVE Q4 EPS $2.49 vs est. $2.48 on sales $1.96B vs est. $2.01B, comp sales +3.4% vs est. +3.85% and guided Q1 and FY23 sales below consensus expectations while saying it is planning to double its sales and more than double its EPS by 2025; BJ launched Same-Day Select service as an add-on service for the membership-based warehouse retailer’s Same-Day Delivery service (for minimum orders of $60, the Same-Day Select Unlimited service, a $100 add-on, is for unlimited same-day grocery deliveries); SPWH Q4 adj EPS 49c vs est. 46c on revs $416.3M vs est. $407M and guided Q1 adj EPS (1c)-1c vs est. (2c) on sales $300-310M whose midpoint is in-line with est. $305.5M

·     Retail research: Cowen said web traffic in UAA and FL running below 2019 levels is concerning with notable accelerations within their March digital checks include BIRD and top idea RL; Truist lowered their PT on TPX to $37 from $45 after lowering their estimates due to not properly accounting for investment spend discussed in last call, continued industry unit weakness, and expectation of more raw material inflation drag

·     Housing related industry: The housing boom continues with US home prices hitting a record high for the 36th month in a row – prices have increased 19% over the last year and more than doubled over the last 10 years; RH with mixed results as EPS of $5.66 beat the $5.58 estimate but sales of $902M missed the $931.8M est. and issued weaker rev outlook of up 5%-7% or $3.95B-0$4.02B vs. est. $4.15B while also announced a three-for-one stock split; MBA said the U.S. mortgage market index falls 6.8% in latest week, purchase index rises 0.6% and refinancing index falls 14.9% as the 30-year mortgage rate rises 30 bps to 4.80%, highest rate in over three years

·     Building products in research, MHK, JELD downgraded to Underweight, MAS, BECN upgraded to Neutral at JPMorgan driven by outlook for several headwinds currently impacting valuations to remain in place over the near to medium term, and reducing price targets by an average of 20% and taking a less constructive, more selective approach to the building products sector; in furniture, Wayfair (W) downgraded to Sell at Loop Capital with $90 tgt saying there is additional risk to model, especially if interest rates and inflation remain on the rise and geopolitical events impact demand

·     Consumer Staples; PG was downgraded to neutral as part of JPMorgan U.S. Beverages and Household product sector calls as they expect demand to remain resilient (elasticities have been low so far), and consumers continue to prefer brands over private label. That said, with the protracted Russia/Ukraine conflict and its impact on commodities costs, transportation, and FX, they reduce estimates as top picks (KO, STZ, EL, OLPX), while remain cautious on companies that have more commodity exposure (KMB, CLX) or more exposure to Europe (TAP). FRPT upgraded to Buy from Neutral at Goldman Sachs and raise tgt to $136 from $111 as believe the cold-state pet food market is on the cusp of an inflection; CALM 3Q EPS $0.81 vs est. $0.83 on revs $477.5Mm vs est. $468.8Mm; net average selling price for all eggs increased 29.4% to $1.612 per dozen compared with $1.246 per dozen in the prior-year period

·     Casinos, Gaming, Lodging & Leisure sector; Cruise lines initiated at Wells Fargo with RCL an Overweight and $93 tgt, NCLH OW and $27 tgt and CCL with an underweight and $21 tgt with a positive view on cruise stocks given his expectation for gradually improving fundamentals in the coming quarters, but is relatively more cautious on Carnival at current share levels; in lodging REITs, HST upgraded to Buy from Hold, and PK downgraded to Hold from Buy at Jefferies saying they continue to focus on value expansion near term and longer term in the context of more conservative capital markets. Recognizing that the Lodging REIT group generally moves in close correlation, we believe the asset trades and positioning of HST shares should outperform; SRAD delivered quarterly earnings and sales that topped estimates as the U.S. sports betting field grew.

Energy

·     Energy stock movers; Russia plans to keep a contract price for gas exports to "unfriendly" countries unchanged but the payment should be done in the Rouble equivalent on a pre-agreed settlement day, as one of the options to switch the currency, two Russian sources said, Reuters reported; a general rebound today in energy VLO , materials MOS , defense stocks LHX as rotation continues in names leveraged to Ukraine/Russia conflict

·     Utilities & Solar; SWX upgraded to Buy and raise tgt to $88 from $81 at Bank America; SEDG receives positive analyst commentary after Analyst Day as BMO Capital said see SEDG’s move towards targeting of larger solar PV segments not coming at the expense of less residential growth and more importantly is not sacrificing bottom line profitability; Wells Fargo said remain positive on EIX as think the company is turning a corner in terms of both diminishing wildfire risk and EPS growth; NWN 2.5M share offering priced at $50.00; several utilities making 52-week highs again today AEE

·     Inventory data: The American Petroleum Institute (API) weekly crude inventories fell -3.0M barrels while crude inventories at Cushing fell -1.1M barrels; gasoline inventories fell -1.375M barrels and distillate inventories fell -200K barrels. The weekly EIA report showed Crude -3.4M barrels vs. -1.022M consensus, gasoline rose +0.8M vs. -1.744M consensus, and distillates +1.4M vs. -1.550M consensus

Financials

·     Bank movers; NTRS upgraded to Buy from Neutral and BK downgraded to Neutral from Buy at Goldman Sachs in Trust Banks; SBCF acquired Apollo Bancshares yesterday in a deal they expect to be 8% accretive to EPS in 2023; Truist’s favorite stocks ahead of 1Q22 EPS season are HWC, PACW, SBCF, TCBIand WTFC given forward EPS estimates should be significantly increased and healthy loan demand, rising rates and stellar credit quality should more than offset lower mortgage income, PPP fees, and NSF fees

·     Bitcoin, FinTech & Payments; Goldman initiated Buy ratings on PYPL with a $144 PT as they expect secular tailwinds from the digitization of payments and ecommerce growth to drive EPS growth above 20% beyond 2022 which could drive a re-rating of its valuation multiple and SQ with a $173 PT as it is well positioned to benefit from Cash App’s growing monetization from new product features and ongoing user growth as well as its continued share gains within SMB acquiring and synergies from its recent AfterPay acquisition; Morgan Stanley initiated HOOD at EW with confidence it can continue growing within Gen Y/Z but decelerating user growth, tough comps, and softening customer engagement limit near-term visibility and likely will weigh on investor sentiment while JPMorgan lowered their estimates and maintained their UW rating and $11 tgt after lowering their estimated crypto and options volume; AAPL said it is working to bring financial services in-house to weigh on FinTech space SQ

·     Financials Services; Deutsche initiated Buy ratings on MCO, SPGI, ABM, CTAS, TRU, VRSK, WSC and Hold on EFX, BFAM, ADV, ARMK, DNB, FDS, FSV, LPRO, MSCI, VRRMin housing services, Goldman initiated Neutral ratings on ZG, RDFNand OPAD while lowering their PT on Buy-rated COMP, BLND and Neutral OPEN as the benefits from the ongoing shift online for real estate inventory is offset by likely traffic growth headwinds from declining sales and low inventory; PAYX Q3 adj EPS $1.15 vs est. $1.05 on revenue $1.28B vs est. $1.22B; Citi sees attractive risk/reward in BTBS with a favorable entry point to play the longer-term B2B commerce digitization growth theme; LC surpassed 4M members

·     REITs; Morgan Stanley downgraded KIM to EW as it now trades near DCF-implied intrinsic value; CPT will replace PBCT (being acquired by MTB) in the S&P 500 on April 4; UDR priced a 7M share offering at $58/share

·     The SEC unveiled a draft new rule to enhance blank-check company investor disclosures and to strip them of a legal protection which critics say has allowed the shell companies to issue overly optimistic earnings projections. The move is part of a broader crackdown on special purpose acquisition companies (SPACs) after a frenzy of deals in 2020 and early 2021 sparked concerns.

Healthcare

·     Pharma movers; Florida reaches opioid settlement with TEVA, CVS, ENDP in deal worth ~$860M; ADGI shares rise as announces ADG20 is the first monoclonal antibody to meet primary endpoints with statistical significance across pre- and post-exposure prophylaxis and treatment for covid-19 and plans to seek U.S EUA; KALA downgraded to Underweight at JPMorgan saying although Eysuvis has shown positive near-term script growth in 4Q21 and 2022 YTD, the product launch remains well below Street expectations; AKBA receives complete response letter from the FDA for vadadustat for the treatment of anemia due to chronic kidney disease in adult patients saying FDA concluded that the data in the NDA do not support a favorable benefit-risk assessment of vadadustat for dialysis and non-dialysis patients

·     Biotech movers; BNTX Q4 and FY’21 revenues of EU5.5B and EU19B; expects to authorize share repurchase program of up to $1.5B and will propose a special cash dividend of €2/share; reiterates FY’22 vaccine revenue guidance of EU13B to EU17B; IGMS prices 8.695M share offering at $23.00 per share; shares down -9% (pricing is 22% discount to stocks last sale $29.49); CVAC said it dosed the first participant in a Phase 1 clinical trial for the new mRNA COVID-19 vaccine it’s developing with GSK and the study is being conducted in the U.S. and is set to enroll 210 adults; VIR will replace MTDR in the S&P SmallCap 600 effective prior to the opening of trading on Monday, April 4

·     Healthcare Services; CVS entered into an agreement with the State of Florida to resolve claims dating back more than a decade related to prescriptions for opioid medications that were filled at Florida CVS Pharmacy locations. Under the agreement the company will settle all opioid claims against it by Florida for $484 million, to be paid over a period of 18 years; SDC was downgraded to Sell at Loop Capital with $2 tgt as now see sales declining 35% this quarter compared to prior estimate for a 30% decline (trend is worsening, they believe, from Q4’s pace of -32%)

Industrials & Materials

·     Aerospace, Industrial & Machinery; CR announces intention to separate into two independent, publicly traded companies; Truist said following a significant spike in diesel prices during March, they trim 1Q22 estimates for MLM and VMC as expect these higher costs to weight margins, but remain bullish given their mix of non-residential construction and even more tailwinds from the infrastructure law; AER shares fell after Q4 profit missed while sales, boosted by the completion of the GECAS acquisition beat forecasts; said it has terminated the leasing of all aircraft and engines with Russian airlines

·     Metals & Materials; lithium, battery related names LAC, FREY, LTHM, ALB, MP, WWR were among early movers after President Biden said is poised to use cold-war powers to develop battery metals. Reuters reported U.S. President Biden may sign this week authority to encourage domestic production of critical minerals for electric vehicles using defense production act

Technology, Media & Telecom

·     Semiconductors; MU Q2 profit and revenue beat estimates and forecasts Q3 revenue higher than analyst expectations saying the Ukraine crisis will bump up costs, but sees no impact on near-term production expected; a report in the Asia’s Nikkei overnight indicated TSM’s CEO said demand for smartphones and PCs is showing signs of slowing amid geopolitical uncertainties and Covid-related lockdowns in China

·     Hardware, Software movers; Wells Fargo said they believe SAIL could potentially benefit from the recent OKTA security breach, and therefore raise price target to $60; AAPL couldn’t manage to extend its winning streak to 12-days, but was only down modestly after rising 18% from the 2022 lows (along with a handful of other tech stocks); GLOB drops after the company said a limited section of its code repository was accessed without authorization; a code repository is a web hosting facility where software developers and programmers store source code for software

·     Internet, Media & Telecom movers; Wedbush lowers its 2022 US core (ex-autos and gas) ecommerce growth estimate to +9.0% from +12.2% prior to 4Q21, which represents a decrease of ~$31B of spend, to $910B, or 18.5% penetration of total retail in 2022 (names like SHOP, ETSY, PINS, SQSP, FB to watch); PSO falls after Apollo drops its bid for the company after the two sides failed to agree on price; rejects third takeover proposal from Apollo for 884.2p per share, saying it undervalued Co – Reuters