Mid-Morning Look

Wednesday, July 10, 2024

U.S. stocks on the rise again into day 2 of Fed Chairman Jerome Powell testimony in Washington DC and ahead of key CPI and PPI inflation data the next two-days as investors/markets show zero concern. The S&P 500 and Nasdaq surge comes behind strength in semis (SOX +1.4% to record highs) with NVDA, AMD, TSM pushing higher, as both indexes on track for a 7th straight day of gains. After outperformance on Tuesday, financials taking a breather (XLF) while technology, industrials and materials leading the S&P early. Yesterday, Fed Chair Jerome Powell returned to the Hill for the start of his semi-annual address in front of the Senate noting that inflation is not the only risk the Fed is facing in a very short opening statement. He acknowledged that the job data is strong but not overheated, returning to pre-pandemic levels. Easing too little or too late could unduly weaken the economy. Overall, this fell in line with recent dovish comments of his with little market reaction. Today’s text to the House was identical, with markets parsing over today’s answers to questions. Will today be another “chop” day for a 3^rd straight day, holding/making new highs as world awaits CPI data tomorrow. A “tamer” inflation reading could be the catalyst to push markets even high, raising hopes of a rate cut in September, while a surprise “hotter” CPI report could push out the rate cut hopes to later 2024, disappointing markets in the near-term. Just no fear as @sentimentrader tweets: “For only the 24th time since 1990, the Volatility Index (VIX) closed below 14 for 24 consecutive trading sessions. Comparable periods with low expected volatility were typically associated with bullish stock market trends.”

• China consumer price index (CPI) in June rose 0.2% from a year earlier, against a 0.3% uptick in May, the slowest in three months, and below a 0.4% increase forecast. Food prices slipped 2.1% year-on-year, compared with a 2% decline in May. CPI edged down 0.2% month-on-month, versus a 0.1% drop in May and worsening from an expected 0.1% fall.
• China producer price index (PPI) fell 0.8% in June from a year earlier, less than a 1.4% decline the previous month, and matched a forecast 0.8% fall. The fall in the PPI was the smallest in 17 months.

• In Retail: LULU remain Underperform at Jefferies and lower tgt to $220 from $240 saying following their case study on UAA, it provides another lens that investors can leverage when reviewing the setup for LULU. Coach was a well-known brand with a strong revenue base in the early 2010s; however, Michael Kors rapidly grew across the marketplace, resulting in a valuation re-rating for TPR over the coming years. Jefferies believes a similar story could be ahead for LULU as early-stage growth Co’s continue to drive brand momentum/retail expansion. In Footwear, Bank America with earnings preview noting Footwear stocks have pulled back 11% off highs and firm thinks most compelling buying oppty are CROX (10x P/E) and SKX (14x P/E) as expects CQ2 sales trends will remain strong and model sales beating or hitting upper end of guidance for each stock. For DECK expects strong qtr; beyond FQ1, more difficult UGG compares, and spec run competition could temper size of beats.
• In Life Sciences & Diagnostics: Citigroup upgraded shares of Agilent (A), ILMN and DGX all to Buy, said ICLR remains top pick for CROs and downgraded AVTR to Neutral citing revenue risk. In Life Sciences, investor sentiment has shifted more negative in recent weeks and the bar has been lowered with ability to meet expectations (vs. delivering above) and demonstrate some level of visibility (including order funnel velocity for Tools) likely to be rewarded. Citi is more cautious on the bioprocessing names given recent industry datapoints and it downgrades AVTR to Neutral. For DHR, remains Buy given the recent pullback as it sees a path to navigate the challenging backdrop.
• In MedTech: Citigroup previews earnings and opens a 30-day positive catalyst watch for TNDM and opens a 30-day negative catalyst watch for ISRG while downgraded GKOS to Neutral as the iDose success (up 59% YTD) is well understood. Notes that MedTech E&S Index up just 4.1% YTD versus the S&P 500’s 17.5% though a few big winners (BSX +32% YTD, EW +22% and ISRG +34%), but the valuation difference between the “haves” and the “have nots” has expanded significantly. Citi said top Picks include BSX, GEHC, and PODD

• AEHR +24%; shares jumped after guiding Q4 revenue of about $16.6M, and net income of about $23.8M, well above its prior quarter figures of revenue $7.6M and a loss of $1.5M.
• CVNA +4%; upgraded to Buy from Hold at Needham with a $160 price target saying they think Carvana can grow unit sales and industry share by leveraging its digital-first customer experience and under-utilized physical footprint.
• LNTH +27%; after CMS proposal (draft proposal of Medicare payment rates for hospital outpatient and Ambulatory Surgical Center, or ASC, services for calendar year 2025).
• SGH +17%; after results as Q3 adj EPS $0.37 vs. est. $0.30; Q3 sales fell -22% y/y to $300.6M in-line with consensus estimates and sees Q4 revenue $325M, plus/minus $25M vs. consensus $322.22M.
• TEVA +2%; upgraded to Buy at Argus saying the company appears to have “steadied its ship” following several years of challenges, launching a range of new drugs and achieving margin growth across all its three primary business segments.
• TSM +2%; reported 32% on-year growth in Q2 revenue at T$673.51 bln ($20.67B), according, compared with estimates of T$654.27B; and is above prior forecast of $19.6B-$20.4B in April.

• IDYA -5%; as 7.23M share Spot Secondary priced at $35.00.
• INTU -3%; said it is cutting about 1,800 roles to lower costs and allocate more investments into Gen AI projects; will then hire 1,800 new people in engineering, product, and customer-facing roles such as sales and marketing.
• KLG -3%; was downgraded to Underperform from Neutral at Bank America and cut tgt to $17 from $24 saying volume trends in the packaged food industry, and in cereal, have yet to show any meaningful improvement.
• LZ -25%; following the announcement that Dan Wernikoff will be replaced as CEO by Jeff Stibel and as the company lowered 2024 revenue guidance to $675-$685M from $700-$720M (promoted two analyst downgrades).
• MA -2%; downgraded to Neutral from Buy at Bank America along with Visa (V) saying upside potential on stocks’ valuations and estimates is limited despite premier business models and competitive advantages.
• SMCI -1%; was downgraded to Neutral from Buy at Nomura with an unchanged price target of $930.
• TXG -15%; after gene-sequencing company ILMN said it has acquired Fluent BioSciences – a developer of single-cell technology, sending TXG shares, which is in the single-cell space, lower on the news.