Mid-Morning Look

Monday, January 23, 2023

The rally in U.S. stocks continue, as momentum remains clearly to the upside to start 2023, with extended gains in Technology (+7.3% YTD), Communications (+12% YTD) and Discretionary (8.5% YTD) pacing the gains into earnings season and following dismal 2022 performances. Defensive sectors utilities and REITs the early market laggards. The keys to 2023 so far: extreme positioning has been the main driver of the squeeze and continue to be so and investors expect the Fed to pause/pivot interest rates this year – despite calls by the Fed themselves to top 5% and no rate cuts. Earnings will be key this week given the Fed “blackout speaking period” into the FOMC meeting next week. Note roughly 90 S&P companies expected to report this week (or about ~25% of S&P Mkt Cap). So far, 52 S&P 500 companies (including early reporters) comprising 14% of S&P 500 earnings have reported. 4Q EPS slid further, now tracking a 1% miss vs. a historical average of 50bp beat post Week 1, and this is after a 7% cut into the season (as per @MikeZaccardi). Oil prices rose by 1% to $88.50 a barrel, extending last week’s gains on the back of a stronger outlook thanks to an expected economic recovery in top oil importer China this year. The dollar index (DXY) overnight held the Wednesday 1-18 low of 101.528, now bouncing back. Treasury yields rise as the 10-year moves above 3.54% before paring gains. Tech shares have led following massive layoffs in the industry, prompting bets that cost cutting will help earnings. The central bank is preparing to raise rates by 25-bps at its Jan. 31-Feb. 1 policy meeting. Asian trading was slower because of the Lunar New Year holiday, but optimism over China’s reopening drives market optimism.

Sector Movers Today

·     Semiconductors: Ahead of earnings season, Barclay’s upgraded AMD, QCOM, STX, and SWKS to OW from EW, while downgraded shares of VECO to EW and cut both AMAT, KLAC to Underweight saying they are more positive on semiconductor companies with data center, PC, and handset exposure, but remains negative on semiconductor capital equipment stocks – Raises WFE (wafer front end) spending estimate to $78 bln (from $69 bln) in CY23, but sees it at $65 bln in 2024. Truist upgrading semis & AI sector view to positive from cautious and adjusting models & price tgts as see most upside potential from our Buy-rated growth stocks TSLA, NVDA, MPWR, and ON. Firms expects >100% upside over 2 years.

·     Utilities: AQUA agreed to be acquired by XYL in an all-stock deal valued at $7.5 billion, where AQUA holders will receive 0.480 Xylem shares for each Evoqua share owned, valuing the shares at $52.89 https://on.mktw.net/3wncLKF ; In research, Guggenheim with several changes as they upgraded FE to Buy and moved to Best Idea list in utilities, while removing PCG from Best Idea list but retaining Buy rating as material valuation upside remains. Firm also downgraded AEE, CNP, OGE to neutral, upgraded OGS to Neutral from Sell and downgraded ALE, LNT, NWE to Sell as no longer recommend any SMID utilities outside of BUY-rated POR, any Gas Utilities outside of NI.

·     Retail: Several analyst rating calls as LEVI downgraded to Neutral from Overweight at JPMorgan; SKX upgraded to Outperform from Market Perform at Cowen and raise tgt to $65 from $48 based on checks it is gaining preference in their survey for casual/lifestyle footwear; TPR downgraded to Equal Weight from Overweight at Barclays; investors continue to pile into beaten up 2022 losers such as discretionary on rising hopes of no recession/rebound in 2023

Stock GAINERS

·     AMD +7%; Barclay’s upgraded AMD, QCOM, STX, and SWKS to OW from EW, while downgraded shares of VECO to EW and cut both AMAT, KLAC to Underweight saying they are more positive on semiconductor companies with data center, PC, and handset exposure

·     AQUA +11%; agreed to be acquired by XYL in an all-stock deal valued at $7.5 billion, where AQUA holders will receive 0.480 Xylem shares for each Evoqua share they own, valuing the shares at $52.89 https://on.mktw.net/3wncLKF

·     CRM +3%; after the WSJ reported this weekend that Elliott Management “has made a multi-billion investment in Salesforce,” following Starboard Value having taken a “significant” investment in Salesforce late last year https://on.wsj.com/3wkMZGK

·     CZR +4%; guides prelim Q4 revenue to $2.81B-$2.83B vs. est. $2.78B and announced that it will offer $1.25 billion in senior secured notes.

·     IAA +7%; RBA said it will increase the cash payout for IAA to $12.80 per share from $10 as part of the deal to buy the U.S.-based company, the WSJ reported. https://on.mktw.net/3QXw8DE

·     NWL +4%; said plans to eliminate about 13% of its office positions as part of a restructuring that could cost up to $130 million.

·     PLRX +60%; as reported positive interim data from a Phase 2a study of its lead product candidate in the chronic lung disease idiopathic pulmonary fibrosis; said the highest dose group of bexotegrast met its primary and secondary endpoints.

·     SPOT +2%; said it is laying off 6% of its staff as a part of a broader organizational restructuring and cost-cutting measures.

·     SYF +3%; Q4 EPS $1.26 vs. est. $1.12; provisions for credit losses were $1.2B vs $561M last year; Net interest income in Q4 jumped 7% to $4.1 bln, driven by higher interest rates and fees on loans; net income, however, reduced in Q4 to $577M vs. $813M y/y.

·     W +20%; following positive commentary/upgrades across the street – follows a +20% gain Friday on announced job cut news say traders.

Stock LAGGARDS

·     ABT ; after the DoJ opens criminal investigation into ABT’s baby formula business and the contamination at one of their plants last year, Bloomberg reported.

·     AMT -2%; In Towers, Keybanc downgraded AMT and CCI to Sector Weight from Overweight as see a tough 4Q22 setup with outperformance in U.S. and International leasing unlikely.

·     CPRX -28%; said it has received a notice from TEVA saying it had submitted an Abbreviated New Drug Application (ANDA) seeking authorization from the FDA to manufacture, use or sell a generic version of Firdapse in the US.

·     PYPL -1%; Big banks including WFC, JPM, and BAC are teaming up to launch a digital wallet that will be linked with customers’ debit and credit cards, the WSJ reported, competing with PYPL and Apple Pay (AAPL) https://on.wsj.com/3R14Wne