Closing Recap

Thursday, August 18, 2022

Equity Market Recap

·     Stocks edge higher in a range-bound slow trading summer day, as several comments from Fed speakers throughout the day, ahead of the Jackson Hole meeting next week, failed to move markets meaningfully. St. Louis Fed President James Bullard said that given the strength of the economy he is currently leaning toward supporting a third straight 75-bps interest rate hike in September to drive down inflation more quickly. Earlier, San Francisco Fed President Mary Daly said hiking rates by 50 or 75 bps next month would be a reasonable way to get short-term borrowing costs to a little bit above 3% by the end of this year. Neither comment failed to rattle markets, with the S&P holding just below the 4,300 level after topping its 200-day MA resistance mid-week around 4,325 (but failed to hold). The energy sector was the top S&P sector for a second straight day behind oil price strength, with WTI crude moving back above $90 per barrel. Economic data was mostly favorable, with jobless claims falling and Philly manufacturing showing an improvement from the NY report earlier this week, though housing remains a weak spot. Tech space was boosted by strength in semis after earnings and networking higher on CSCO results. Discretionary stocks were mixed following a handful of retail earnings results.

Economic Data:

·     Weekly Jobless Claims fell to 250K in latest week from 252K prior (and below est. 265K); the 4-week moving average fell to 246,750 in latest week from 249,500; continued claims rose to 1.437M from 1.430M prior week and the insured unemployment rate unchanged at 1.0%

·     Philadelphia Fed Aug Business Index 6.2 vs July reading of -12.3 and better than the expected decline to -5.0; Philly Fed Prices Paid decreased to 43.60 points in Aug from 52.20 points in July; index for current new orders climbed 20 points but remained negative for the third consecutive month at -5.1; future new orders index moved up 4 points but remained negative at -8.3

·     July Existing Home Sales fell -5.9% m/m, well below consensus at 4.81Mn unit rate vs. est. 4.89M and June 5.11M; the inventory of homes for sale 1.31 mln units, 3.3 months’ worth; July national median home price for existing homes $403,800, +10.8% from July 2021

Commodities, Currencies & Treasuries

·     Oil prices rise with WTI crude +$2.39 or 2.71% to settle at $90.50 per barrel and Brent crude rises and Brent at $96.59, rising 3.14%; U.S. natural gas futures eased about 1% on Thursday after touching a fresh 14-year high earlier in the session, with output on track for a record high this month. Prices soared earlier in the day on a smaller-than-expected storage build. Gold prices fell for a 4^th straight session, down -$5.50 or 0.3% to settle at $1,771.20 an ounce, hitting its lowest level in about three weeks. Treasury yields slide but finish off the lowest levels of the day, with the 10-year at 2.88%. The U.S. dollar jumped nearly 1% on the day with the dollar index (DXY) hitting the 107.50 level, near its previous year high close, which was also a 20-year high as the euro and British Pound hit one-month lows (euro below 1.01) more a factor of the weakening fundamentals in Europe more so than the strengthening picture here in the U.S.

Sector News Breakdown

Consumer

·     Retailers: KSS slides following earnings and lower outlook as guided year EPS to $2.80-$3.20, below the Street at $4.04 and prior range of $6.45-$6.85 and now expects fiscal 2022 net sales to decline between 5% and 6%, compared with its previous forecast of flat to 1% growth; BJ rises on beat and raise as Q2 EPS $1.06/$5.1B tops $0.80/$4.64B estimate, with comps up +19.8% y/y and ups FY22 EPS view to $3.50-$3.60 from $3.25 (est. $3.33); TPR forecast FY23 profit $3.80-$3.90 below the $3.91 estimate and revs about $6.9B vs. est. $6.94B after mixed Q4 results; BBWI tgt raised by several analysts after earnings results as quarterly sales trends improved in July with new product launches; MAT initiated Buy at Bank America saying it has successfully completed its turnaround and is now in growth mode; WWW was downgraded to Hold at Argus as expect inflation, excess inventory, supply-chain headwinds, and the strong U.S. dollar to weigh on earnings at Wolverine over the next 12 months; BBBY downgraded to Underperform at Wedbush as yesterday, activist investor Ryan Cohen, manager of investment firm RC Ventures, submitted a Form 144 signaling his intent to liquidate the entirety of his 11.8% beneficial ownership in BBBY; CRMT reported Q1 adj EPS $2.00 vs $3.57 y/y (est. $3.14) citing industry headwinds of higher vehicle prices due to supply shortages; provision for credit losses of $82.9M up from $54.1M

·     Housing & Building Products; Deutsche Bank named TREX, CNM, AWI, FBHS top picks in order of conviction buys in an initiation of coverage for building products and one sell rating on AMWD (initiates coverage on 22 Building Products Stocks) and said their most out of consensus calls are likely TREX (Sentiment, NY #’s, X’s), PGTI (NY #’s), CNM (NY #’s, X’s) and BECN (X’s)

·     Consumer Staples; EL Q4 adj EPS $0.43 vs. est. $0.33; Q4 revs $3.56B vs. est. $3.44B; sees Q1 net sales to decrease between 10% and 8% y/y and Q1 organic net sales to decrease between 6% and 4%; guides year EPS $7.39-$7.54 vs. est. $7.92; SPTN raised 2022 retail comp sales up 4%-7%, saw up 1%-3% and sees FY22 adj EBITDA $227M-$240M, saw $224M-$239M; for WING, Chicken wing prices have now dropped to below their pre-pandemic levels.

·     Restaurants: EAT was downgraded to Sector Weight from OW at KeyBanc following the stock’s 40%+ run over the last month (vs. +11% for the S&P 500) as believe the stock’s upward trajectory was a function of improved sentiment with commodity prices likely peaking; SBUX tgt raised to $104 from $94 at Cowen as see the highest probability that the 9/13 investor meeting will be a positive catalyst

Energy, Industrials and Materials

·     Energy stock movers: energy stocks among early leaders (was lone sector higher on Wednesday), with APA, DVN, XOM, HAL, VLO among top S&P 500 leaders; PSX submitted a proposal to acquire all common units of DCP it does not already own for $34.75 per unit; Phillips said the transaction would be structured as a merger of DCP w/an indirect subsidiary of Phillips 66; natural gas producers CHK, CTRA, AR advanced following weekly bullish natural gas data, as prices surpass and hold above $9.00 mln btus today

·     Metals & Materials; SQM reported an almost ten-fold jump in Q2 net profit at $859.3M, but missed the $876.41M analyst estimate; reported Q2 revs of $2.6B; in containerboard (IP, WRK, PKG, GEF) Bank America lowers price forecasts for containerboard a total of $30/ton through 1Q23, based on the continued weakening in results coming from our latest Box Survey; SDIG downgrade Outperform to Market Perform at Cowen saying restructuring & n-t shift to grid sales leaves a sub-scale min, while lowering pt to $2.25 from $11

·     Utilities & Solar; Solar rating changes at Morgan Stanley saying the Inflation Reduction Act Is a big deal for US clean tech; increasing growth and price targets as downgrade ARRY to UW from EW while upgrade FSLR from UW to EW – increasing growth rates for solar, wind, energy storage, and clean hydrogen, as well as raising price targets on many clean tech stocks, due to the clean energy support featured in the new IRA legislation. Their favorite US clean tech beneficiaries of the new law are RUN, PLUG ; CSIQ Q2 beat and raise as Q2 EPS $1.07 vs. est. $0.53; Q2 revs $2.31B vs. est. $2.23B; total module shipments recognized as revenues in the second quarter of 2022 were 5.06 GW, up 37% y/y; raises 2022 revenue view $7.5B-$8B from $7B-$7.5B (est. $7.25B); in utilities, for first time since July 2021, every member in S&P 500 Utilities sector is trading above 200d moving average (coming into the day)

Financials

·     Insurance; ALL estimated catastrophe losses for month of July of $223 million or $176 million, after-tax; PFG downgraded to Neutral from Outperform on valuation at Credit Suisse noting shares are trading at 10.6x CS estimated 2023 EPS, well ahead of peer average of 8.0x (closest peer by business mix is VOYA which trades at 8.2x); ACT downgraded to Underperform from Neutral at Bank America with a $25 price target as continues to view the business model favorably, but says the stock’s current view valuation is "extended."

·     Consumer Finance: in mortgage finance, RDN upgraded to Neutral from Underperform at Bank America with a price target of $24, up from $22.50 saying its capital return in Q2 "was impressive" and shares offer 3% upside potential and 8% total return; MTG upgraded to Buy from Neutral at Bank America saying the stock’s risk/reward is more attractive

Healthcare

·     Pharma movers; ELAN downgraded to Equal-weight at Morgan Stanley saying the co’s 22 guide cut/medium-term outlook retraction was not surprising, but still left with questions regarding visibility on several factors; TEVA announces US District court upholds validity of QuilliChew ER® patents as TEVA infringes Tris patents; CRIS said the FDA has lifted the partial clinical hold on the TakeAim Lymphoma Phase 1/2 study of emavusertib after reviewing the comprehensive data package submitted by Curis; ALNY to present data from the APOLLO-B Phase 3 study of Patisiran; JAZZ initiates Phase 3 trial of Epidiolex

·     Biotech movers; BLUE fell after yesterday’s FDA clearance of its Zynteglo therapy; KRTX removed from the Best Ideas List at Wedbush following the stock’s recent run-up after release of Phase 3 EMERGENT-2 data in schizophrenia, while remains a top idea and continue to hold an Outperform rating on the stock; PFE shares fell on a WSJ report that the U.S. is preparing to move Covid-19 vaccines and therapeutics onto the private market, ending the practice of the federal government buying and distributing the drugs without charge,

·     MedTech Equipment; TXG was downgraded to Sell from Neutral at Goldman Sachs as expect a materially slower cadence to its 2023/24 sales growth rate vs consensus (and historically) as the company transitions to a multi-market, multi-product company; QDEL announces $300M share repurchase authorization; PKI downgraded to Hold from Buy at Stifel following CFO exit

Technology, Media & Telecom

·     Semiconductors; WOLF FQ4 results and FQ1 revenue outlook were both better, driven by robust Silicon Carbide demand and solid manufacturing execution and also raised its FY26 revenue outlook by 30-40% on the back of strong design-in pipeline; ADI downgraded to Hold from Buy at Needham following a solid F3Q22, saying the co and the semiconductor industry in general, is just beginning to see the start of a broader slowdown and believe estimate cuts may be ahead; QCOM is plotting a return to server market with new chip according to a Bloomberg report

·     Software movers: KEYS Q3 results were nicely ahead of consensus expectations and guidance was again increased; NEWR said its board committed to a restructuring plan to realign its cost structure with its business needs and announces restructuring plan, where co will be reducing its workforce by about 90 employees in U.S.

·     Hardware, Components & Services; CSCO tops estimates on revenue and profit and gives optimistic annual sales forecast as product revenue across the core and growth segments drove almost all the upside; SNPS reported a beat-and-raise quarter result in EDA sector as new FY22 rev guidance assumes ~21% y/y growth, or $50M above the prior guidance; CLS upgraded to Buy from Hold at Argus with $14 tgt in the EMS sector

·     Telecom movers: VZ downgraded to Underperform at MoffettNathanson with $41 tgt noting it has now been more than two years since ATadopted its aggressively promotional stance in wireless. Over that time, AT&T has accelerated its subscriber growth, but at the cost of repeatedly cutting their free cash flow and notes VZ has been the biggest loser of its strategy; according to industry reports, streaming TV viewing (DIS ) passed cable last month (CMCSA ) in industry first