Closing Recap

Monday, November 01, 2021

Equity Market Recap

·     Stocks finish higher, with the Smallcap Russell 2000 index leading (rising over 2%) while the S&P 500, Dow Jones Industrials and Nasdaq Composite all close at new record highs ahead of a key FOMC meeting on Wednesday and another earnings onslaught this week. Semiconductor stocks hit new record highs (SOX), with more strength in electric vehicles and solar stocks while defensive REITS lagged. Big week coming up for the “reopen” related names with lodging (HST), casinos (WYNN, MGM) and travel (BKNG) among those expected to report earnings as well as vaccine developed (MRNA, PFE). This morning, U.S. manufacturing data came in weaker than expected for ISM and Markit readings, with new orders slipping to lowest since June and construction spending falling for the first time since February. China’s economy showed signs of further weakness in October as power shortages and surging commodity prices weighed on manufacturing, as the official PMI fell to 49.2, (services sector dropped to 52.4). Overall, a good start to the week and month, as major averages try to build on its strong October where the S&P 500 500 gained 6.9%, the Dow Jones Industrial Average climbed 5.8%, the Nasdaq Composite added 7.3% and the Russell 2000 jumped 4.2%.

·     Stock/sector news: ON surges to record highs after its strong earnings report, lifts NXPI as SOXX Semis ETF hits ATH; HOG, BF/B, LEVI among the names seeing a boost after the U.S. and EU reached a truce on steel and aluminum tariffs over the weekend that will drop the EU’s retaliatory tariffs on motorcycles, jeans, and bourbon; BEN soars to highest since March 2018 on its quarterly beat and acquisition of Lexington Partners; DE jumps after reaching a tentative agreement with the UAW two weeks after the union began a strike; Bitcoin-related names outperform even as the cryptocurrency remains relatively flat since Friday; COIN hits its highest level since its initial spike in the stock’s 1st 2 trading days in April after Barron’s highlights it as a potential winner of the metaverse, SI rockets over 23% to record highs, MARA shoots higher; online gaming also outperforms as OpCo names GENI FUBO as their top short-term picks, DKNG as their favorite long-term idea in the space lifts each stock; in vaccine names, MRNA slides after the FDA delays its decision on approving its vaccine for children aged 12-17 while NVAX soars after it received emergency use approval in Indonesia, filed for authorization in Canada, and completed submission for rolling review to European Medicines Agency.

·     In politics, President Joe Biden’s economic agenda appears on track for passage by Congress even as Democrats are still tussling over lingering differences on a $1.75 trillion social-spending plan. House Democratic leaders are pushing hard to get that package finalized, with votes on both that bill and a smaller infrastructure planned this week.

Economic Data:

·     Markit October PMI Manufacturing Index: 58.4 vs. 59.2 consensus, and down from 60.7 prior; final output index for October at 52.1 vs flash reading 52.3 and final september 55.7; input prices index for October at 86.9 vs flash reading 88.2 and final september 87.0

·     ISM U.S. manufacturing activity index 60.8 in October vs 61.1 in september; prices paid index 85.7 in October vs 81.2 in September; new orders index 59.8 in October (lowest since June 2020) vs 66.7 in September; employment index 52.0 in October vs 50.2 in September

·     U.S. Sept construction spending -0.5% vs. est. up +0.4% to $1.574 trln, vs Aug +0.1%; Sept private construction spending -0.5%, public spending -0.7%

Commodities, Currencies & Treasuries

·     Oil prices rose on Monday, with WTI crude up $0.48 or 0.57% to settle at $84.05 per barrel as expectations of strong demand and a belief that OPEC+ will not pump production too fast helped reverse initial losses caused by the release of fuel reserves by China. Gold prices jumped $11.90 or 0.7% to settle at $1,795.80 an ounce, rallying along with other precious metals following a dip in the U.S. dollar, as investors position themselves ahead of Wednesday’s FOMC policy meeting where no rate hikes are expected, but market widely anticipating for them to begin the asset tapering plan to start this month, possibly concluding by summer ’22. Treasury yields edge higher, with the 10-yr briefly topping the 1.6% level before paring gains ahead of the FOMC this week, while shorter-term yields rose with the 2-yr above 0.515 and the 5-yr yield around 1.2%.

Sector News Breakdown

Consumer

·     Retailers; Cowen lowered estimates and PTs on off-price retailers BRUL, ROST, TJX as they see freight, wage, and cost inflation likely above 1H22 sell-side consensus; BTIG said Vietnamese production shutdowns over the summer have impacted TPR and CPRI with TPR appearing worse off and prefer CPRI into earnings due to its lesser Vietnam exposure, and say delays should be contained in the holiday quarter-early spring 2022; UBS started SIG at Buy with a $140 PT (57% upside) as they see the company sustaining above-industry sales growth over the next 4 years; BBBY formed a partnership with UBER to roll out a delivery service for baby and kids products through the Uber Eats app; Bank of America raised their PT on Buy-rated OSTK to $110 from $97 as they believe a higher multiple is warranted; Guggenheim upped their target on WMT to $185 from $170 as they believe the market is undervaluing its U.S. business at only ~10x EBITDA, estimates their strategic investments (Flipkart, JD.com, WalMex, Dada) are worth $30/share.

·     Auto sector; RACE is Morgan Stanley’s favorite electric vehicle stock with the company set to show off its technical capability, compelling designs and expanding total addressable market – says they believe the current price assigns little to no value for RACE’s EV strategy. We assume Ferrari BEV sales begin in FY25 and ramp to more than 30% of Ferrari unit volume by 2030; also in EV space, Chinese autos with monthly updates: 1) LI delivered 7,649 Li ONEs, up 107.2% year over year; as of October 31, 2021, the year-to-date and cumulative deliveries of Li ONEs reached 62,919 and 96,516 respectively; 2) NIO said it delivered 3,667 vehicles in October 2021, representing a decrease of 27.5% year-over-year; XPEV said monthly deliveries in October 2021 of 10,138 Smart EVs, representing an increase of 233% Y/Y and a 2.6% decline over last month

·     Home Furnishing, Housing, & Building Products; JELD mixed Q3 results as EPS beat $0.45 vs. est. $0.36 on sales $1.15B vs. est. $1.17B while backs year rev view up 10%-12% vs. est. $4.71B, which disappointed; SWK downgraded to Underperform from Hold at Bank America and cut tgt to $170 from $230 citing lackluster Q3 results amid slowing core Tools & Storage business along with negative comps likely coming in the first half; Credit Suisse lowered their PT on Wayfair (W) to $321 from $380 ahead of Thursday’s earnings as they lowered 3Q21-FY22 revenue estimates while incorporating higher shipping and fulfillment charges for the balance of 2021 and 1H22, but keep Outperform rating; ZG shares tumble into earnings with Truist and KeyBanc expressing caution ahead of results (Truist lowered numbers)

·     Consumer Staples; KO buys full control of BodyArmor for $5.6 billion in its largest-ever acquisition (confirming reports from last week); NWL upgraded to Overweight at JPMorgan saying they feel more confident with the turnaround as management finalized the divestitures of non-core businesses to simplify operations; BF/B, TAP among names that also benefitted from the EU/U.S. tariff deal news.

·     Restaurants; SBUX was upgraded to Overweight at Stephens with $130 tgt saying they believe now is the time to build positions as September U.S. & China comps accelerated, "bad" news is out and has support from $20B dividend/buyback program; SHAK upgrade from Hold to Buy at Truist with $90 tgt saying it’s not a call on earnings (11/4) as they expect a miss, but more believe that NT concerns around a slow urban sales recovery and inflation creates a strong buying opportunity (SHAK’s shares are -18.4% YTD vs. +9.8% for restaurants)

·     Lodging & Leisure sector; in leisure, HOG shares rally after the U.S. and European Union reached a trade truce this weekend/the EU agreed to drop retaliatory tariffs on U.S. motorcycles, jeans, and bourbon whiskey (HOG said it sees a lower tariff impact after the U.S./EU deal); TRIP downgraded to Underweight from Overweight at Barclay’s and cut tgt to $30 from $49; Shanghai Disneyland closed Sun following a suspected COVID-19 outbreak; monthly gun data was weak (RGR, SWBC) as NICS checks showed criminal background checks fell 22% in October from a year ago, (to 2.59M from 3.3M) and down -1.3% from 2.63M in Sept; LTH initiated with Buys at Mizuho ($24), OpCo ($40), RBC ($21), Guggenheim ($21), and Neutral at Morgan Stanley ($21), Goldman ($23), BMO ($20)

·     Casinos & Gaming; for WYNN, LVS, MLCO, Macau’s gaming bureau reported October gross revenue from games of fortune in the region decreased 40% year-over-year to 4.365B patacas; BALY submitted a proposal to Chicago to develop and operate the $1.6 billion Bally’s Chicago, an entertainment destination resort; FUBO rises behind positive comments from Opco saying GENI and FUBO top short-term picks and DKNG remains our favorite LT idea in online gaming

Financials

·     Bank & Asset Managers movers; BCS CEO Jess Staley was asked to step down Monday following an investigation by U.K. regulators into his relationship with convicted sex offender and financier Jeffrey Epstein; BAC was downgraded to Underperform at Baird as believe the risk/reward of the stock is generally unfavorable as it trades near ~2.2x TBV and ~13x-14x normalized EPS; BEN reports Q3 EPS $1.26 vs. est. $0.86 with revs $2.18B vs. est. $2.02B and AUM at $1.53 trillion – also to acquire Lexington Partners, a leader in secondary private equity and co-investments; IBKR said Oct. daily avg. rev. trades +31% vs. +121% y/y and said had 1.58 mln client accounts in Oct. 2021, 57% higher than prior year and 3% higher than prior month

·     Insurance; Loew’s (L) Q3 adj EPS 87c, pretax catastrophe losses $187M, revenue $3.37B, underlying combined ratio 91.1%; CNA Q3 core EPS 87c vs. est. 60c, posted record underlying combined ratio of 91.1%, double-digit gross written premium growth across all P&C business segments and new business growth of 24%; Piper downgraded KMPR to Neutral after reducing their EPS estimates following last week’s troubling results; Wells downgraded AON to EW after its earnings report on Friday and with shares +37.6% since pulling the WLTW merger 7/26; Truist raised its FY21 and 22 EPS estimates on KNSL after its earnings last week to reflect faster growth and greater optimism on underwriting profitability

·     FinTech, Payments, & Consumer Finance; LDI with a Q3 beat as EPS $0.46 tops the $0.39 estimate and revs $923.7M vs. est. $881.6M saying market share growth increased to 3.5% from 2.4% during the same quarter last year; SOFI shares outperformed in lending space; ARKB initiated Buy and $27 tgt at Roth Capital as view it as an ESG-friendly way to gain exposure to the quickly expanding crypto mining sector. ARBK is projected to increase its capacity fourfold by 2023, powered by 100% renewable energy; AFRM slides after Morgan Stanley said acceptance growth at AFRM is slowing, and they think it supports view that the leading US BNPL provider and its peers may need to rely on existing payments infrastructure from the card networks and merchant acquirers to scale, add new products, and drive adoption". SI surges after mentioned in a Morgan Stanley note that observes increased institutional investor interest in cryptocurrency.

Healthcare

·     Biotech movers; Two biotech players in the COVID-19 vaccine race are moving in the opposite direction as MRNA shares slipped after saying it was notified the U.S. FDA will require additional time to assess the company’s emergency request to approve its Covid-19 vaccine for children ages 12 to 17 as regulators examine the risk of a rare heart inflammation; NVAX rises after the company said Indonesia cleared its protein-based vaccine for emergency use, the first approval anywhere in the world for Novavax. NVAX also files for covid-19 vaccine authorization with health Canada and completes submission for rolling review to European medicines agency; ANIP rises after saying the FDA approved its supplemental New Drug Application for Purified Cortrophin gel for indications including MS, rheumatoid arthritis, and nephrotic syndrome.

·     Pharma movers: BMY downgraded to Hold from Buy at Argus on concerns about generic competition for Revlimid, the company’s largest product by revenue; MRK was upgraded to Buy from Hold at Argus and setting a price target of $110 after generated strong sales of oncology and antiviral drugs in 3Q21, and has added a new growth driver in Molnupiravir, which could be an important weapon against COVID-19 and has the convenience of oral delivery; ACAD was upgraded to Buy at Guggenheim saying upgraded saying they like the risk/reward heading into the upcoming Trofinetide pivotal data in Rett; AUPH slips after GSK said it is not interested in making a bid for the company.

·     MedTech Equipment; ZBH tgt lowered to $185 from $205 at Guggenheim as expect the company to miss on both the top- and bottom lines given the macro headwinds that cropped up during the quarter, an outcome that shouldn’t come as a surprise to investors on the heels of cautious commentary from management in September and disappointing results from peers.

·     Healthcare Services: ALGN announces $100 million accelerated stock repurchase program; in research, Citigroup downgraded BHG and CNC to neutral in managed care after they analyzed Exchange (HIX) data to assess market position and pricing for 2022 across coverage universe and sees a more competitive backdrop and have some concerns around "land grab", with premium decreases in 2022 in the face of higher cost trend and lower margin seen thus far in 2021.

Industrials & Materials

·     Aerospace & Defense; LMT was downgraded to Neutral from Buy at Bank America; MANT has agreed to buy systems-engineering firm Gryphon Technologies for $350 million from AE Industrial Partners/Gryphon Technologies provides digital and systems engineering for Department of Defense agencies.

·     Industrial & Machinery; AGCO downgraded to Neutral from Buy at Bank America and cut tgt to $135 from $154 post earnings saying realistic peak earnings power is now priced into the shares; DE said it reached a tentative agreement with the United Auto Workers (UAW) two weeks after more than 10K workers at 14 plants went on strike; FLR wins $1.16B contract extension for Navy nuclear propulsion work

·     Transports; AAL cancelled 262 flights (4.6% of total) on Monday and nearly 850 domestic and international flights (16% of total) on Sunday, with a total of over 2,200 flights cancelled since Friday citing staffing shortage and unfavorable weather as reason; XL said it expects continuing supply-chain issues, including microchip shortages and lack of new fleet chassis, to hurt Q3 results, which include lower revenue as sees revs about $3.2B, below last years $6.3M; Credit Suisse lowered their PT on LYFT to $69 from $84 after lowering their estimates ahead of tomorrow night’s earnings; CAR shares slip ahead of earnings tonight, but shares are up over 360% YTD, helping pace gains in the Dow Transport index this year (which is up 27% YTD)

·     Metals & Mining; steel stocks active (X, NUE, STLD) after the U.S. and European Union reached a trade truce on steel and aluminum tariffs over the weekend. The two sides were working hard to reach a deal before Dec. 1, when the European retaliatory tariffs were set to double; the 25% tariffs will apply to EU exports beyond 3.3 million tons.

·     Materials; paper stocks IP and WRK downgraded to hold at Jefferies and cutting estimates sharply to reflect more earnings leakage, even after lowering numbers into the print. The pivot on growth slowing, inventories normalizing, & stepping up exports came 6-9 months sooner; LAC made an offer to acquire Millennial Lithium (MLNLF) in an all-stock deal for C$4.70/share, or ~US$400M; MOS downgraded to Neutral from Buy at Citigroup; MERC downgraded to Underperform & lowers tgt to $8 at RBC Capital as believe that the next year will be challenging for Mercer’s pulp business given the potential combination of a negative demand shock (Chinese energy curtailments) and a sharp rise in low-cost BEK capacity.

Technology, Media & Telecom

·     Semiconductors; the Philly semi index (SOX) making new all-time highs, topping 3,485 (prior record high 3,484.19), helped by better ON earnings; NVDA hits new all-time highs; ON as Q4 EPS of $0.87 tops $0.73 est. and revs of $1.74B, rising 32.2% beats the $1.71B estimate while guides Q4 revs $1.74B-$1.84B above ests $1.72B

·     Software movers; ZEN shares active after Bloomberg reported this morning that activist Legion opposes SurveyMonkey’s owner sale to Zendesk (the M&A news Friday sunk ZEN shares as analysts were negative on deal); HUBS tgt raised to $850 at BMO calling it one of their favorite high growth software names ahead of earnings, and RBC said they are buyers into Q3 earnings based on positive checks; CRWD downgraded from Buy to Neutral at BTIG saying checks lead them to believe that competition is on the rise and that tailwinds to CRWD’s growth in CY22 will downtick from CY21 (think ARR growth will likely moderate into the 40% – 45% range in a FY23 upside scenario); MTTR rises again after jumping 18% on Friday – seen as a "metaverse" play – recall Wedbush this morning said favorite metaverse play continues to be MTTR

·     Hardware, Components & Services; DELL announces distribution ratio for VMW spin-off special dividend (stockholders will receive .440626 of a share of VMware Class A common stock for each share of Dell Technologies common stock held as of 10/29); CMTL confirmed receipt of an unsolicited, non-binding proposal from ACTG; said Comtech’s Board of Directors is evaluating the proposal in consultation with independent advisor

·     Media movers; Barron’s said it’s time for CNK, IMAX to shine as IMAX had its best October on record thanks to “Dune” and other films while MKM said CNK’s Q3 should show signs of improvement as momentum builds; Barron’s also said MSGS, MSGE, AMCXeach of which are controlled by the Dolan family, were inexpensive due to a perceived Dolan discount and the MSG stocks should benefit from online sports gambling starting in NY over the next few months; AMC claimed October 2021 is estimated to be considerably better than any month for the domestic industry box office since February 2020; Evercore started SEAT at In-Line with a $16 PT saying the risk/reward is relatively balanced at current valuations; Bernstein issued upgrades to Market Perform on SPOT due to strong music streaming industry data, DISCA as they no longer think risk/reward is skews significantly negative given recent underperformance despite their view the company still faces a long list of very serious concerns, and ATVI; Citi said cable firms’ longstanding competitive advantage within the broadband market is at-risk with it on the precipice of meaningful change, and opened a negative catalyst watch on CHTR due to greater risk given its premium FV/EBITDA multiple and said CMCSA faces similar risks; Ahead of earnings, JPMorgan raised their estimates/PTs on FWONK, LYV, MSGS, WWE and lowered their PT on MSGE to $79 from $105 as it now excludes contribution from Comcast where channels went dark October 1; RBC downgraded TRI to Sector Perform following strong YTD shares price move