Mid-Morning Look

Monday, February 14, 2022

U.S. stock indexes open mixed (S&P and Dow slip while Nasdaq and Russell 2000 higher) amid concerns about higher interest rates, while comments from a Russian official eased worries about a possible invasion on Ukraine. Russian Foreign Minister Lavrov helped ease market concerns with comments earlier this morning saying Russia can consider continuing talks with the U.S and said he would propose to continue diplomatic measures and that part of the U.S. response was more constructive. Lavrov said prolonged discussions are not possible, but there is always the possibility of agreement. These comments helped rally S&P futures, which fell to overnight lows of 4,354 back near highs of 4,428 but were again tested by more tough talk on interest rates from the Fed’s Bullard. St Louis Fed President Jim Bullard (his “hawkish” comments last Thursday sunk stock markets) said this morning in a CNBC interview that the Fed’s credibility is on the line and rate hike timing is Powell’s responsibility. He also reiterated the last 4 inflation reports show it broadening, justifies 100 bps policy increase by July 1 (similar comments to last week). He also noted inflation reports since October has called into question the idea price increases will moderate without Fed action. Goldman Sachs lowered its S&P 500 price target to 4900 from 5100 saying since November outlook, inflation has surprised to the upside and their economists now expect 7 Fed hikes in 2022 and real yields to drive a 33-bps rise in the nominal 10-year Treasury yield to 2.25%. A very choppy start to the morning for U.S. stocks with the S&P 500 battling the 4,400 after breaking below its 200-day moving average support last Friday (now roughly 4,453). Gold to the highs up 1.45% or $26 to $1,868 an ounce – now up 10 of the last 11 sessions, Treasury yields rising with the 10-year back above 2% and oil prices slip slightly. Another very busy week of earnings coming up as well including that of CSCO and chip giant NVDA as well as some big box retail like WMT.

Sector Movers Today

·     Auto sector; TSLA sold 59,845 China-made vehicles in January, the China Passenger Car Association (CPCA) said on Monday after selling 70,847 China-made vehicles in December; Chinese EV makers NIO delivered 9,652 cars in January, increasing by 33.6% year on year, and XPEV delivered 12,922 vehicles – CPCA said passenger car sales in January in China totaled 2.11 million, down 4.5% from a year earlier; GT was upgraded to Overweight from Neutral at JP Morgan after the firm reported solidly better 4Q21 results Friday but at the same time pointed to a softer than expected 2022 outlook, citing inflation, sending the shares -27.4% lower; IAA downgraded to Neutral from Buy at Guggenheim following recent weaker than expected 4Q

·     Semiconductors; MU upgraded to Outperform from Neutral with $120 tgt at Wedbush noting that the assumptions for NAND pricing used have become conservative, given the recent disruptions at Western Digital’s plants in Japan; TXN was downgraded from Outperform to Market Perform at Raymond James citing rising capital intensity late in the cycle, with new spending details that they and the market weren’t expecting ($3.5 billion in CAPEX for 2022); AMD closed on its $50B acquisition of XLNX today; NVDA in focus with earnings later this week (February 16^th after the close)

·     Insurance; MET is exploring the divestment of its U.S. variable annuity book as it seeks to free up resources to invest in higher-growth parts of its business, Reuters reported this weekend; in research, ALL was upgraded to Buy from Neutral at UBS as believe that underlying margin improvement beginning in 2H22 will drive upward EPS estimate revisions and multiple expansion, while downgrade PGR to Neutral from Buy as believe it is generally ahead of the industry in taking corrective rate filing action and should be able to see margin expansion ahead of peers , but believe that this is already largely reflected in current valuation

·     Aerospace & Defense; LMT announced it has terminated its agreement to acquire AJRD the decision to terminate the agreement follows the U.S. FTC’s lawsuit filed late last month seeking a preliminary injunction to block the acquisition; TGI was upgraded from Hold to Buy at Jefferies and raise tgt to $26 from $20 w/ visibility to positive FCF following the last divestiture this month and saying revenues, profit, FCF are all set to inflect; BA said is not concerned about a potential disruption to Russian titanium supplies because of tensions over Ukraine, but is keeping a close watch on other industry supply chain pinch point; EADSY was upbeat on freighter sales, while plays down supply chain fears

Stock GAINERS

·     BDSI +51%; to be acquired by COLL for $5.60 per share in cash in deal valued around $600M

·     CNR +22%; after saying it received a non-binding proposal from its largest shareholder, Clayton, Dubilier & Rice LLC, to acquire the rest of the company for $24.65 a share in cash.

·     GT +5%; upgraded to Overweight from Neutral at JP Morgan after the firm reported solidly better 4Q21 results Friday but at the same time pointed to a softer than expected 2022 outlook,

·     MU +3%; upgraded to Outperform from Neutral with $120 tgt at Wedbush noting that the assumptions for NAND pricing used have become conservative, given the recent disruptions at Western Digital’s plants in Japan

·     SPLK +7%; as CSCO recently made a takeover offer worth more than $20B for SPLK according to reports late Friday by the WSJ, but the companies aren’t currently in active talks, and it isn’t clear whether other potential suitors are circling Splunk https://on.wsj.com/3rMsGAQ

·     THS +4%; Q4 EPS was in-line on slightly better sales of $1.17B, but down -1% y/y while guiding FY22 Rev growth to 11% v est. ~4% which brings EBITDA midpoint above street estimates

·     ZG +6%; extends last week earnings gains to best levels in about a month

Stock LAGGARDS

·     AJRD -4%; after LMT announced it has terminated its agreement to acquire AJRD

·     APA -4%; as energy stocks among weakest S&P sectors to start the week

·     APRN -7%; signed an agreement for an additional $5.0m private placement investment by RJB Partners LLC, an affiliate of Joseph N. Sanberg

·     MRNA -10%; as COVID vaccine makers among worst performers with PFE, NVAX tumbling too – recall late last week FDA postpones panel on PFE preschooler covid shots

·     SE -18%; after the Indian gov’t bans 54 Chinese apps that pose threat to the country, including popular Chinese apps like TikTok, WeChat, UC Browser and more to safeguard the interests of crores of Indian mobile users

·     TSN -2%; downgraded to Equal weight at Barclay’s saying while reported strong results last week, they see limited upside potential at current levels

·     WEBR -16%; after posting a top line miss (Revs $283.1M vs. est. $310.78M) as gross margins missed, and EBITDA guidance was taken down citing cost inflation and supply chain headwinds and sees FY22 net sales growth to be 6%-8% above FY21-year-end