Mid-Morning Look

Wednesday, January 04, 2023

U.S. stocks opened higher, rebounding after yesterday’s modest pullback led by Financials, REITs, and Communications, but another “hot” jobs reading once again raise concern the Fed will stay the course of longer and deeper interest rate hikes to cool a strong employment picture. The monthly ISM Manufacturing report contracts for a 2nd month, as Prices Paid & New Orders plunged, but the employment component was strong and the JOLTS report showed continued strength as well, as inflation wages remain one of the key targets of the Fed. Energy the biggest market decliner for a second day after massive outperformance in 2022, as investors rotate out of 2022 winners and into 2022 losers (technology). Several large cap movers following research calls on Wall Street as MSFT tumbles 5% after UBS downgraded shares. Next up, minutes of the Dec. 13-14 meeting will likely show that it was concern about the labor market not cooling fast enough that drove 17 of 19 FOMC participants to write down a terminal rate above 5% in the updated dot plot. That was a sharp turnaround from the dovish November minutes. Treasury yields are down a second day along with the dollar, boosting gold prices and oil tumbles a second day as well on demand concerns.

Economic Data

·     JOLTS job openings 10.458M in November vs. Oct 10.512M but well above the 10.0M estimate

·     ISM Manufacturing PMI for December 48.4 vs 48.5 est. and 49.0 in November; strong employment trends weigh on markets as employment index 51.4 in December vs 48.4 in November, which overshadowed a drop in orders and prices paid – prices paid index 39.4 in December vs 43.0 in November and new orders index 45.2 in December vs 47.2 in November

·     Bespoke Investment notes the only times the Prices Paid component of the ISM report fell by more (-47.7 points) in a 9-month span was during the financial crisis and in April 1975.

Sector Movers Today

·     Retailers: TGT downgraded to Equal Weight from Overweight at Wells Fargo as see a complicated and rather uninspiring investment backdrop for their group as we kick off 2023 saying they like staples retailers leveraged to trade down and the low income consumer, with DG, BJ, and WMT at the top of our list; AMZN tgt trimmed at UBS (to $125 from $165) and cut AWS ests to +21% y/y in 4Q, +18.4% y/y in ’23, and +19.3% y/y in ’24, considerably below VisibleAlpha (VA) consensus at 23% / 22% / 22%, respectively; BURL was upgraded to Hold from Sell, price target $200 at Loop Capital; OSTK downgraded to Hold from Buy at Needham; BABA shares rise with Ant’s approved fundraising plan boosting optimism that China’s regulatory clampdown on its internet sector is easing

·     REITs: several analyst changes today: Raymond James downgraded BFS and ROIC in shopping center REITs while saying FRT and KRG are top picks; Mizuho downgraded CUZ saying the Sunbelt should see an uneven recovery post-COVID, driving our then-Neutral stance on CUZ and HIWwhile upgrade VNO to Neutral, remain Underperform on HPP, and keep our Buy on BXP, KRC and PGRE; DLR was downgraded to Underperform at Credit Suisse and cut tgt to $81 from $91 as forecast further ~20% downside from current levels after falling -40% in 2022; Deutsche Bank downgraded BXP from Buy to Hold as office CRE faces a secular headwind as companies right-size their footprint and a cyclical slowdown driven by an expected recession and AVB cut from Buy to Hold as the company’s $2.3B development platform harbors negative leverage risk

·     Industrial & Machinery: UBS with several changes in the sector as HON downgraded to Sell from Buy on full valuation, anticipated order slowdown & subsequent backlog burn and tgt cut to $193 from $220; EMR downgrade to Neutral at UBS as sum-of-the-parts analysis and pro forma acquisition modeling suggest full valuation – tgt to $100 from $118; HUBB downgraded to Sell with shares at a more than 2 SDEV premium vs the SPX, we see scope for 2023 derating – tgt to $225 from $254; TT upgraded to Buy and raise PT to $200on view its well positioned to bridge the gap to a more accommodative Fed policy / macro backdrop via sustained order momentum and resulting backlog buffer; ENVX plunges after the company’s Executive Chairman gave a special presentation yesterday, with JPMorgan flagging further delays in the production ramp, which the broker said may disappoint investors, while Cowen reiterated Overweight and $25 tgt

·     Software movers: CRM announced a restructuring plan that it will incur approximately $1.4B-$2.1B in charges in connection with plan which includes a reduction of current workforce by about 10%, select real estate exits and office space reductions within certain markets; MSFT downgraded to neutral from buy at UBS and lowered its price target to $250 from $300 saying Microsoft’s growth engine, Azure, is entering a steep growth deceleration which may be due to maturation and not just a tough macro environment; SGH rises on earnings as 1Q adj EPS $0.79 vs est. $0.57 on revs $465Mm vs est. $447.7Mm, gross margin 25.4%, adj op Inc $54.8Mm vs est. $43.3Mm; guides 2Q sales $460Mm vs est. $432.2Mm and adj EPS $0.45-0.75 vs est. $0.49; in research, RPD and VEEV downgraded from Overweight to Equal Weight at Barclays as start shifting to more defensive picks in 2023; Bank America upgrades PWSC (defensive) and AMPL (category leadership) to Buy from Neutral; downgrade BIGC (execution risks) and ZI (valuation) to Neutral from Buy; and downgrade ENFN (transition risks), DCT (competition) and LAW (low model visibility) to Underperform from Neutral and revising C23 estimates downward heading into recession – 2022 was a tough year; PRGS announced plans to acquire NoSQL multi-model database vendor MarkLogic for $355 million

Stock GAINERS

·     BA +3%; topping $200 per share and among leaders in the Dow, extending recent gains

·     BABA +6%; shares rise with Ant’s approved fundraising plan boosting optimism that China’s regulatory clampdown on its internet sector is easing

·     CE +4%; upgraded to OP from SP at RBC given better than expected M&M integration, double-digit growth anticipated in EM, a Q1/23 trough in AC EBIT, and solid deleveraging

·     CRM +3%; announced a restructuring plan that it will incur approximately $1.4B-$2.1B in charges in connection with plan which includes a reduction of current workforce by about 10%

·     GEHC +6%; announced that its previously announced spin-off from GE is complete, and GE HealthCare will begin trading as an independent company today

·     MU +5%; along with gains in WDC on reports that China is pausing its investments aimed at building a chip industry to compete with the U.S. as the country’s COVID resurgence strains it economy https://bloom.bg/3WLt9A2

·     SGH +3%; rises on earnings as 1Q adj EPS $0.79 vs est. $0.57 on revs $465Mm vs est. $447.7Mm, gross margin 25.4%, adj op Inc $54.8M vs est. $43.3M; guides 2Q sales $460M vs est. $432.2M

·     WYNN +6%; strength in China related stocks and those with exposure to Macau

Stock LAGGARDS

·     BKR -3%; as energy stocks lead S&P 500 decliners for a second day on oil slide

·     ENVX -46%; after the company’s Executive Chairman gave a special presentation yesterday, with JPMorgan flagging further delays in the production ramp, which the broker said may disappoint investors, while Cowen reiterated Overweight and $25 tgt

·     HON -2%; downgraded to Sell from Buy at UBS on full valuation, anticipated order slowdown & subsequent backlog burn and tgt cut to $193 from $220

·     MSFT 5%; downgraded to neutral from buy at UBS and lowered its price target to $250 from $300 saying Microsoft’s growth engine, Azure, is entering a steep growth deceleration

·     PFE -3%; downgraded to Neutral from Buy at Bank America based on uncertainty over the magnitude of the revenue decline for Comirnaty/Paxlovid in 2023 and collective impact from launches to offset the ~$17B LOE hole in 2025-2030

·     PHAT 35%; announced that the FDA is delaying its decision on the NDA for vonoprazan (p-cab approved as Voquezna in H. Pylori) in erosive esophagitis, originally for January 11, 2023

·     VERA -58%; following the post-close release of topline results from the Phase 2b ORIGIN trial (NCT04716231) of atacicept for the treatment of IgA nephropathy – downgraded at Wedbush