Mid-Morning Look

Monday, July 11, 2022

After two weeks of stock market gains, major averages back under pressure early amid sharp declines in technology, discretionary, industrials, while defensive sectors Staples, Utes, Pharma outperform ahead of earnings season kickoff this week. News overseas that multiple Chinese cities tightened their coronavirus restrictions this weekend amid rising Covid cases weighed on sentiment in the commodities space and the casino sector (Macau exposure names). Treasury yields tumble as investors flock to haven bonds with the 10-year back below 3% while the dollar rises to best levels since 1998 against the yen. Bitcoin tumbles as investor back to “risk-off”, falling over 6%; Euro dropping below the 1.01 level vs. the US dollar – down over 1% and nearing parity. In tech, TWTR tumbles as Elon Musk terminates offer to buy the social media company, while several stocks slide on analyst recommendation changes. No major economic data today or Fed speakers to impact markets.

Sector Movers Today

·     Retailers; LULU downgraded to underperform and UAA downgraded to hold by Jefferies in athletic apparel firms, saying buy-rated NKE still best-in-class; KeyBanc lowers estimates across furniture and mattress coverage supported by industry checks and numerous data points (WSM, ETD, TPX, SNBR, and PRPL) and lower tgts on TPX and PRPL due to the more challenging env’t and our lowered EPS estimates; MAT upgrade from Neutral to Buy at Goldman Sachs with $31 tgt as believe that MAT stands out in benefiting from several company specific demand drivers in TV & film content releases, the returning Disney Princess toy license in 2023, and new product innovation; Bank America said they believe that retailers that benefitted the most on sales and margins in COVID could face greater downside risk in a recession. Net, see greatest risk to TGT, see gross margin risk to DLTR, and lesser extent to DG while view KR as best positioned.

·     Industrial & Machinery; several previews ahead of earnings season: at Bank America, HON, APG both upgraded to Buy, ITT raised to neutral and downgraded ALLE to Underperform and both AME, ITT to neutral in multi-industry saying more long cycle, less consumer/Europe into 2H22: favor aero/O&G & better operators; also upgrade FLS to Neutral from Underperform saying while execution has been challenged, view end market strength (44% oil & gas), valuation as offsets; WSO mentioned positively in Barron’s noting shares of the air-conditioning distributor have cooled off, creating an opportunity for investors to buy the stock; Citigroup Top picks into 2Q are TT (positive Catalyst Watch), IR, and EMR; 3 longer term top picks include DOV, HON and ROK; and also open a negative Catalyst Watch on GE

·     Semiconductors; QRVO was downgraded from Outperform to Market Perform at Cowen and cut tgt to $108 from $150 as low/mid-tier Android weakness likely weighs further on revenue, margins, and sentiment; NVDA estimates lowered at Piper based on continued issues in China and Russia, gaming laptop weakness, consumer pressure, and our concerns on crypto; QCOM, AAPL, SWKS, QRVO ests lowered saying following CY21’s pandemic recovery driven growth, they see macro slowing as a headwind for the smartphone market in CY22-23 and reduce their CY22 shipment outlook to -6% Y/Y (prior 1%) and expect CY23 to be -2%.

·     Casinos, Gaming, Lodging & Leisure sector; Casinos with operations in China’s Macau gambling hub (WYNN, LVS, MGM, MLCO) fell after city officials ordered all businesses aside from essential services to shut down for a week, with residents required to stay at home; JMP Securities noted regional gaming revenue increased 11% in May; trending +9% in June with an unfavorable calendar (GDEN, PENN) saying gaming revenue has remained resilient through June despite broad macro pressure across the economy and government stimulus in the prior year.

Stock GAINERS

·     DWAC +17%; benefits on news that Elon musk terminated his deal to acquire TWTR

·     LJPC +82%; to be acquired by INVA for $6.23 per share in cash, implying an enterprise value of ~$149M, the companies announced on Monday https://bit.ly/3IvobRR

·     MRK +1%; top gainer in the Dow as Healthcare names moderately higher

·     PLRX +131%; after positive data from their key proof-of-concept study of lead drug ‘809 in idiopathic pulmonary fibrosis (IPF), showing clear directional benefits on lung function

·     PRGO +2%; submitted application to the U.S. FDA for approval of an over the counter (OTC) birth control pill

·     X +1%; as metals names outperform early (STLD, CLF, NUE)

Stock LAGGARDS

·     BABA -9%; U.S. listed Chinese stocks tumble JD, TCEHY, BIDU) on Covid shutdowns for a week as well news that China has imposed fines on the technology giants as well as a range of other firms for failing to comply with anti-monopoly rules on the disclosure of transactions

·     COIN -6%; falling alongside crypto related stocks (MARA, RIOT, MSTR) as Bitcoin resumes downward momentum, falling over 6% below $20,400

·     FSLY 14%; downgraded to UW from EW at Morgan and lower PT to $12 from $18 as see a less favorable risk/reward

·     GBX -4%; hits 52-week lows after the company reported lower-than-expected Q3 results as EPS miss as revs rose 76% but gross margin contracted from the prior quarter to 9.6%

·     MGNX -9% after discontinuing Phase 2 Mid-stage head and cancer study due to patient fatalities

·     MLCO -10%; Casinos with operations in China’s Macau gambling hub (WYNN, LVS, MGM, MLCO) fell after city officials ordered all businesses aside from essential services to shut down for a week, with residents required to stay at home

·     QRVO -3%; downgraded from Outperform to Market Perform at Cowen and cut tgt to $108 from $150 as low/mid-tier Android weakness likely weighs further on revenue, margins, and sentiment

·     TEVA -3%; slips after Attorney General James uncovers evidence that Teva Pharmaceuticals lied to evade accountability for opioid crisis in New York

·     TWTR -6%; declines after Elon Musk, in a 13D filing after the close Friday, terminated the merger agreement with Twitter because of a material breach of multiple provisions of the agreement