Closing Recap

Friday, June 04, 2021

Equity Market Recap

·     Major U.S. averages finished strong, just off their best levels of the day and closing out the week with modest gains for the S&P 500, Russell 2000, Nasdaq Comp and Dow Industrials, though Dow Transports were notable laggards. Stocks and gold prices jumped while the dollar fell following a good, but not great (missed estimates) U.S. monthly jobs report that made investors less worried that the U.S. Federal Reserve would rein in monetary stimulus soon. Nonfarm payrolls data showed 559K jobs were added on May, well above April figures but below the 650K estimate. Treasury yields fell off highs around 1.6355%, slipping to lows around 1.56% along with a reversal in the U.S. dollar off 3-week highs prior to the data.

·     Amid the ongoing drama in the Reddit/WallStreetBets Forum names that have once again grabbed headlines and attention of Wall Street and retail investors, reports today (Bloomberg) said some of Wall Street’s top brokers are quietly tightening their rules for who can bet against retail traders’ most-popular meme stocks. Bank of America Corp., Citigroup Inc. and Jefferies Financial Group LLC are among firms that have adjusted their risk controls at prime-brokerage operations, according to reports. The banks are trying to protect themselves against fallout from extreme surges and dips that have characterized trading in companies such as GME, BB, MVIS, BBBY and the latest AMC which has been among the most volatile.

Economic Data:

·     Payroll data misses economist estimates: the U.S. economy added 559K vs. est. 650K (revised to 278K vs. 266K prior), private payrolls reported at 492K vs. est. 600K (prior 218K) and manufacturing jobs rose 23K vs. est. 24K (prior month -18K) – unemployment rate dips to 5.8% vs. est. 5.9% (vs. 6.1% prior) and avg hourly earnings rose 0.5% vs. est. 0.2%

·     Factory Orders for April fell -0.6% to $485.2B vs. -0.2% consensus and +1.4% prior (revised from +1.1%) while shipments rose +0.6% to $249B

Commodities

·     Oil prices rise $0.81 or 1.2% to settle at $69.62 per barrel, boosted by rising demand expectations and a declining dollar. For the week WTI crude ends with a roughly 5% advance, its biggest one-week gain in seven to a two-and-a-half-year high of $69.62 a barrel. At the same time, OPEC this week stuck to its script for a slow increase in production, which could mean oil supplies will tighten even more this summer as economies reopen. The weekly Baker Hughes (BKR) rig count showed the total U.S. rig count was down 1 from last week to 456 with oil rigs unchanged at 359, gas rigs down 1 to 97 (the U.S. Rig Count is up 172 rigs from last year’s count of 284, with oil rigs up 153 gas rigs up 21).

·     August Gold rises $18.70 or 1% to settle at $1,892 an ounce, but futures slip roughly -0.7% on the week (the weekly decline coming on the heels of four consecutive weekly gains) despite the latest week decline in the dollar. A weaker-than-expected rise in May U.S. nonfarm payroll pressured the dollar, contributing to the rise in dollar-denominated gold prices.

Currencies & Treasuries

·     The U.S. dollar index (DXY) pulled back from three-week highs after the weaker jobs data, with the dollar index dropping to lows around the 90 level after trading as high as 90.62 prior the report. The dollar fell to 109.45 from 110.15 ahead of the jobs data, and overnight highs of 1.1033, while the euro, Canadian dollar, and British Pound also climbed. The jobs report was strong but did not raise fear the Fed is moving any closer to QE tapering. Treasury yields tumbled as the benchmark 10-year yield fell over 6 bps to below 1.56%, sharpest move in over two-weeks. The slip below key levels of 1.60% and 2.30% (for the 30-yr) added to the downside momentum and rates are at better than 1-week lows.

Sector News Breakdown

Consumer

·     Retailers; LULU posted another quarter of solid results with both stores and e-commerce beating expectations (consistent across both geographies and product categories) – Q1 adj EPS $1.16 and revs $1.2B both topped ests of $0.91 on $1.13B and its Q2 guidance was also above estimates as they see Q2 adj EPS $1.10-1.15 (est. $1.01) on revs $1.3-1.33B (est. $1.2B) and now sees FY net rev. $5.83-5.91B from $5.55-5.65B; JOAN rises after analysts posts better-than-expected quarterly results as first report since IPO in March as Q1 adj EPS 46c beat est. 19c and revs $574.4M vs est. $566.8M, and Guggenheim raised their price target to $20 from $15 after the beat; ZUMZ Q1 EPS $1.03 vs. est. $0.04 on revs $279.1M vs. est. $221.88M and did not provide guidance; FIVE reported Q1 EPS $0.88 on sales $597.8M above est. $0.65/$551.1M, comp sales +162% vs est. +146.8%, and guides Q2 sales $640-660Mm (est. $584.3M); TLYS Q1 EPS 36c vs est. (2c) loss on revs $163.2M vs est. $128.9M; Stephens upgraded DKS to EW from UW and raised its target to $95 from $74; AEO raised its dividend 31% to 18c from 13.75c.

·     Hardline/broadline retail; Staples sent a letter to ODP’s Board of Directors outlining a $1B, or $18.27/share, proposal to acquire its consumer business, including the Office Depot and OfficeMax retail stores business, the Company’s direct channel business (officedepot.com), and the Office Depot and OfficeMax intellectual property, including all brand names; Bank of America terminated their coverage on GME, BBBY as they say the stocks are not trading based on fundamentals; HOFT posts record sales as Q1 consolidated net sales of $162.9 million, a $58.3 million, or 56%, increase compared to the year-ago period

·     Auto sector; JPMorgan positive on autos as they raised Ford (F) tgt to $18 from $16, GM pt raised to $73 from $71 and raise ests on benefit from Inflation, strong price/mix, and less than feared semis headwind; WKHS downgraded to market perform at Cowen saying it now looks fairly valued following the retail trader-driven rally; TSLA a nice recovery after recent slide while CHPT rises after reporting earnings overnight in EV charging space

·     Consumer Staples; DEO upgraded to Buy from Hold at Argus and setting a target price of $225 as expect continued improvement in Diageo’s U.S. business, driven by the company’s strong brands and market share gains in the spirits segment; GO downgraded to hold from buy at Jefferies and cut tgt to $32 from $45 as believes diverse inflationary cost pressures will reduce GO’s EPS growth rate, and weigh on the multiple, though co is set for long-term predictable growth; GIS said it expects to incur charges of approximately $160 mln in fiscal 2021, primarily reflecting severance expenses; COST reported May net sales $15.59B (+24.2% YoY), total comp sales +22.8% (est. +23.4%) for the month, and comp sales ex-gas, FX +16.7% (est. +14.5%)

·     Gaming & Leisure sector; AMC shares volatile again after saying it will ask its shareholders for the authority to issue 25 million shares, effective in 2022. The proposal contrasts with a previous request that shareholders authorize 500 million new shares. Yesterday completed its "at-the-market" equity sales program; it sold 11.55 mln shares, raised $587.4M at avg price of $50.85; in education space, further declines for EDU, GOTU and TAL as Credit Suisse notes investor concern that the government may ban after-school tutoring on weekends and holidays in grades 1-9 is mounting.

·     In lodging, Raymond James said given the recent lifting of capacity and mask restrictions, our expectation for the convention business to begin to ramp, and slow ramp in international travelers, we expect red-hot Vegas to keep the momentum, driving higher EBITDA for the operators and improved coverage for the gaming REITs (GLPI, VICI, MGP)

Energy

·     Energy stock movers; shares of oil cos rise, tracking gains in crude prices as Brent tops $72 a barrel for the first time since 2019. Crude gains as OPEC+ supply discipline and recovering demand counter concerns about patchy COVID-19 vaccination rollout around the globe; NGL shares fall as its Q4 adjusted EBITDA from continuing operations fell to $94.3M from $161.8M a year earlier, hit by lower volumes in each of its operating segments; TRGP to replace CLGX in S&P 400 at open on 6/9; Mizuho raised their price target to $21 on KMI after their $1.23B Stagecoach acquisition this week as they see the transaction as an attractive asset in a desirable region; SND shares jumped after the Superior Court of the State of Delaware ruled that USWS breached a long-term take-or-pay master product purchase agreement

Financials

·     Bank movers; financials remain among the top S&P gainers this year a analyst play catch up; WFC upgraded to Buy from Neutral and raise tgt to $60 at Bank America OZK upgraded to Overweight from Equal Weight at Wells Fargo as believe the company is on pace to reclaim what was once (not long ago) a premium valuation while downgraded ASB as believe the near-term credit catalyst has played out and loan growth will be challenging in the near-term; ENV rises on news it will replace TCF in S&P 400 at open on 6/9

·     Insurance; The information reported Insurance carriers that write policies to shield company directors and executives against shareholder lawsuits are increasing premiums for those affiliated with special purpose acquisition companies. Some insurers in this market—which includes Axa XL, Chubb and Japan’s Sompo—are also becoming more selective in underwriting SPACs due to concern about a possible wave of litigation against SPAC sponsors and the companies they have taken public, say lawyers and brokers who work on the transactions

·     Fintech, Consumer Finance; ADS downgraded to Neutral from Buy at bank America citing valuation with shares up 66% YTD and on the absence of few near-term catalysts and the expectation of continuing pressure on loan growth and flattish full-year revenue; SQ rises after CEO Jack Dorsey tweets that the company is considering making a hardware wallet for bitcoin.

·     Bitcoin news; Bitcoin (and crypto prices in general) slides after a cryptic tweet from Elon Musk apparently hinting at a potential split with the largest cryptocurrency. Musk’s tweet in which he wrote the hashtag #Bitcoin with a broken heart emoji also referenced lyrics from "In the End," a song by Linkin Park; NCTY shares rise after saying to buy carbon-neutral cryptocurrency miner Montcrypto Ltd, to invest up to C$5.6 mln in two phases

·     REITs; AVB downgraded and MAA upgraded at Truist as upgrading in the Sunbelt and downgrading on the coastal gateway. Apartment REIT FFO estimates are little-changed, but raising PTs an average of 12%, as improving leasing volume & rent spreads, a shortage of housing, fiscal stimulus and short lease duration to combat inflation support elevated valuations; UBS initiated a handful of names as prefer REIT subsectors emerging from the pandemic in a better position and eye idiosyncratic opportunities in subsectors impaired by the evolving environment – launch with 4 Buys (EXR, KIM, SUI, ELS) and 3 Neutrals (SPG, FRT, REG)

Healthcare

·     American Society of Clinical Oncology this weekend – several data points out this morning: BGNE presents clinical data from two phase 2 trials of Pamiparib at the 2021 ASCO annual meeting; PBYI presents data comparing findings from the phase ii control trial with the neratinib arm of the phase III ExteNET trial at ASCO; IOVA announces clinical data for lifileucel in combination with pembrolizumab in advanced melanoma at ASCO; FATE highlights positive interim Phase 1 data from its FT516 program for patients with relapsed / refractory B-cell lymphoma at ASCO; HARP falls after early-stage prostate cancer study data fails to impress

·     Pharma movers; BMY presents data from CheckMate -648 showing Opdivo plus chemotherapy and Opdivo plus Yervoy significantly improved overall survival compared to chemotherapy in unresectable advanced or metastatic esophageal squamous cell carcinoma; GLPG announced that primary and secondary endpoint results from the phase 3 SELECTION induction and maintenance study were published in The Lancet; CHRS and Shanghai Junshi Biosciences announce results from a nasopharyngeal cancer treatment trial; SURF posts encouraging new data from early stage trials of the company’s cancer treatments SRF388 and SRF617; CGEM rises following the release of phase 1/2a interim data on its non-small cell lung cancer candidate.

·     MedTech Equipment; COO Q2 sales of $719.5M (+31% organic; +7.0% vs. 2019) came in $28.5M above consensus, while EPS of $3.38 (+124% YOY) beat by $0.29 driven mostly by CooperSurgical, which beat by $19.9M on strength in Fertility, while CooperVision came in $8.6M ahead; SENS rises after saying Promise study demonstrated strong accuracy of 180 Day CGM Sensor; ABT said it plans a restructuring as costs are expected to be incurred during remainder of 2021 with majority of costs expected to be recorded in Q2; PEN upgraded at Buy at BTIG saying survey conducted by the brokerage suggests doctors stuck with co’s stroke portfolio despite share losses early in FY21 due to competitive trialing

·     Healthcare Services; PHR reported 1Q revenue that came in well above consensus expectations driven by strength across each of the segments (reported 16.5% YoY growth in the number of provider clients, 20.8% growth in revenue per provider client) but EBITDA came in below ests

Industrials & Materials

·     Industrials, Aerospace & Defense; NOC upgraded to Buy from Hold at Stifel and raise tgt to $475 from $350 saying defense industry stocks are cheap and the market will eventually realize it; GE CEO Larry Culp says the deal to combine its jet-leasing unit, GE Capital Aviation Services, with rival AER remains on track to close later this year or early next year; Morgan Stanley downgraded their U.S. Multi-industry view to In-Line from Attractive and are downgrading PNR from Equal-weight to Underweight amid macro strength, early cycle verticals have risk with high valuation and front-loaded revisions; OSK awarded $942.9m contract to update weapon system on U.S. army Stryker infantry carrier vehicles; EH shares surging all day in drone space, rising as much as 30% late day while UAVS also outperforms

·     Transports; CSX announces a 3 for 1 stock split; Raymond James keeps Outperform on FDX ahead of earnings and strong buy on UPS ahead of its June 9 analyst day as we surmise 2H20-borne tailwinds within the parcel complex have continued through 1H21 and should continue into 2022 as raise tgts for both FDX and UPS to $330 and $240, respectively

·     Metals & Materials; U.S. Steel (X) was upgraded to Neutral from Sell and raise tgt to $30 from $15 at UBS saying the current steel price rally is not the result of a super cycle, and it is more supply-constraint than demand-strength driven, according to data and steel buyers. But that said, it still has some legs, in our view; FCX downgraded to Neutral at Exane; MOS says it will immediately close its K1 and K2 potash mine shafts at Esterhazy, Saskatchewan, and resume production at its Colonsay potash mine to partly offset the closures (expects potash production to be reduced by ~1M metric tons during the transition period to March 2022)

Technology, Media & Telecom

·     Internet; FB is the latest big tech target of the European Union as regulators opened a formal investigation into its classified advertising service. The European Commission will probe whether the social network violated competition rules by using data gathered from advertisers to compete against them in classified ads; FB separately suspended Donald trump for 2-years

·     Semiconductors; AVGO reported strong results/guidance, which were above expectations, as pull-ins in wireless (AAPL) drove upside in the quarter with solid GMs at 75% as broadband and networking are expected to see double-digit y/y growth (raised guidance); FORM upgraded to Buy at Davidson based on ramping long term drivers (including an intensifying Foundry battle), strong model leverage and an increasingly attractive valuation

·     Software movers; ASAN reported Q1 non-GAAP EPS of ($0.21) better than (consensus ($0.27)) on revenue of $76.7M (vs. est. $70.1M), up 61% YoY and the 2^nd straight quarter of acceleration from 57% in FQ4 and 55% in FQ3; DOCU reported Q1 results that were much stronger than expected and raised its full-year forecast to $2.027B-$2.039B vs. est. $1.98B – Q1 billings of $527M (consensus $467M), up 54% y/y, an acceleration from 46% in F4Q21; MDB posted strong Q1 results, with non-GAAP EPS of ($0.15) vs. est. loss ($0.36) on y/y revenue growth of 39%, well above the consensus of 30% and an acceleration from 38% growth last quarter, and with Atlas revenue of ~$93.4M, up 73% y/y (guidance mixed); PD reported better than expected Q1 results. Q2 guidance calls for revenue growth ahead of expectations and EPS below; full-year guidance was raised for revenue and left unchanged for EPS; CRWD delivered quarter with near-record organic new ARR of $140M (was $144M as reported) vs. $143M in Q4/21 to total $1,194M (+74% y/y) vs expectations of $1,120M (+63% y/y), FCF of $117M (39% margin) and 1,524 customers.

·     Hardware, Components & Services; MSFT received U.S. antitrust approval for its planned purchase of NUAN, according to an 8K filing; according to Bloomberg, AAPL is working on a new iPad Pro with wireless charging and a redesigned iPad Mini; company is planning narrower screen borders for the new iPad Mini and looking at removing its home button. Apple is testing a glass back for the iPad Pro to enable wireless charging for the first time

·     Media & Telecom movers; Bill Ackman’s SPAC Pershing Square Tontine Holdings (PSTH) fell after the blank-check company confirmed that it was in discussions with Vivendi (VIVHY) to buy 10% of Universal Music Group for around $4 billion