Closing Recap

Thursday, September 09, 2021

Equity Market Recap

·     Markets were choppy as overnight weakness began to subside early after the ECB said it is not tapering financial support despite slowing its pace of emergency bond purchases. The rebound accelerated minutes later when the U.S. reported a pandemic-low 310,000 weekly jobless claims that was better than the expected 335,000. However, the S&P reversed course again in the afternoon, edging lower after Federal Reserve Board Governor Michelle Bowman said the U.S. is making great progress on price stability and is very close on its goal of maximum employment with very robust economic growth despite August’s weak monthly jobs report, and the central bank starting to scale back its asset purchases this year is likely appropriate if data comes in as expected. This sentiment that the central bank will provide less support once full employment returns echoes Fed Chair Powell’s comments at Jackson Hole last week, so investors will continue to monitor weekly jobless claims and monthly jobs data closely for signals on when tapering will begin. Today also marked the S&P’s first close below 4,500 in 2 weeks and extended its losing streak to 4 days, its longest since June 15-18, though it has not experienced a string of 5 red days since late February. However, the market’s weakness was not all-encompassing as the tech-heavy Nasdaq edged higher, travel stocks and other reopen plays were mostly higher despite several airlines (UAL, LUV, JBLU, AAL, DAL) warning that Q3/Q4 will be worse than previously expected and athletic names were stronger in conjunction with LULU’s quarterly beat.

·     Stock/sector movers: LULU surges to new record highs above $430 after its beat and raise, lifting other athletic names – NKE leads the Dow, UAA, SKX also higher; GME drops after reporting a wider than expected quarterly loss; furniture companies RH, LOVE both spike after strong earnings, boosting WSM, W in sympathy; airline stocks soar despite negative forecasts from LUV, AAL, DAL, UAL, JBLU; PTON jumps after launching Peloton Apparel, its own private label apparel brand; MRNA rises on its R&D Day that includes development of a single dose Covid and flu booster; possibly also getting push higher on vaccine mandate for all federal workers and contractors, though other vaccine names mixed; SAM tumbles to 52-week lows after withdrawing guidance and seeing decelerating growth trends in hard seltzer.

Commodities

·     Oil prices end lower as WTI crude slips -$1.16 or 1.67% to settle at $68.14 per barrel, pulling back after a smaller-than-expected weekly oil drawdown in stockpiles (-1.5M barrels vs. -4.6M consensus, -7.2M last week) but larger gasoline draws (-7.2M vs. -3.4M consensus). Meanwhile, some articles noted a report indicating China plans to release, or sell, a sizable chunk of its crude-oil reserves so that global raw commodity prices won’t keep rising.

·     Gold prices end higher, with Dec gold rising $6.50, or 0.4% to settle at $1,800.00 an ounce, getting a boost late day as Treasury yields tumbled following a 30-year auction and as the dollar slipped. With today’s gains, gold prices snapped its two-day losing streak.

Currencies & Treasuries

·     The U.S. dollar index (DXY) slipped on Thursday, down -0.2% to around 92.50 after renewed bets that the Fed may start early tapering of economic support capped gains (following Fed comments today), with the European Central Bank also slowing its bond buying. The ECB said it will trim emergency bond purchases over the coming quarter in a first small step towards unwinding its pandemic related emergency aid. Separately,

·     Treasury yields remained depressed, adding to theme most of the week, as the 10-year fell below 1.32% in the wake of better jobless claims data and a move by the European Central Bank toward pulling back on its emergency stimulus measures. The ECB said it would slow its emergency bond purchases implemented during the COVID-19 pandemic over the coming quarter, which ECB President Christine Lagarde said was not tapering. After two strong auctions earlier this week (for the 3 and 10 year), the U.S. sold $24B in 30-year notes at a yield of 1.91% vs. 1.928% when issued, with a bid-to-cover (demand) at 2.49 and indirect bidders awarded 69.67% and directs getting 17.25% of the auction.

Sector News Breakdown

Consumer

·     Retailers; LULU a standout quarter as EPS of $1.65 coming in well ahead of $1.19 consensus and sales in Q2 were +61% Y/Y supported by triple-digit store growth & 4% Y/Y CC gain in eComm on top of +157% last year (FY2H guide topped prevailing consensus and implies low/mid-20%’s 2 year CAGR); Macy’s (M) upgraded to Outperform with $27 tgt at Cowen as forecast continued momentum from: more agile inventory and pricing management, data-centric loyalty, and personalization actions; GME Q2 revenue totaled $1,183B topping $1.12B est. while EPS loss of (-$0.76) missed the est. loss (-$0.67); ASO raised its full-year earnings forecast, citing improving profitability to $5.45-$5.80 from prior $4.15-$4.50 on better sales; JILL posts Q2 profit from loss year ago while Direct to consumer net sales, which represents 46.4% of total net sales, grew 11.3% over 2020 levels; mattress retailers TPX, PRPL, SNBR higher – recall yesterday Wedbush noted Labor Day Weekend (the highest sales volume period of the year for the industry) checks indicate continued strong demand, with little consumer resistance to price increases, particularly at the mid-high end of the industry.

·     Auto sector; auto supplier LEA cut its Q3 revenue of $4.35 billion, below the midpoint, $4.66 bln, of its previous forecast range (comments at RBC Conference); Ford (F) said it plans to restructure its operations In India to bring to market some of the automaker’s iconic global vehicles and electrified SUVs, while ceasing local vehicle manufacturing in the region; NIO slipped after report that co may delay Hong Kong listing to next year; HYZN was initiated with an Overweight and $18 tgt at JPMorgan as think Hyzon’s early leadership in fuel cell vehicles, strong partnerships within the hydrogen ecosystem and pureplay focus could uniquely position it to outperform relative to competitors; CPRT reported F4Q sales and earnings above consensus as beat on both Service revenues and Vehicles, but upside from Vehicles sales was much greater

·     Housing, Furnishings, & Building Products; RH reported 2Q results that beat expectations on the top- and bottom-lines and margins, +470bps of EBIT margin expansion (to +26.6%) and raised its 2021 outlook for the second time this year; LOVE Q2 EPS of $0.52 easily topped views for a loss on sales of $102.4M from $61.9M a year ago (est. $113m); BLD upgraded from Hold to Buy at Benchmark after the co announced the acquisition of Distribution International (DI) from Advent in an all-cash transaction valued at ~$1.0B.

·     Consumer Staples; SAM tumbles in the beverage sector after saying the market for hard seltzer products has continued to experience decelerating growth trends and believe there will be continuing uncertainty about hard seltzer demand trends for remainder of 2021 (withdraws year guidance as sees year outlook below prior view); MCD will launch the McPlant in the U.K. and Ireland, a plant-based sandwich made in partnership with BYND; for CVGW, while Q3’21 results fell in line with pre-released expectations, Calavo announced the surprise retirement of its new CEO, adding another layer of uncertainty.

Energy

·     Energy research: Goldman removed DVN from their Americas Conviction List as they see greater recognition from the market for DVN’s fixed + variable dividend strategy with shares +79% since being added to the Conviction List vs peers +35%, XLE +18%, S&P +22%, though they maintain their Buy rating and see potential for dividend payout increase to drive the next leg of inflection for the shares, and they added PXD to its Conviction List; Truist raised their price target on XEC to $100 from $80 due to the share price not rallying over the past 6 months with dry and wet gas or various other gas stocks (XEC +12%, nat gas +85%, RRC +63%, AR +54%) and their forecast of the company generating one of the better 2023 FCF yields that will improve post-merger; KeyBanc named CRC as a new OW with a $45 target due to its high potential revenue from its carbon capture business in California; RBC initiated Outperform ratings on HAL ($27 PT) as the company with the strongest leverage among large-cap peers to upcycles in North American drilling and completion activity, BKR ($31 PT) given its diversified exposure across oil and gas value chain and growing exposure to an eventual energy transition, HP ($35 PT) with a premium that is justified by its market share and strong customer book with lower overall risk profile, SLB ($37) as it is positioned to improve returns given its global scale and growing digital platform, and Sector Perform ratings on NOV ($15), PTEN ($9.50), LBRT ($13), NBR ($100); CVX announced partnerships with CAT to develop hydrogen demonstration projects in transportation and stationary power applications and with GEVO to pursue sustainable aviation fuel investment

·     Energy news; PXD said they expect FCF to increase about 40% in 2022 from 2021, will hold oil production at 400k bpd in 2022 (+5%), and they anticipate stronger oil market in late 2022 into 2023; HES announced they discovered oil at Pinktail Offshort Guyana, its 20th significant discovery on Stabroek Block, and they are confident the Guyana government will approve field development plan for its Yellowtail project by the end of the year.

·     Alt Power, Utilities & Solar; Mizuho downgraded ES to Underperform and lowered their PT to $85 from $89 as they believe the current premium valuation is subject to near-term event risk, given the Public Utility Regulatory Authority (PURA) of Connecticut’s expected draft decision due on 9/15 that will consider intervenor recommendations to reduce rates via changes to its allowed ROE and equity capitalization; NJR raised its quarterly dividend by 9% to 36.25/share; JPMorgan initiated WPRT at N with a $5 target as a leading supplier of alternative fuel solutions for transportation applications but one they expect to under-earn over the next 2 years as they invest in their flagship HPDI product to support the low-cost conversion of heavy-duty truck fleets to low-carbon fuel.

Financials

·     FinTech & Payments; ADS posted continued improvement in business activity and credit card metrics in its Q3 business update. Full-year 2021 guidance, though, implies a contraction in revenue and average receivables, in line with previous guidance issued in July; several analysts weigh in on GPN after investor day as Wedbush said the co brilliantly rebuked the bear argument for the traditional payments’ eco-system, which has been strengthened following multiple competitive actions/events, including Square’s expected acquisition of BNPL pioneer, Afterpay

·     Bitcoin news; RIOT said in August, it produced 441 BTC, an increase of approximately 451% over its August 2020 production of 80 BTC; YTD through August 2021, the Company produced a total of 2,051 BTC; MARA said that DMG Blockchain (DMGGF) will become the first North American Bitcoin miner, excluding Marathon, to join Marathon’s mining pool, MaraPool; MA agreed to buy a cryptocurrency-intelligence company in an effort to accelerate and expand its crypto-related strategy.

Healthcare

·     Pharma movers; HGEN tumbles after U.S. FDA declines emergency use approval for COVID-19 drug; said the FDA declined to grant emergency use authorization for its drug, lenzilumab, to treat patients hospitalized with COVID-19; ACOR announced a corporate restructuring to reduce costs and more closely align operating expenses with expected revenue and announced changes to its management team; CRDF said that data from a colorectal cancer drug trial showed “robust objective response rate and progression free survival; FDA grants Fast Track designation to ELOX Pharma’s ELX-02 for cystic fibrosis; NVAX shares slid after reports its Covid vaccine filing guidance now end of 21 for MHRA,WHO,EMA FDA etc. In Q2 update WHO filing was august, MHRA was 3Q

·     Biotech movers; in research, BMRN was upgraded to Buy at Stifel with higher $96 tgt saying after significant underperformance since Aug-2020, we’re expecting a turnaround with (potential) Vosoritide FDA approval, and a strong launch thereafter. The firm downgraded VRTX to Hold with lower $213 tgt as agree somewhat with the bull case that Vertex’s CF franchise supports the valuation today, or even some upside to the current price; MRNA said it plans to announce the development of a vaccine candidate that will protect against Covid-19 and the flu, to be known as mRNA-1073. The company will also announce a pediatric vaccine called mRNA-1365, which combines its experimental respiratory syncytial virus vaccine with its experimental human metapneumovirus vaccine; BIIB shares tumble after the company admits Aduhelm launch slower than we anticipated.

·     MedTech Equipment; DGX raises year revs to $9.84B-$10.09B (from $9.54B-$9.79B) and adj EPS of $11.65 to $12.35 (from $10.65 to $11.35), with COVID-19 molecular testing driven by the surge of the Delta variant boosting expectations, while expectations for the base business remains consistent; IVC cuts FY21 revenue view to down 1% to up 2% from up 4%-7%; sees FY21 adjusted EBITDA $30M-$37M and sees FY21 free cash flow usage $10M-$20M; TWST enters into research collaboration with Boehringer Ingelheim.

·     Healthcare Services; HQY reported F2Q22 results which were above estimates and reiterated its F22 guidance while indicating that it continues to face COVID headwinds including sales deferrals for its HSA/CDB platform as well as lower revenue from commuter programs.

Industrials & Materials

·     Transports; airlines issue monthly outlooks: 1) UAL said it expects Q3 capacity to fall at least 28% compared with the same period in 2019, as bookings take a hit due to the rise in COVID-19 cases fueled by the Delta variant; 2) LUV said it sees October operating revenue down 20% to 30% vs 2019/expects q4 2021 capacity to increase about 60% YoY and to decrease about 5% vs. Q4 2019; 3) JBLU warned Q3 revs would be down 6% to 9% from the same period in pre-pandemic 2019, compared with previous guidance of a decline of 4% to 9% and sees bookings softness extending in to 4q trough period; 4) AAL cut Q3 rev outlook to be down 24% to 28% from the same period in pre-pandemic 2019, compared with previous guidance of a 20% decline (Street est. at -22.5% decline) and now expects adjusted pre-tax margin to be negative 10% to negative 14% versus previous guidance of negative 3% and negative 7%; 5) DAL now expects its adjusted total revenue in September to be near the low end of its prior guidance, which estimated a decline of 30% to 35% compared with the pre-pandemic September-ended quarter in 2019.

·     Metals & Materials; AXTA, PPG, SHW all downgraded to Neutral from Buy at Citigroup noting higher raw material prices and low availability that persisted through summer after winter storm Uri have been exacerbated after Hurricane Ida. Shortages, pricing headwinds, and the effects of the semi shortage on Auto OEM builds have led us to downgrades; overall metals (FCX, NUE, AA, CLF) saw a rebound after slipping earlier this week.

·     Industrial, Aerospace & Defense; AVAV posted recorded record-high funded backlog of $258M in Q1/22, which was up 67% y/y, bottom line results were significantly lower than in Q1/21, but still better than estimates for the quarter; Dow component BA rebounds for the first time in 4-trading days as industrials paced selling pressure this week.

Technology, Media & Telecom

·     Internet; U.S. listed China tech companies again pressured as China’s focus on reining in the power of tech companies continues/a report in the South China Morning Post notes that the government will halt approvals for new online games (shares of NTES, TCEHY, DOYU have been weak); SE to sell 11Mm ADRs with the option to offer 1.65Mm more as part of a so-called green shoe option; it is also raising $2.5B in a convertible bond that has a $375M Greenshoe; FB is building a chip to power machine learning that it uses to recommend content to users, The Information reports.

·     Semiconductors; in memory, Cowen said checks suggest there is now risk to December qtrs. and 1H22 outlooks as they are cutting estimates and price targets on MU, WDC and STX as believe that the bias will be directionally lower for both memory and hard disk drive prices. Said checks indicate pockets of demand softness across PCs, greater manufacturing allocation to server DRAM that has caused a build-up of inventory at hyperscale providers. Stifel a different take on STX saying they believe near-term demand trends remain on track, and we are very comfortable with our +9% y-o-y growth forecast for FY22 (June), which is in line with management’s stated outlook of "high single digit" growth y-o-y.

·     Software movers; SentinelOne (S) delivered a strong quarter with substantially higher than forecasted ARR, revenues, margins and guidance, highlighted by 127% Y/Y growth in ARR, which was an acceleration from the prior quarter. The company also reported record NRR (129%) and a record number of $1MM+ ARR customers.

·     Hardware, Components & Services; CSCO downgraded to EW from OW at Morgan Stanley, but up tgt to $59 from $57 saying while they remain confident in growth trajectory, achieving our bull case requires a stronger software growth trajectory, leaving us on the sidelines heading into upcoming Analyst Day; BASE shares tumble as beats Q2 revenue expectations, but non-GAAP net loss per share of $1.54 comes in wider than estimate of a $1.23 loss on weak rev outlook ($29.3M-$29.5M vs. est. $30.61M); NPTN upgraded from Underperform to Market Perform at Raymond James as expect NeoPhotonics takes a small portion of the ZR transceiver market, but a majority share of lasers, which helps profitability; APP upgraded to Buy from Hold with $90 tgt at Stifel saying positive stance is based on our increased confidence in the software platform outlook, which includes upside from the Adjust acquisition; DM announced the acquisition of Italian metal 3D service bureau and design specialist Aidro.

·     Telecom and Media; TMUS 12.5M share block prices $130; NOK extends US cellular relationship with 5G standalone core agreement; TGNA authorizes use of $300M share buyback program by 2022; DLR 6.25M share Spot Secondary priced at $160.50; the NFL and VZ announced a new 5G partnership; ESPN in talks to acquire NFL Sunday Ticket according to reports today.