Closing Recap

Friday, November 19, 2021

Equity Market Recap

·     Markets were generally lower after Austria became the first western European to re-impose lockdowns as it faces another surge in cases. Big tech outperformed with the Nasdaq hitting new record highs, though the upswing was not broad as the S&P, Dow, and Russell 2000 went negative as cyclical stocks were crushed with the energy sector on the new lockdown restrictions and financial names slipped in conjunction with sliding Treasury yields. Overall breadth was negative on the day as investors might be concerned about the lockdowns or possibly want to lock in profits after a remarkably strong earnings season where over 80% of the S&P companies that have reported so far have beaten their Refinitiv earnings estimates. Next week is abbreviated for Thanksgiving with markets closed Thursday and an early close Friday, though there are still a few companies scheduled to report earnings with DE joining retailers URBN, AEO, ANF, BBY, BURL, DKS, GPS, JWN, and tech names (ZM, ADI, ADSK, HPQ, DELL, VMW, PLAN, PSTG.

·     In Washington, the U.S. House of Representatives approved President Joe Biden’s $1.75 trillion social and climate spending bill on Friday after an hours-long delay by the chamber’s top Republican last night delayed it (trimmed down from the initial $3.5T plan). The bill now goes to the Senate where it may have a tougher task passing. Meanwhile the Congressional Budget Office (CBO) found that the Build Back Better Act would contribute $367B to the deficit over 10 years, though that doesn’t include $207B in revenue which could result from spending $80B on tax enforcement efforts at the IRS. Adding those in, the bill’s 10-year deficit still totals $160B.

·     Stock/sector news; INTU soars over 10% to make new ATHs north of $700 and PANW also climbs to record highs after strong quarterly reports; Retailers post beats again but shares fall amidst a sector reversal on profit-taking and rotation out of re-open sectors: FL plunges as its beat is outweighed by its CFO saying supply chain disruptions will persist through the next quarter; WSM, ROST slide despite beat/raises, BKE opens at ATH but shares succumb to sector weakness and rolls to red; AMAT stumbles on its quarterly miss and weak guidance with worsening supply chain constraints, though MU jumps on the miss/commentary and gets a further boost as Citi initiates a positive catalyst watch on the stock as they the DRAM correction drawing to a close; Other post-earnings decliners include WDAY despite its beat and raise and acquisition of VNDLY, POST after its Q4 adj EPS and FY22 forecast both miss consensus, and FTCH on its revenue miss and lower annual GMV growth outlook; Energy names were hammered with HES, DVN, SLB, BKR, OXY, FANG, PSX, APA, etc. all among the S&P’s worst as oil prices slump again; Travel names (CCL, UAL, BKNG, ABNB) underperform on European lockdowns, while online shopping names (W, ETSY, OSTK) outperform ahead of the holiday season; Banks (JPM, C, BAC, WFC) slip with falling Treasury yields; MRNA rises after the FDA approves its Covid booster shot for all adults, lifting other vaccine makers BNTX, NVAX

Commodities, Currencies and Treasuries

·     Oil prices fell to a 7-week low and settled down -$2.91, or 3.68%, at $76.10, its 3^rd straight weekly decline as a fresh surge in COVID-19 cases in Europe threatened to slow the economic recovery while investors also weighed a potential release of crude reserves by major economies (U.S. and China) to cool prices.

·     Bitcoin turned positive early morning after trading as low as $55,600 overnight – Bitcoin still down about 15% from the record high it touched just last week on Nov. 10, falling below $56K earlier with factors for recent weakness including: 1) China’s renewed pressure on crypto and new U.S. tax-reporting provisions may also be weighing on the world’s largest cryptocurrency, 2) also this week, Reuters reported India may seek to disincentivize, but not ban, use of cryptocurrencies and may allow only pre-approved virtual currencies to be traded while the govt may levy high taxes on crypto gains and transactions; 3) another report showed that earlier this week, a Tokyo court approved plan that will see Mt. Gox trustee Nobuaki Kobayashi reimburse creditors with around 150,000 bitcoin, which some investors assume will be liquidate into cash – bottom line, it has had a massive run in 2021

·     Gold prices slipped -$9.80, or 0.5%, to settle at $1,851.60/oz. to give up brief overnight gains after Federal Reserve Governor Christopher Waller said recent improvements in the labor market and high inflation readings have led to him favoring faster tapering and rate hikes, while Vice Chair Richard Clarida said it may be appropriate for the central bank to discuss tapering at is December meeting.

Sector News Breakdown

Consumer

·     Retailers; FL Q3 adj EPS $1.93 beat est. $1.38 on revs $2.19B vs est. $2.15B, same-store sales +2.2% vs est. +0.6%, said inventory levels are ready to meet holiday demand, but shares fell after their CFO says they expect global supply chain constraints to persist throughout Q4; FTCH delivered surprisingly soft numbers with Digital Platform GMV coming in at 23% growth vs. guidance of ~30%, while expects 4Q Digital Platform GMV to grow 18-20% y/y vs. 22-37% growth implied in prior guidance, sending shares lower; BKE Q3 EPS $1.26 vs est. $0.82 on sales $319.4M vs est. $299.1M, comp sales +27.3%; ROST Q3 EPS $1.03 vs. est. $0.78 on revs $4.6B (+19% YoY) vs. est. $4.33B, comp sales +14%, and raised full-year guidance ranges for EPS and comp sales; DDS declared a special $15 dividend, payable Dec. 15 to shareholders of record November 29; U.K. retail sales rose 0.8% in October, the first increase in six months and beat +0.5% est.

·     Retail research; several analysts raised their price targets on Macy’s (M) after their Q3 beat yesterday, including Cowen calling it their top holiday pick; Argus upgraded TPR to Buy with a $54 target on a favorable view of the company’s DTC sales model, efforts to expand internationally and to younger customers, and response to higher costs and supply chain challenges by raising prices and reducing discounts that have boosted margins and earnings; MKM upgraded WMT to Buy with a $166 PT from $156 due to their better positioning vs peers on inventory levels heading into the holidays, progress towards a subscription model

·     Housing & Building Products; WSM received several price target hikes and positive analyst notes after reporting Q3 adj EPS $3.32 vs est. $3.14 on revs $2.05B vs est. $1.98B, comp sales +16.9% vs est. +13.8%, sees FY revenue +22-23% vs est. +20.1% with long-term annual growth in the mid-high single digits; Credit Suisse assumed coverage on HD at Outperform with a $450 PT from their prior $357 and they also increased their estimates given the ongoing health of home repair and remodel trends

·     Auto sector; Wedbush sees a green tidal wave playing out and a $5T market opportunity over the next decade in EVs with TSLA leading the way, and they upped their PT to $1400 from $1100 on strong China demand, which they see adding $400/share in 2022; RIVN shares pared some gains in the early afternoon after a driver involved with testing their vans said their range is more limited than what was disclosed in the company’s IPO, and issues were especially noticeable when running heating or air condition, and fell to new lows late in the session after Ford (F) CEO Jim Farley said they no longer plan to make an EV with Rivian

Energy

·     Oil stocks fall premarket, tracking a dip in crude prices as investors watch how much stockpiled oil will major economies release in a bid to cool oil prices (following recent reports suggesting a coordinated release of petroleum reserves by the U.S. and China), while investors also keep an eye on a rise in COVID-19 cases in Europe that can slow down economic recovery. WTI crude oil prices tumbled early, extending its weekly decline to three weeks. Oil majors such as CVX, XOM services, SLB, HAL, E&P names HES, DVN, EOG and refiners HFC, PSX were weak

·     Energy news; in the E&P sector, MTDR was upgraded to overweight at Wells Fargo as co continues to accelerate debt reductions, momentum into 2022 drilling should provide strong FCF, we estimate is trading at a discount and CPE upgraded to equal weight saying strong execution has set the stage for debt reduction in 2022. Overall, some caution is justified in E&P, the LT investment case for the sector continues to get better, US shale operators holding onto capital discipline, they are adapting their cash return frameworks to support their valuations, move CTRA to top picks alongside DVN and MROIn alt energy, Morgan Stanley raised their price target on PLUG to $65 from $43 after significantly increasing their revenue estimates driven by management commentary on growth from these businesses over the next several years

Financials

·     Bank movers; banks (JPM, C, GS) fell amid the sharp drop in treasury yields (10-yr hit low below 1.52%); in financial services; INTU rises after delivering revenue, operating income, and EPS that beat estimates by +11%, +51%, and +55%, respectively, including an acceleration in Online Ecosystem growth to +36% y/y vs +30% in F4Q21 – several analysts raise price tgts; HOOD pressured early after Deutsche Bank put out a catalyst “sell” call saying as thinks the stock may continue to face near-term pressure while SCHW shares continue to advance; PIPR announced a $150M share buyback

·     Insurance; Jefferies initiated on ACGL, AXS, CB, RE and RNR at Buy; ALL, AIG, HIG, TRV and WRB at Hold and PGR at Underperform in P&C Insurance and Insurtech sectors; the firm also initiated on AJG, BRO, MMC at Buy and AON, BRP, WLTW and SLQT at Hold in insurance brokers noting the group typically underperforms market immediately out of recession, but we are more than 12mo out; lastly the firm initiated HIPO with a Buy, ROOT at Hold and LMND at Underperform

·     Consumer Lending & Finance; UWMC rallies after saying SFS Holding, its principal shareholder, has terminated the previously announced secondary offering of Class A Common shares and concurrent stock repurchase effective immediately; Stephens initiated OW ratings on NCR given its diverse businesses are positioned to capitalize on several tailwinds on NCNO despite its premium valuation as it reflects its first-mover advantage in digital lending tech and leading share within the U.S. commercial market, and an EW rating on JKHY as its above peer RPOC, leading share of core banking market, strong balance sheet, and consistent track record limit downside but its premium valuation also limits upside

·     Bitcoin news; Bitcoin prices fell below $56K in overnight trading, the lowest since mid-October and some 18% south of the all-time high it reached earlier this month but rebounded – Bitcoin still down about 15% from the record high it touched just last week on Nov. 10; prices rebounded later in the morning, lifting several names that had been beaten up this week (COIN, RIOT, SI)

Healthcare

·     Pharma movers; PFE and BNTX said the FDA has expanded the emergency use authorization (EUA) of a booster dose of the Pfizer/BioNTech covid-19 vaccine to include individuals 18 years of age and older. the booster dose is to be administered at least six months after completion of the primary series; in research, BMO Capital launched coverage on the e US BioPharma sector seeing multiple avenues to outperformance across coverage universe with Outperform ratings on BIIB, BMY, GILD (upgraded to OP), VRTX and PFE; MRK said it is stopping dosing of patients in a mid-stage study evaluating a combination of its drug candidates, MK-8507 and islatravir, as a once-weekly oral treatment for HIV-1 infection

·     Biotech movers; MRNA rises after saying the FDA has extended the emergency use authorization of a booster dose of its COVID-19 vaccine to all adults aged 18 and older; BNTX said the FDA granted fast-track designation to BNT111, the lead product candidate from its FixVac platform, for the potential treatment of advanced melanoma; VRTX downgraded to Neutral and cut tgt to $218 at Piper as see an unfavorable risk/reward heading into AbbVie’s CF data in early 2022; BMRN said the FDA approved Voxzogo injection to improve growth in children five years of age and older with achondroplasia and open epiphyses, meaning these children still have the potential to grow

·     Healthcare Services, MedTech Equipment; several analyst note SYK laid out a long-term financial outlook largely consistent with its pre-COVID-era goals during its analyst day; TDOC shares fell early a day after the co maintained its 2022 revenue target of $2.6B and introduced a 2024 revenue target of $4B, but mgmt noted that its margin expansion target of 100-150 bps will be pressured next year by a 75 bp purchase accounting headwind

Industrials & Materials

·     Industrials, Aerospace & Defense; BA shares slipped after the WSJ reported the plane maker has further slowed production of 787 Dreamliners as it addresses defects that are delaying deliveries of new jets and complicating airlines’ plans; IR upgraded to Overweight and raise tgt to $68 from $54 at Wells Fargo saying they wish this were a proactive upgrade instead of a reactive one, but the investor day impressed them on several fronts; WWD Q4 adj EPS $0.92 vs est. $0.86 on revenue $570M vs est. $605.1M, guided FY22 EPS $3.55-$3.95 vs est. $3.99, sales $2.45B-$2.65B vs est. $2.54B, expect end markets and supply chain disruptions to improve but persist in FY22; Wolfe upgraded DAL and LUV to Outperform in airlines

·     Metals & Materials; LAC tgt raised to $39 from $28 at JPMorgan to reflect our higher lithium price forecasts and LAC’s pending acquisition of Millennial Lithium; HAYN Q4 EPS of $0.20 vs. Street’s +$0.07 given higher gross profit dollars (volumes, margins, potential raw material benefits) and lower opex despite in-line unit pricing/mix; in steel market (X, NUE, STLD), UBS said based on latest data, they expect the higher Q4 steel prices to more than offset the input costs, and with steady revenue growth, this should boost Q4 gross margins above Q3 levels; mining and material stocks were broadly lower; KeyBank warned an Alabama IP mill that went down two weeks ago during a scheduled maintenance outage may not be fully operational until early next and could cause a production loss of ~150k tons and financial impact of up to $50M

Technology, Media & Telecom

·     Semiconductors; AMAT slides following its Q4 results, where it missed expectations on top and bottom lines and guided to a disappointing profit figure for the current quarter (sees Q1 EPS $1.78-$1.92, below consensus $2.01 and sees Q1 revenue approximately $6.16B plus or minus $250M vs. est. $6.5B); MU leading in the semi sector following AMAT earnings/commentary – Citigroup noted expect more positive catalysts for DRAM in the coming months and are initiating a positive catalyst watch on Buy-rated Micron

·     Software movers; WDAY volatile as Cowen noted 3Q bookings growth of 24% beat their 21% est., but upside was a little softer vs. 1H – overall, Q3 results including accelerating 24-month subscription backlog growth, subscription revenue growth, and 24-month RPO bookings growth; PANW price tgt raised by several analysts as delivered strong FQ1 results, exceeding Street expectations across all key metrics as BTIG said the biggest surprise in the quarter was product revenue, which grew 25% y/y vs. their 12% est. (Street 11%) and billings outperformed +6%; ESTC downgraded from Outperform to Neutral on valuation at SMBC Nikko; SNOW downgrade from Buy to Neutral with $370 tgt (up from $300) at Rosenblatt on valuation; ZEN extends yesterday declines after Cowen downgraded to MP from OP and cut tgt to $115 calling it a “show me” story after holding its analyst/investor day on Thursday; DDOG upgraded to Outperform at RBC Capital on increased conviction in the durability of new customer adds, the cross-sell motion of the platform, and more comfort in their pricing model that is ROI driven

·     Hardware, Components & Services; ANET was downgraded from Overweight to Equal weight at Morgan Stanley as believe valuation has come to credit much of the upside they expect over the next year (says further catalysts in new hyperscale wins are likely required to drive the stock towards our bull case); GLOB reported better than expected revenue and EPS of $342M and $0.98, ahead of consensus of $327M and $0.93, respectively (+65% y/y revenue growth vs. 67% in 2Q21 and 52% y/y organic); VNET was downgraded from Buy to Sell at Goldman Sachs as see 21Vianet struggling to keep its wholesale customer acquisition and order momentum