Closing Recap

Friday, December 10, 2021

Equity Market Recap

·     Stocks finish the day and week solidly higher, with the S&P closing at a new all-time high, with major averages were up between 2%-3% this week as inflation data surging to fresh four-decade highs fail to dent investor optimism. Large cap names doing the “heavy-lifting” again as Apple (AAPL) boosted the Dow, S&P 500, and Nasdaq again, soaring to new all-time highs and now within $5 points of being the first $3 trillion dollar market cap company. No specific rhyme or reason why Apple has remained so strong over the last month, other than perhaps seen as a safety type play into the holidays. Semiconductors have also been strong with the Philly semi-index (SOX) hitting record highs this week, boosted today behind AVGO earnings. Software remains mixed with ORCL leading the space higher Friday on stellar earnings (though several high growth names have pulled back over the last month). Today’s CPI data came and went but failed to hurt markets despite signs of inflation still rising – while next week brings Producer Prices data on Tuesday, as well as several central bank policy meetings including the FOMC. Gold rose as the dollar and yields fell, while Bitcoin prices were volatile again, trading below $50K last. Information technology, industrials, consumer staples, financials and materials paced gains today, while energy, consumer services and REITs lagged.

·     Stock & Sector movers: ORCL, AVGO both surged to record highs after quarterly beats, strong guides, and $10B buyback authorizations; in retail, COST rises after its EPS, revenue, and comp sales all top estimates, LULU slips despite its beat due to its cautious Q4 outlook on possible demand hits from Covid, CHWY sinks to 52-week lows after cutting the top-end of its FY sales; LESL jumps on its beat, guidance above consensus, and new buyback, ASO rises on its beat-and-raise, while AOUT plunges on its quarterly miss and weak guide; MRNA stumbles after reporting its vaccine flu data that Morgan Stanley says is no better than competition; CF soars after raising its full-year guidance, lifting MOS, NTR; in healthcare, CNC hits record highs after its 2022 guidance was better than expected to boost other MCOs; reopen names generally weak with MTN plummeting to 52-week lows after their earnings, and LUV rolling to 52-week lows after Goldman downgrade to Sell as airlines slide.

Economic Data:

·     Consumer Price Index (CPI) MoM for November rises +0.8% vs. est. +0.7% while on a year-over-year basis rises 6.8% (highest since June 1982) and was in-line with estimates. On a core level (CPI ex: food & energy rose +0.5%, in-line with estimates and on a YoY rose an in-line 4.9%; CPI energy +3.5%, gasoline +6.1%, new vehicles +1.1%

·     University of Michigan surveys of consumers sentiment Prelim Dec 70.4 (above consensus 67.1) and vs final Nov 67.4; current conditions index prelim Dec 74.6 (vs. consensus 71.0) vs final Nov 73.6; consumers expectations index prelim Dec 67.8 (consensus 62.0) vs final Nov 63.5

Commodities

·     Oil prices finish higher, as WTI crude gains $0.73 or 1.03% to settle at $71.67 per barrel, and Brent rises $0.73 or 0.98% to settle at $75.15 per barrel – posting a weekly gain of more than 8% for WTI, rallying alongside the jump in stocks this week. Gold prices finish the day higher by $8.10 or 0.5% to settle at $1,784.80 an ounce, getting a lift behind a softer dollar and sliding Treasury yields, managing to eke out a slight +0.1% advance on the week. Gold will be in focus next week ahead of the FOMC policy meeting.

Currencies & Treasuries

·     The U.S. dollar shed early gains and turned lower on Friday after U.S. consumer prices increased further in November, posting their largest annual rise in nearly 4-decades as investors took profits before a Federal Reserve meeting next week. The in-line report added pressure on the Fed to withdraw pandemic-era stimulus at a faster pace in coming months, with possible faster rate hikes as well by mid-2022. The consumer price index accelerated 6.8% y/o/y in Nov, the biggest year-on-year rise since June 1982 and followed a 6.2% advance in October. The euro and British pound advanced while China’s yuan fell a day after the PBOC raised FX reserve requirements for the second time since June.

·     Treasury yields were lower despite a higher CPI inflation reading, with the 10-year yield falling as low as 1.45% before partially recovering, off highs around 1.51% prior the CPI report, and down from the 1.7% multi-month highs just 3-weeks ago. Prospects the Fed will get more aggressive on asset tapering at its last policy meeting next week failed to raise yields on the day (or recently in general), though shorter-term yields have held up much better with the 2-yr at 0.65%.

Sector News Breakdown

Consumer

·     Retailers; LULU reported a beat for 3Q as adj EPS $1.62 tops est. $1.41 and revs $1.5B beats est. $1.44B but warns athleisure clothing demand will be hit by the spread of new coronavirus variants as guides 4Q revs $2.125-2.165B vs est. $2.166B and lowers projected ’21 mirror revenue to $125M-$130M; ASO Q3 results easily top views at $1.75 vs. est. $1.12 on better sales $1.59B while Q3 comp sales rose +17.9% topping est. +10% and raises year EPS view to $6.75-$6.85 from $5.45-$5.80) a boost for sporting goods stores DKS, BGFV, SPWH); PTON downgraded to Neutral at Credit Suisse and cut tgt to $50 saying higher mobility, a shift in consumer spending, and the return of in-person fitness are demand headwinds after a breakneck F21; COST reported Q1 results ahead of Street expectations at EPS of $2.97 above Street of $2.62 as U.S. comparable sales excluding fuel, currencies +9.9%, vs. estimate +8.23%; total company comps excluding fuel +9.8% vs. +17.1% y/y, vs. estimate +8.63%; AOUT shares tumble after top and bottom line Q2 miss (Q2 adj EPS $0.58 vs. est. $0.76; Q2 revs $70.8m vs. est. $82.23M) and guides year EPS and revs below views; ZUMZ approved buyback of up to $150M stock; FIGS lowest since IPO in May this year as CFO Lawrence retires, effective Dec. 24

·     Housing & Building Products; in building products, MLM upgraded to Buy at Truist as revenue growth could accelerate to double digits from good volume and price for several years from the Infrastructure Bill starting in 2023 and spending is not priced in the stock; Wayfair (W) breaking to new 52-week lows today

·     Consumer Staples; UTZ approved an annual dividend increase from $0.20 to $0.216 per share; FIZZ results missed consensus expectations specifically on earnings as the company has been hit hard primarily by aluminum cost and sales decelerated as LaCroix faced a difficult top-line comparison, and increasingly stronger competitive headwinds; BYND slips after Taco Bell cancels test of Beyond Meat product after disliking samples in October, as per Bloomberg; for grocers (ACI, KR, SFM), Bank America said aggregated card data showed grocery spend in Nov. slowed to -4.3% y/y (vs. Oct. -1.2%) & +5.1% vs. 2019 (vs. Oct. +12.3%); in tobacco, (PM, MO), DJ reported Democrat senators removed the provision for a tax on nicotine from the reconciliation package of the Build Back Better bill that would have impacted vaping and nicotine pouches (reduces some risk as these products would have become more costly than cigarettes)

·     Restaurants; BJRI was downgraded to Neutral at Wedbush as believe the casual diner may have one of the tougher paths towards an eventual top- and bottom-line normalization within the casual dining peer set as the post-COVID ‘new normal’ unfolds; Truist said CMG appears to be taking ~3.5-4.0% of menu price in Dec. and raised its delivery price premium to 21% from 17%, judging from our weekly scrape of menu prices (firm now expect menu price of ~+9.5% in 4Q21 vs. consensus of +7.5%, and +6.8% in ’22 vs. consensus of +3.6%)

·     Casinos, Gaming, Lodging & Leisure sector; in pools, LESL shares rise as Q4 net sales and gross profit dollar results exceed expectations, and said 2022 sales growth outlook (+10-12%) incorporates mid-single digit inflation; MTN EBITDA -$108m (in-line) but season pass sales +47%/+21% Y/Y in units/dollars, an acceleration from September’s +42% /+17% while guidance maintained noting pass sales "significantly outperformed" expectation and lodging bookings are ahead of last year, but snowfall is running behind normal levels in the early season; RCL upgraded to Hold at Berenberg in the cruise sector; AMC slips as chairman, president, and CEO Adam Aron disclosed the sale of 312,500 common shares on December 7 at $30.867 per share for $9.65M; EVP & CFO, Sean Goodman disclosed sale of 18,316 common shares on Dec. 07 at $30.862

Energy

·     E&P, Majors and Equipment; Citigroup upgraded PTEN to Buy from Neutral with $11 tgt in broader oil services sector saying the OFS market in 2022 is likely to witness two distinct trends in estimate revisions as foresee upside to 2022 consensus EBITDA of 8% for HAL 13% for pumpers and 6% for land drillers – firm 30% above on 2022 EBITDA for NOV while prefer HAL, PUMP, LBRT and PTEN (upgrade to Buy) on revision potential to start the year but prefer NOV, SLB, BKR and CHX on global leverage over the full year; the Baker Hughes (BKR) weekly rig count rose 7 from last week to 576 with oil rigs up 4 to 471, gas up 3 to 105, and miscellaneous rigs unchanged at 0.

Financials

·     Asset managers with monthly AUM data: AB preliminary assets under management decreased to $759 billion during November 2021 from $765B at the end of October; BEN reported preliminary month-end assets under management of $1,546.8B at November 30, 2021, compared to $1,561.7B at October 31, 2021; IVZ preliminary month-end assets under management of $1,572.5B, a decrease of 1.3% versus previous month-end; LAZ reports preliminary AUM approximately $267.4B as of November 30; the month’s AUM included market depreciation of $5.8B, foreign exchange depreciation of $3.4B and net outflows of $3.1B; TROW preliminary month-end assets under management of $1.63 trillion as of November 30, 2021. Client transfers from mutual funds to other portfolios, including trusts and separate accounts, were $1.1B; VRTS preliminary assets under management (AUM) as of November 30, 2021 of $184.5B; VCTR reported assets under management (AUM) of $160.5B as of November 30, 2021.

·     FinTech & Payments; FIS, FISV, and GPN all downgraded to in-line from outperform at Evercore/ISI saying for 2022E, we expect increasing revenue and margin headwinds from rising labor expenses, slowing cross-border payments growth tied to the Omicron variant and higher innovation-focused capital spending to negatively pressure earnings and free cash flow for the top 3 U.S. merchant acquirers FIS, FISV and GPN; HOOD trades to new all-time lows as payments and FinTech high growth names crushed AFRM, UPST, PYPL

·     Financial Services & Consumer Finance; EPAY is working with Deutsche Bank to explore a sale and consider options, Bloomberg reported; according to people with knowledge of the matter, Bottomline has attracted interest from private equity firms. https://bloom.bg/3ELrcL1

·     REITs; IRM agrees to acquire 80% of outstanding shares of ITRenew, a data center lifecycle management solutions company on a cash- and debt-free basis for ~$725M in cash, with the remaining 20% acquired within three years of close for a value of $925M; Truist raising tgt for STOR to $35 from $34, MAC to $20 from $16, FRT to $130 from $125, KIM to $27 from $25, and REG to $82 from $75; in apartment REITs, BMO Outperform rated on AVB (which they upgrade to Outperform), EQR, ESS, UDR, while downgraded CSR due to valuation and strong performance YTD – said AVB has attractive rent growth in 2022 (14%) driven by LTL of 14.0% (3Q21) and 7.2% market rent growth

Healthcare

·     Pharma movers; Pharma names pressured (BMY, MRK) after a House Committee on Oversight and Reform report said drug companies aggressively raise drug prices, abuse the patent system, and suppress competition all to the detriment of consumers; for PFE and AZN, UK health security agency said booster increases protection against mild disease to around 70% to 75% in real world study looking at 581 people with confirmed Omicron; seeing evidence of immune evasion with Omicron; UK experiments show Omicron decrease lab neutralization 20 to 40 fold compared to original virus, 10 to 20 fold compared to delta; seeing reduced vaccine effectiveness of both AstraZeneca and Pfizer COVID-19 vaccines against mild disease with Omicron

·     Biotech movers; MRNA falls on mixed data – after providing its initial Phase 1 data for its mRNA Flu vaccine program, where weakness is being driven by lower-than-expected GMT rises (sub 4-fold) in two of the four flu strains among both age cohorts; ANGN falls as Phase II PoC for ANG-3777 failed to meet the primary creatinine endpoint and most secondaries, though the most relevant endpoint of MAKE90 demonstrated positive trend; CNTX rises after saying its experimental drug, ONA-XR, significantly increased the suppression of tumor cells in a window-of-opportunity trial in patients with a type of breast cancer

·     Healthcare Services; CNC issued 2022 financial guidance as now expects total revenues of $135.9B to $137.9B (vs. est. $131.49B) and adjusted EPS of $5.30-$5.50 (vs. est. $5.40) and health benefits ratio of 87.6% to 88.2% – said it is reviewing its non-core assets as part of its ongoing portfolio optimization processes

Industrials & Materials

·     Aerospace & Defense; LMT said Finland has chosen the co’s F-35 fighters to replace ageing F/A-18 combat jets and plans to order 64 planes with weapons systems in a $9.4 billion deal, the government said on Friday; BA said it is "disappointed" with Finland fighter decision, sees significant international interest in F/A-18 block iii Super Hornet and EA-18g Growler

·     Industrial & Machinery; Deutsche downgraded AGCO to Hold with a $124 PT from $144 as they are concerned about the current cycle and that it 2022 may be representative of peak demand and CARR to Hold as it has gained 14% since their Buy initiation in June, doubling their coverage universe to now trade at a premium to peers; TGLS boosted the lower end of its FY21 revenue outlook to $490M to $495M from $485M to $495M (consensus $491.69M) and raised Adjusted EBITDA guidance to $147M to $150M from $140M to $145M; also noted that it believes the recent report issued by a short seller contains inaccurate statements; WM authorizes $1.5B stock buyback, raises quarterly dividend 13% to $2.60; Benchmark started ASPN at a Buy with $70 target as management aims to double revenue every 24 months through 2030 based on increasing adoption of its products into EVs and a recovery in its legacy energy infrastructure business to pre-pandemic levels

·     Transports; Stephens upgraded GBX to OW with a $56 PT from $41 on the belief that the North American railcar market is poised for an elongated recovery that should be supported by the rail industry becoming increasingly focused on improving the pace of volume growth; Goldman downgraded LUV to Sell and ut their target to $36 from $59 as they expect the company to see higher-than-industry inflation over the medium-term, in part driven by investments in upgrading its technology in addition to its entrance into the GDS’s and expansion into higher cost airports, which will drive a slower-than-industry return to profitability combined with a weaker domestic pricing environment; CHRW raises quarterly cash dividend to $0.55 from $0.51 and increased share repurchase authorization by an additional 20M shares; MESA reported a Q4 adj loss of (6c), surprising analysts who expected a 12c profit on revs $130.8M that missed est. $150.6M with the miss attributed to higher maintenance and pilot training costs, and Deutsche downgraded to Hold with a cut $7 PT from $15; KSU shareholders are meeting today to vote on the proposed CP merger

·     Metals & Materials; CF raises FY21 adjusted EBITDA view to $2.65B-$2.85B from prior view of $2.2B-$2.4B which reflects continued strong global nitrogen market conditions that have supported higher-than-expected realized pricing for products; SON Non-GAAP estimates remain unchanged as first disclosed in Q3 earnings report; that is, Sonoco expects its base earnings to be at the top end of the guidance range of $0.84-$0.90 per share, vs. consensus of $0.87; MP adds to yesterday gains after agreeing to build U.S. Magnet factory, enters long-term supply agreement with GM (MP CEO was on CNBC Thursday night as well)

Technology, Media & Telecom

·     Internet; BTIG out with E-Commerce note saying as enter 2022 with less hype & more reasonable expectations with top ’22 picks CARS, REAL, UPWK, FTCH and ENJY as raise CARS PT to $22 from $18 and trim on DMS to $9 from $10 and UPWK to $65 from $72 saying YTD the e-commerce sector has returned +10%, lagging the Nasdaq’s +22% and significantly lower than 2020, when the same group of stocks returned +153%; CHWY falls on larger Q3 EPS loss with in-line revs of $2.21B while lowers the top end of year rev outlook to $8.9B-$8.94B vs. prior view $8.9B-$9B; 3Q21 gross margin of 26.4% declined increased 90 bps y/y and was 70 bps worse than the consensus forecast of 27.1%

·     Semiconductors; AVGO leads semis higher as reported strong Q4 results, raised dividend by 14%, and announced a $10B buyback and guided to a strong JanQ at $7.6B (~5%+ above ests); TSM November sales were NT$148.3B, up 10.2% M/M and 18.7% Y/Y (vs. October’s NT$134.5B)

·     Software movers; ORCL shares surge after earnings beat and higher forecast as sees Q3 EPS between $1.19-$1.23 on revs $10.7B-$10.9B above est. $1.16 and $10.56B while Q2 cloud revenue rose 22% to $2.7B; EVBG shares tumble after the company announced the resignation of CEO Meredith and offered an initial outlook of 20-23% growth in 2022, which came in below street expectations; AI shares rise after the company disclosed that it had established a new $500M, five-year Production-Other-Than-Transaction Agreement; and the National Defense Authorization Act for Fiscal Year 2022 passed including a very interesting Section 227, “Modification of the Joint Common Foundation Program”; Reuters reported MSFT is set to secure unconditional EU antitrust approval for its $16 bln bid for NUAN

·     Hardware, Components & Services; no rhyme or reason, but AAPL still making new all-time highs as shares push higher into holiday; JBL was upgraded to Buy from Neutral at Goldman Sachs and raise target to $75 from $63 as fast-growing end markets including EVs and cloud (with customers including Tesla, Rivian, and AWS) are becoming an increasingly large percent of the company’s total portfolio, which we expect to allow Jabil to sustain solid top-line growth; SNPS approves stock repurchase program with authorization up to $1 billion