Mid-Morning Look

Tuesday, September 21, 2021

Stocks opened strong to continue yesterday’s late bounce off their lowest levels in several months, although they have reversed and are now slightly lower on the day. Barring another rally, the S&P is poised to snap its 7-month winning streak, the Nasdaq is on pace for only its second red month of 2021, and the Dow is threatening its first negative quarter since 1Q20 when the pandemic rattled markets. Yesterday was also the first time in almost a calendar year that the S&P’s intraday low stood more than 5% off all-time highs and was the index’s second consecutive close below its 50-day moving average after closing above that indicator every day since June 18^th. Bulls are hopeful that this is just a natural correction and the “buy-the-dip” mentality that has swooped in at every move lower over the past year and a half will continue and rise to the occasion yet again. On the other hand, bears might argue that the non-stop optimism that has pushed stocks to repeated all-time highs this year is subsiding and the reopen trades have played out, while the accommodative monetary policy may be nearing its end. Investors will turn their attention to the Fed’s September FOMC meeting today and tomorrow for hints on when the central bank will begin to taper bond purchases and raise rates from their current 0-0.25%. Overnight news also provided a stark reminder that Covid-19 still presents an overhang that does not seem to be going away. Homebuilder Lennar warned that they expect the unprecedented supply chain challenges to continue into the foreseeable future, KAR Auction Services withdrew its full-year guidance due to the uncertainty from the continued chip shortage, and medical device company Conformis was forced to lower their quarterly guidance due to rescheduled and deferred surgeries because of the recent Delta variant surge.

Economic Data

·     US Housing Starts Number Actual 1.615M (Forecast 1.55M, Previous 1.534M); US Housing Starts Change MoM Actual 3.9% (Forecast 1%, Previous -7.0%)

Sector Movers Today

·     Bank movers; USB agreed to purchase the personal banking arm of MUFG in a deal worth $8B, including $5.5B in cash and 44M USB shares (2.9% stake); Goldman initiated COWN at Sell with a $35 PT as the bank’s strong growth has been driven by high-risk business that Goldman expects to normalize, and Buy ratings on JEF ($45 PT) as the market is underappreciating its transition from a merchant bank to a pure play, full service investment bank and PIPR ($168 PT) who closely resembles a full-service independent advisor after completing its multi-year transition, though the market is not factoring this in; PACW was upgraded to Buy at Truist due to its growing excess liquidity that should improve earnings power, loan growth that is positioned to accelerate, credit issues now in the rearview mirror with lower YTD losses vs peers, and its material EPS discount to peers; Da Davidson upgraded SSB to Buy

·     MedTech Equipment; BSX to buy the remaining 84% of private Devoro Medical for $269M upfront and up to $67M in additional payments; Raymond James reinstated BAX at Outperform with a $93 target as they say the revenue and EPS growth from the HRC deal should support a higher multiple and the stock should have more downside support than most MedTechs since it is only trading at about 16x their 2023 EPS estimate; Stifel downgraded SDC to Hold after the stock’s modest bump off post-2Q21 lows given concerns of losing market, future growth opportunities, and the balance sheet as they would need evidence of progress and that unit economics work for the company’s model; JPMorgan reiterated their OW ratings on recent IPOs CVRX, NPCE, RXST and TMCI and say it is a question of when, not if, they begin to outperform peers as their domestic focus on elective procedures has cause them to struggle, though this should be transient and these are now attractively valued high-growth opportunities

·     Retailers; Jefferies downgraded ZUMZ to Hold as they expect top-line and margin trends to lag peers near-term and upgraded SHOO to Buy with a $50 PT as the company’s best-in-class supply chain and proactive measures to circumvent disruption are an even bigger asset in an unprecedentedly difficult supply chain environment; Benchmark initiated CTRN at Buy with a 4115 target as CEO David Makuen has led 8 consecutive quarters of SS growth since his appointment and longer-term guidance and details on prototype stores should be catalysts; Piper downgraded BIG to Neutral and lowered their PT to $50 from $60 on macro headwinds of lapping stimulus check headwinds, rising ocean freight rates, and retail wage pressure that is unlikely to abate soon; Argus upgraded BBWI to Buy as they believe the new company is positioned for more consistent sales growth and margins post-spinoff and is trading at multiples that undervalue it at 14x FY23 EPS estimate (vs peer average 19x) and at its historical median price/sales

Stock GAINERS

·     UBER +8%; raised Q3 EBITDA guidance to ($25M)-$25M from previous view of a loss exceeding ($100M), narrowed bookings forecast to $22.8-23.2B from $22-24B, and sees Q4 EBITDA $0-$100M; said last week had the best U.S. volumes since March and gross bookings are 35-40% above IPO levels

·     JNJ +1%; Phase 3 study shows booster shot at 2 months after 1^st dose provides 94% protection against COVID-19 infection, 100% effectiveness against severe disease, and 4-6x increase in antibody levels, while booster shot at 6 months increased antibody levels by 12x

·     HLBZ +180%; announced partnership with AMZN to stream on Amazon Prime video channels

·     AZO +2%; Q4 EPS $35.72 vs est. $29.81 on revenue $4.9B vs est. $4.57B, same-store sales +4.3%

·     COP +2%; purchased RDS.A’s Permian Basin assets for $9.5B

·     NOTV +27%; agreed to purchase Envigo, a leading global provider of research models and services, for $545M via $200M in cash and more than 9.36M NOTV shares

Stock LAGGARDS

·     CFMS -10%; lowered Q3 revenue view to $13.7M-$14.3M from $15.5M-$16.5M due to higher levels of deferred and rescheduled knee and hip procedure as a result of the Delta variant

·     VRCA -16%; received a Complete Response Letter (CRL) regarding its NDA for VP-102 for the treatment of molluscum contagiosum after the FDA identified deficiencies at a facility of a contract manufacturing organization (CMO),

·     LEN -2%; Q3 adj EPS $3.27 that nearly matched est. $3.26 on revs $6.94B that missed est. $7.25B and net new orders 16,277 vs est. 16,248, and guided Q4 new orders 15,200-15,400 and deliveries about 18,000, though said unprecedented supply chain challenges should continue for the foreseeable future

·     KAR -1%; withdrew FY21 financial outlook due to the continued disruption caused by the chip shortage and lack of visibility into used vehicle volumes in its marketplaces; sees Q3 adj EBITDA $95M-$100M and expects approximately 2.6M vehicles sold in 2021

·     BIG -5%; downgraded to Neutral at Piper with a $50 PT from $60 on macro headwinds

·     APOG -6%; Q2 adj EPS 53c vs est. 54c on revs $325.8M vs est. $319.7M and sees FY adj EPS $2.20-2.40 (est. $2.28)