Mid-Morning Look

Tuesday, August 22, 2023

U.S. stocks open sharply to the upside but lose momentum quickly as the S&P moves back near the breakeven level as investors digest some important earnings releases in retail, a pop in Treasury yields and mixed economic data. Treasury yields hit another fresh 16-year high, with the 10-year topping 4.36% before paring gains and the 2-yr above 5%, both breaking long-term downtrends ahead of the Fed 2-day Jackson Hole meeting this Thursday and Friday (Powell speaks Friday). The US dollar extending gains as gold prices are flat after bouncing on Monday. Banking stocks under pressure early after S&P ratings lowered the grades of several US banks (KeyCorp, Valley National Bancorp, UMB Financial & Associated Bancorp among them) citing higher funding costs and reduced deposits impacting their liquidity; comes 2 weeks after Moody’s cut a series of US banks. Interest rate sensitive sectors extend declines as Utilities and Telecom remain weak. Technology, Communications and Consumer Discretionary helped lead major averages higher yesterday despite negative market breadth – today looks like a mirror image so far though breadth is flattish.

Economic Data

·     Existing Home Sales for July fell -2.2% to 4.07M unit rate below consensus 4.15M and June 4.16M as July inventory of homes for sale 1.11 mln units, 3.3 months’ worth and the July national median home price for existing homes $406,700, +1.9 pct from July 2022.

·     August Richmond Federal Reserve Manufacturing Survey reported at down -7, in-line with consensus and vs. -9 prior; shipments -5 vs. -6 prior; Capacity utilization -11 vs. -7 prior, and volume of new orders -11 from -20 prior.

Sector Movers Today

·     IT and BPO Services coverage: JP Morgan upgrades CTSH from UW to Neutral as expectations bar seems low enough against progress on CEO’s priorities and downgrade G from Neutral to Underweight on higher relative concerns of achievability of FY23 guidance. Said continues to recommend EXLS as one of its top picks for the rest of the year, which benefits from both trends. APP was upgraded to Buy from Hold at Jefferies citing greater confidence in market share gains and price taking in its mobile ad tech segment and higher near to medium term growth outlook.

·     In China Internet: BIDU rises as Q2 EPS $3.11 tops est. $2.32 and revs $4.7B beat the $4.57B estimate as revenue from its online-marketing services grew 15% y/y to CNY21.08 billion as the number of monthly active users for its flagship Baidu app rose 8% to 677 million in June; Online video platform IQ beat as net income RMB 0.37 vs year-ago loss of RMB 0.28 as revs beat and reports monthly average revenue per membership of RMB 14.82 vs. y/y RMB 14.53.

·     In REITs: IRM upgraded to Outperform at RBC Capital and raises tgt to $68 from $58 post 2Q23 results that included key financials ahead of expectations; PEB provided operating update after impact of Tropical Storm Hilary, said did not see material damage, sees demand to be negatively impacted this week due to travel disruptions & negative media coverage of southern California. In research, ADC named top picks in the Triple-Net REIT space at Stifel.

·     In Utilities: EIX upgraded from Neutral to Buy at Mizuho as believes investors are underestimating its earnings power as the company continues to rerate and delivers on its forecast 5-7% EPS CAGR. XEL was downgraded to Neutral at Bank America after regulatory setbacks in Minnesota & Colorado and potential wildfire liabilities that will make a positive re-rating challenging. PNW upgraded to Buy from Neutral at Mizuho saying is sees an increasingly constructive regulatory environment in the utility’s Arizona home market in the coming years.

Stock GAINERS

·     APP +2%; upgraded to Buy from Hold at Jefferies citing greater confidence in market share gains and price taking in its mobile ad tech segment and higher near to medium term growth outlook.

·     FN +25%; after Q4 results topped estimates saying new AI products and data-communications sales drove numbers higher; Q4 adj EPS $1.86 vs. est. $1.80; Q4 revs rose 12% y/y to $655.9M above est. $641.4M; guides Q1 revs $650M-$670M, vs. est. $657.2M.

·     FULC +47%; after the FDA has lifted the clinical hold on the Investigational New Drug application for FTX-6058 for the potential treatment of sickle-cell disease.

·     HAS +8%; after Bank America reiterated Buy and raised its tgt to $90 from $85 due to the exceptional performance of Monopoly Go and Baldur’s Gate 3.

·     LOW +2%; better than expected 2Q results, with comps coming in better as decreased (-1.6%) vs. est. for drop of (-2.6%) and margins also beat expectations by 50 bps, up 40 bps Y/Y calling out a “strong spring recovery” and traction in its Pro and online businesses; Reiterated FY guidance.

·     NVAX +6%; after headlines that the company’s updated covid shot generates immune response against ‘Eris’ subvariant.

·     TSLA +1%; after jumping 7.3% on Monday when it snapped its 6-day losing streak.

Stock LAGGARDS

·     BJ -3%; Q2 adj EPS $0.97 tops est. $0.90 but revs of $4.96B ell from $5.1B y/y and below the $5.15B estimate while comp store sales rose 1.1% missing the 2.1% estimate; guides year EPS $3.80-$3.92 vs. est. $3.88; and sees 2% comp sales increase, below prior 4%-5%.

·     COTY -2%; mixed Q4 results as EPS just below estimates on slightly better revs ($1.35B vs. est. $1.31B) while forecasts FY24 adj. EPS $0.44-$0.47 vs. est. $0.48 saying higher labor and production costs impact results.

·     DKS -24%; shares tumbled after lowering its FY adj EPS view to $11.50-$12.30, below its prior view $12.90-$13.80 after missing Q2 revenue and profit estimates ($2.82 vs. $3.81 est.) due in large part to the impact of elevated inventory shrink.

·     EBS -10%; after being replaced by AAP in the S&P 600 at open on 8/25.

·     M -7%; Q2 adj EPS $0.26 tops the $0.14 estimate as sales fell -8.4% y/y to $5.13B above est. $5.09B dragged down by heavy discounting and higher promotions with in-line GMs of 38.1% and left annual forecast unchanged despite beat

·     NDSN -3%; as Q3 EPS $2.22 misses the est. $2.32 on sales $648.67M vs. est. $665.65M and guides FY revs +0-2% below est. +2.45% and EPS $8.90-9.05 vs est. $9.06.

·     PCT -18%; as files to sell $200M of Green Convertible Senior Notes.