Closing Recap

Friday, October 08, 2021

Equity Market Recap

·     Today was a choppy day with mixed macro news clouding sentiment. Overnight, the Senate voted to temporarily avoid a default by raising the borrowing limit by $480B until December 3, kicking the can down the road. Meanwhile, the September nonfarm payrolls report widely missed expectations this morning, showing 195k jobs created last month vs the expected 500k, the second consecutive month where job growth was below even the lowest prediction collected by Reuters, as August’s 235k jobs reported last month also missed the expected 725k (revised to 366k in today’s report). The summer momentum in the labor market, where 559k, 850k, and 943k jobs were created from May-June, has seemingly ground to halt over the past two months, perhaps partly due to the Delta variant causing another wave of Covid cases. This report was not all bad, however, as hourly earnings increased and the unemployment rate fell to 8.5% from 8.8% despite the tepid growth. Markets did not sputter in the aftermath of the miss, though, as a slower snapback to full employment likely means slower rate hikes by the Fed based on their recent comments. Immediately preceding the report, Refinitiv put the probability of the next rate hike occurring in September at 49.3%, but the fed funds future fully priced in the hike not happening until December after the data. Treasury yields initially dipped after the payrolls report but rebounded with the 10-year yield topping 1.6% for the first time in more than 4-months, contributing to tech’s underperformance. Oil prices also continued their upwards momentum with WTI Crude topping $80/barrel for the first time in almost 7-years to lift the broader energy sector. All in all, markets finished their first week of October and Q4 higher, a welcome sight after being pressured throughout September.

·     Stock/sector news; Energy (APA, EOG, HES, COP, FANG, OXY, PXD) again leads the S&P, rebounding from yesterday as WTI Crude hits $80/barrel for the first time in almost 7-years; CHTR, CABO slide after Wells downgrades on risks including slower net adds and less FCF growth; In transports, JPMorgan lifts UNP by upgrading it and NSC by adding it back to its focus list, while its JBHT downgrade and cautious notes on KNX, WERN sends those shares lower; QDEL jumps after now seeing Q3 revenue $505-510M vs est. $186.3M with Covid revenues rising from last year; CCXI nearly doubles after receiving FDA approval for treating rare autoimmune disease that also underpins upgrades at Raymond James, Piper along with other bullish PT raises; HD, LOW slip after Loop downgrades both to Hold on a riskier environment; OSK falls after cutting guidance

Economic Data:

·     Nonfarm payrolls increased by 194,000 jobs in September, well below the 500K jobs estimate by economists while data for August was revised to show 366,000 jobs created instead of the previously reported 235,000 positions (so miss and downward revision) as employment remains 5.0 million jobs below its peak in February 2020. The unemployment rate tumbled to 4.8% from 5.1%, while average hourly earnings increased 0.6% (above views of +0.4%)

·     August Wholesale Inventories rose +1.2% to $731.1B vs. +0.6% consensus, +0.6% in July. Aug wholesale sales fell -1.1% vs. est. +1.0% and vs. July +2.1%

Commodities, Currencies & Treasuries

·     Gold prices slid -$1.80, or 0.1%, to settle at $1,757.40/oz, reversing from an initial spike on the jobs miss. Oil prices hit another multi-year high, rising $1.05, or 1.34%, to settle at $79.35 per barrel. Prices topped $80 for the first time since November 2014, continuing yesterday’s move higher on the Department of Energy not planning to tap into the supply or ban exports. Treasury yields rose, with the 10-year yield hitting 1.6% for the first time in 4-months as it bounced following an initial drop on the jobs miss.

Sector News Breakdown

Consumer

·     Retailers; UAA tgt lowered to $29 from $33 at Cowen and tweaking ests lower related to potential Vietnam exposure (~25% of sourcing) but remain bullish into 2022 and see a multi-year path to above consensus EPS and Free Cash Flow growth; ULTA upgraded to Buy from Neutral at Cleveland Research; Cowen’s top picks into 2022 are LULU, DKS, YETI, FIGS, UAA, DECK as they see the inflationary environment lasting deep into the year, but brands with pricing power have offsets while off-price retailers likely face higher inflation than consensus expectations; Off Wall Street has a Strong Sell on ASO with a $28 target given increased competition from others like AMZN and secular headwinds with Covid easing

·     Auto sector; TSLA CEO Elon Musk confirmed that the car maker is moving its headquarters from Fremont, California to Austin, Texas at its shareholder day. CEO Musk also said a global shortage of chips and ships is the only thing standing in the way of the company maintaining sales growth more than 50%; Canaccord raised tgt on TSLA to $940 as see upside to the stock based on strong delivery numbers and increased gross margin from Model S and Made-in-China Model 3/Y

·     Housing & Building Products; HD and LOW both downgraded to Hold from Buy at Loop Capital as believe their estimates for HD had been too aggressive given challenges the company is facing in maintaining in-stock positions in key categories (said also question the company’s decision to set stores for Christmas after Lowe’s does)

·     Consumer Staples & Restaurants: OTLY upgraded to Overweight from Neutral with a $21 price target at JPMorgan saying with the stock -49% from its 6/11/21 peak (median food -7%), they now view the upside potential (+43% to our price target) as far greater than the downside risk; CAG was downgraded to Neutral at JPMorgan on inflationary concerns, saying they prefer to stay on sideline until it sees greater upside to EPS, also lowers PT to $38 from $41; HRL was upgraded to Overweight at JPMorgan as see a more favorable margin outlook going forward, with earnings to benefit from price increases, Planters accretion, and improved turkey industry fundamentals; Loop Capital said their latest MCD U.S. franchisee checks indicate same-store sales growth came in ahead of expectations in 3Q21; Stifel started SKIN at Buy with a $33 target

Energy

·     Energy stock movers; Oil prices setting new 7-year highs, helping energy stocks pace the gains in the S&P 500 initially (APA, FANG, PXD, HES, COP, EOG, MRO, DVN, OXY among index leaders); Morgan Stanley reinstated coverage at OW on CVE (C$18 PT), SU (C$38) and EW on CNQ (C$53 PT), IMO (C$45); Northland upped their target on DVN to $41 from $34, and Bernstein said the current iteration of the company after their most recent strategic shift and acquisitions is their favorite of the past decade and said the strategy is still in the first few steps and has not reached its destination

·     Utilities & Solar; PLUG upgraded to equal weight at Barclays saying that the company’s Oct. 14 Symposium event could be a positive catalyst for the stock; Mizuho cut their target on PNW to $65 from $88 as yesterday’s Arizona rate case had a worse outcome than expected

Financials

·     Insurance; CI to sell its life, accident and supplemental benefits businesses in seven countries to CB for $5.75B (~8% of CI’s current mkt cap), with the deal expected to close in 2022; in the P&C insurers space (ALL, TRV), Wells Fargo lowers estimates as higher cat losses overshadow better alternative results. For brokers, estimates are mostly unchanged, but believe AJG set the stage for another strong organic growth quarter; ALL seeks to track consumers’ driving behaviors using telematics to determine car insurance rates, the company told the WSJ.

·     Bitcoin, FinTech & Payments; overall a strong week of returns for crypto assets with Bitcoin topping $55K today and Ethereum above $3,600 early; Wyoming Sen. Lummis discloses Bitcoin purchase of up to $100K; Truist reiterated Buy and $140 PT on LSPD saying weakness is an opportunity as a negative report swings and misses, calling it its best Payments idea.

·     Consumer Finance; the number of mortgages in active forbearance fell by 117K in the past week as many plans are marked for review or final expiration in September, according to Black Knight’s McDash Flash daily loan-level forbearance data (shares of COOP, NRZ, OCN, PFSI leveraged to the data); for credit bureaus, RBC previews saying they see TRU and EFX beating 3Q21 consensus estimates and guide 4Q21 above consensus given strength in consumer lending.

·     REITs; Baird was bullish on skilled nursing REITs citing favorable risk/reward and expected improved performance as investors receive greater clarity on extent of tenant credit issues as they initiated SBRA with an Outperform ($18 tgt) and named top pick, CTRE ($23 tgt) and OHI ($36 tgt) also initiated with an Outperform.

Healthcare

·     Pharma movers; AZN said the FDA granted orphan-drug designation to tezepelumab for the treatment of the rare inflammatory disease eosinophilic esophagitis; CCXI surges as announces FDA approval of Tavneos (avacopan) in ANCA-associated vasculitis and the company expects to make TAVNEOS available to clinicians and patients in the next few weeks; ALLO tumbles after the FDA halts its off-the-shelf CAR-T studies over safety concern. One patient treated with an Allogene Therapeutics cancer therapy developed what the company called a "chromosomal abnormality," leading the FDA to place the company’s clinical trials on hold; CDTX 14.84M share Spot Secondary priced at $1.55.

·     Biotech movers; MRNA among weakest names in S&P 500 early after negative headlines on week (yesterday, Finland joins Sweden and Denmark in limiting Moderna COVID-19 vaccine on potential side effects); TAK said the Antimicrobial Drugs Advisory Committee of the FDA recommends the use of its investigational drug maribavir as a potential treatment for refractory cytomegalovirus infection; PYXS 10.5M share IPO priced at $16.00; ISO 8.333M share IPO priced at $15.00; BIIB tgt and ests lowered at Jefferies saying the consensus estimates for sales of its controversial Alzheimer’s drug, Aduhelm, may be too high.; Morgan Stanley upgraded PRLD to OW

·     Healthcare Services & MedTech Equipment; QDEL rises after guiding Q3 revs $505M-$510M vs. est. $186.3M; says covid-19 revenues for Q3 of 2021 expected to be about $406M, compared with $375.7M YoY (other Covid testing companies ABT, QGEN, OSUR were active on guidance); ACCD delivered revenue and adj-EBITDA that topped guidance and Street estimates while the 3Q’FY’22 adj-EBITDA loss guide was slightly more than estimate.

Industrials & Materials

·     Aerospace & Defense; OSIS reported two delivery orders for the Security division totaling ~$200M from US Customs & Border Protection (CBP), plus CBP options for additional $65M if/as CBP exercises options. We expect the firm delivery orders to substantially impact FY23; RADA announced that the company had received $24M in new orders during Q3/21. Year-to-date, the company has expanded new orders by 36% to $80M; Cowen said remain buyers of LDOS (calls it #1 defense IT pick) after its investor day as its 5-6% 2022-24 organic growth guide looks cautious, possibly in reaction to the stock’s selloff on modest Q2 reset.

·     Industrial & Machinery; OSK warned that supply-chain and logistics disruptions were hurting its ability to make and ship units, as it lowered guidance for Q4 as now sees adj EPS $0.90-$0.95 on revs $2.05B, both below consensus of $1.77 and $2.14B; FAST downgraded to Underweight from Equal-weight at Wells Fargo citing emerging risks and elevated multiples; AYI initiated by Wells at OW, $218 PT based on the belief its capital allocation will provide EPS accretion over next 3 years, do not see it as a value trap, and expect it to continue expanding adjusted operating margins despite a muted gross margin outlook

·     Transports; CAR trading at all-time highs today, as Jefferies said their scrapes indicate CAR pricing was up sequentially on a y/y basis (up ~43% vs up ~39% in August) after CAR reported 2Q21 RPD in the Americas up ~67.5% y/y; JPMorgan downgraded JBHT to Underweight from Neutral with a $150 target as believe spot truckload rates are reaching a plateau and JBHT is currently trading at a record premium to TL equities; while the firm upgraded UNP to Overweight and raise tgt to $247 from $234 at on recent selloff and said for upcoming quarter, would avoid WERN and KNX that are subject to the overhang of TL spot rates near peak, asymmetric risk from a vaccine mandate, and inability to generate organic growth. NSC moves back to the Analyst Focus List

Technology, Media & Telecom

·     Semiconductors; Apple suppliers (CRUS, SWKS, STM) with weakness early after Asian AAPL suppler AAC Technologies dropped in Hong Kong after a profit warning; IMOS reports Q3 revenues rose 25.9% on a Y/Y basis to $257.2M (+2.6% Q/Q) vs. a consensus of $262.90M; TSM September revenue was up 19.7% Y/Y to NT$152.69B or about $5.44B; AU Optronics reports September revenue rose 26.5% Y/Y to NT$33.0B (+0.9% M/M)

·     Software movers: VMW authorized new stock buyback program for up to $2B during its VMworld analyst day while laid out new FY25 targets and expects subscription/SaaS revenue growth to accelerate in FY24 and account for 40% of the total revenue by FY25 and finalized an $11.5B special dividend related to its final separation from DELL

·     Hardware, Components & Services; Samsung Electronics Co Ltd (SSNLF) said Q3 operating profit likely jumped 28% to its highest in three years, helped by rising memory chip prices and brisk sales of its new foldable smartphones; estimated July-September profit at 15.8 trillion won ($13.3 billion) vs. est. of 16.1 trillion won

·     Media & Telecom movers; cable companies Wells Fargo downgraded CHTR and CABO saying the Cable universe is getting riskier with the biggest names in the industry set to see tougher times ahead, including slowing net adds and less FCF growth. CHTR was double downgraded to underweight, as the co is the industry’s biggest pure-play and maintain equal weight for ATUS lowering ests, unlike peers we don’t think shares have far to fall after the recent derating; SIRI was downgraded to Neutral from Overweight at JPMorgan driven by a combo of lower self-pay net add ests, as new auto sales slow, and higher capex from a pull forward of satellite builds