Mid-Morning Look

Friday, December 08, 2023

U.S. stocks rebound, reversing pre-market losses after the November payroll reading showed higher wages m/m, lower unemployment and a headline beat on nonfarm/private payrolls. Higher reading raises fears on the Fed staying “higher for longer” on rates vs. expected interest rate cuts as soon as March (according to Fed Fund future). The market reversal higher comes as analysis shows net -35K jobs revision over last 2-months, raising soft landing expectations as the economy stays strong, but not “too-hot.” The CBOE Volatility index (VIX) remains pressured, down again with “zero” market fear into end of year. Oil prices are higher but remain on track for a 7^th straight week of losses while gold slides behind a bounce in Treasury yields and the dollar. The benchmark 10-year Treasury yield rose about 10 basis points after the release of November’s payrolls report, jumping to 4.27% from 4.18% just before the release but has since pulled back to 4.22%. Smallcaps Russell 2000 outperforms early, but solid move for stocks initially trying to reverse modest weekly losses. Stocks got another boost higher following 10:00 AM data as the University of Michigan inflation expectations were sharply below the prior reading. Stocks jump to new highs following the data as the S&P 500 (SPX) remains approaches 4,600.

Economic Data

·     Strong November jobs reading as private sector jobs +150,000 (mostly in-line with the +153,000 estimate) and Nonfarm payrolls +199,000 above consensus +180,000); average hourly earnings all private workers +0.4% from prior month (above est. +0.3%) and the Unemployment rate falls to 3.7%, below the 3.9% estimate. November labor force participation rate 62.8%. Solid headline jobs readings, higher wages, and lower unemployment.

·     The change in payrolls for September was revised down by 35,000, from +297,000 to +262,000, and the change for October remained at +150,000. With these revisions, employment in September and October combined is 35,000 lower than previously reported.

·     University of Michigan surveys of consumers sentiment prelim Dec 69.4 above consensus 62.0 and the Nov final 61.3; current conditions index prelim Dec 74.0 (vs. est. 68.5) vs final Nov 68.3; expectations index prelim Dec 66.4 (vs. est. 57.0) vs final Nov 56.8

·     University of Michigan data inflation expectations for 1-yr was 3.1%, sharply below the prior reading of 4.5% and inflation expectations for 5-yr reported at 2.8% vs. prior 3.2%.

Sector Movers Today

·     In Business/Info Services: Deutsche Bank said sees asymmetric risk/reward in EFX which they upgrade to Buy if mortgage rates decline to 5.5% (from 7%), and a recession should hasten this decline and maintains Buy on TRU as a mortgage recovery will help. Said SPGI and MCO are also set up to outperform as rate volatility declines; however, sees valuation upside for MCO as limited; also downgraded CTAS, VRSK, FDS to Hold.

·     In Homebuilders, Deutsche Bank reiterates DHI and MTH as Top Picks and adds TOL following its strong earnings report earlier this week, upgraded NVR to Hold from Sell on more favorable valuation and TMHC to Buy from Hold on favorable relative valuation and expected momentum in the business due to its diversified buyer exposures. KBH was downgraded to Sell on valuation.

·     In Building Products, Deutsche Bank sees the year ahead favoring stock selection, and has positive bias toward Residential Construction exposure and the Distributor business model. Reiterate Top Picks BLD, BLDR and CNM and add BECN to Top Picks; upgrades OC to Buy from Hold on a combination of solid Roofing and Insulation prospects and attractive valuation and downgrades POOL to Hold from Buy as it worries that potential downside risks to earnings in ’24 are now not at all reflected in the stock’s multiple especially after the more recent rise in the shares. Other changes, AMWD upgraded to Hold from Sell, AZEK downgraded to Hold from Buy.

·     In Semiconductors: Morgan Stanley with several changes: They move their industry view on Semiconductors from In-Line to Attractive, as see a bottoming process for the broad markets in 1H24 as they saw in vertical markets in CY23. Offsetting, they downgrade Semi Cap from In-Line to cautious as current trends are likely to soften. LRCX was downgraded from Overweight to Equal Weight w/ $720 PT as expects a recovery in memory utilization to dampen hope around a V-shaped recovery and see limited margin upside. In Semi’s, QRVO upgraded from Equal Weight to Overweight w/ $134 PT (from $120) saying it has the most attractive catalysts out of smartphone names while downgraded QCOM from Overweight to EW after good execution.

Stock GAINERS

·     AX +10%; after announced that it purchased two loan portfolios (including CRE, multifamily and mixed-use properties) from the FDIC.

·     CURV +30%; on better results as Q3 EPS loss ($0.03) smaller than est. ($0.05), adj EBITDA $19.4Mm vs est. $13.4Mm on revs $275.408Mm vs est. $245.83Mm, gr mgn 33.2%; guides Q4 net sales $267-283Mm vs est. $266.72Mm.

·     FSLR +4%; upgraded from Equal Weight to Overweight at Morghan Stanley and raise tgt to $237 from $214 saying after the 20% sell-off in the past three months, sees an attractive risk-reward profile for the stock – believes FSLR pricing will remain resilient in the near-medium term.

·     MBI +65%; after announced a “special” dividend from its insurance operating company, National Public Finance, $550M of which will be used to pay the $8 extraordinary dividend.

·     PARA +7%; after Deadline reported last night that David Ellison & RedBird Capital Kicking Paramount Global’s Tires Via National Amusements. https://tinyurl.com/4br48p2z

·     SMAR +2%; posted solid F3Q revenue and OM results and is raising its FY24 revenue and guidance; Q3 billings growth of 22% comes in well ahead of consensus of 17% and the Company maintaining its FY24 billings growth outlook of 20%.

Stock LAGGARDS

·     CDMO -18%; as lowers FY24 revenue view to $137M-$147M from $145M-$165M (est. $154.09M) after a wider Q2 miss and revs of $25.4M missing the est. $33.21M and said expects revenue growth during the second half of the fiscal year.

·     GOOGL -1%; give back some of Thursday gains after TechCrunch noted its new Gemini AI model is getting a mixed reception after its big debut yesterday, but users May have less confidence in the company’s tech or integrity after finding out that the most impressive demo of Gemini was pretty much faked. https://tinyurl.com/3u348y9d

·     HCP -20%; after cRPO/billings miss vs its ests, and mgmt still modeling sharp 2H deceleration; Q3 earnings beat as revs rises 17% y/y to $146M vs. est. $143M, but down from 26% last quarter; posted non-GAAP RPO of 700M missing consensus of $719M.

·     JOUT -13%; posted a bigger-than-expected Q4 EPS loss of (-$1.56) vs. est. loss (-$0.32) as sales fell to $96.3M from $196.4M y/y and below consensus of $121M saying was particularly impacted by significantly slower demand.

·     MDRX -15%; after saying they overhauled its leadership team, and named a new executive chairman, and interim CEO and interim CFO following an independent investigation of its internal controls.

·     RH -13%; Q3 results came in slightly worse than expected on the top line and much worse on the bottom line while the company reduced its outlook for FY23; lowers FY operating margin in the range of 13.6%-14.0% vs. prior forecast of 14.5% to 15.5%.

·     SWBI -7%; mostly in-line Q results with adj EPS $0.14 vs est. $0.14 on revs $124.96Mm vs est. $123.9Mm, gross margin 25.4%; warned margins continue to be temporarily pressured by fixed-cost absorption, inflationary factors, and inventory reserve adjustments.