Mid-Morning Look

Monday, June 27, 2022

U.S. stocks fade on the open, briefly taking out overnight lows for S&P futures (3,893.50) after strong buying momentum last week. A combination of falling Treasury yields off recent decade highs and lower oil prices (also off multi-year highs) have eased inflation concerns temporarily and lowered some expectations of an overly aggressive Fed interest rate hike cycle (while end of quarter buying also possibly responsible for last week jump). Morgan Stanley’s strategist (Wilson), who has been cautious on markets the last few months noted today “with talk of recession increasing sharply over the past few weeks and culminating with Fed Chair Powell’s Congressional testimony, markets decided enough bad news had been priced. We also think the fall in both oil and interest rates have helped ease some of the concerns on inflation.” Economic data came in better-than-expected for housing and Durable Goods. Overseas, Russia defaulted on its foreign-currency sovereign debt for the first time in a century following sharper Western sanctions that shut down payment routes to overseas creditors. China further eased COVID-19 restrictions driving Asian markets higher overnight. Overall, a choppy start to the trading day entering the final week of trading for the quarter/first half of 2022. The S&P 500 ended its 3-week losing streak last week, +6.5% (2nd-best weekly return so far in 2022); last week was 1 of just 2 weeks that had a gain in Q2, with > 2/3 of weeks so far in 2022 ending in negative territory.

Economic Data

·     Durable Goods Orders for May rose +0.7% vs. est. + 0.1%; Durable goods orders ex transports rose +0.7% vs. est. +0.4%; Capital Goods orders non-def ex air rise +0.5% vs. est. +0.2%

·     Pending Home Sales for May rose +0.7% M/M vs. -2.5% consensus and -4.0% prior

Sector Movers Today

·     Auto sector: Mizuho lowered JunQ/2H EV unit delivery estimates for TSLA, RIVN, and NIO, given Shanghai shutdowns and supply chain constraints. However, they see strong EV demand despite higher prices, with longer lead times, as production and new models ramp; CVNA sought to disrupt auto sales, but it delivered undriveable cars according to a Barron’s article this weekend; AZO was upgraded to Buy from Neutral at Goldman Sachs and up tgt to $2,296 from $1,969 as views the company as defensively positioned in the current environment saying the majority of auto part sales are non-discretionary.

·     Biotech movers: AXSM shares surge after saying it received proposed labeling from the U.S. FDA for its depression drug candidate, AXS-05; AXSM is reviewing proposed labeling and will reply to FDA to secure final labeling agreement; EPZM agreed to be acquired by France’s Ipsen for an initial $247 million; Ipsen is paying $1.45 a share in cash for Epizyme, a roughly 52% premium; MDGL data from the Phase 3 MAESTRO-NAFLD-1 trial highlighted at EASL over the weekend continue to support an impressive overall profile for resmetirom according to JMP Securities

·     Transports: SAVE slides after urging its shareholders to back a merger deal with ULCC after ULCC raised its offer for co to $4.13 per share, along with 1.9126 of co’s shares in the cash-and-stock deal. ULCC’s revised offer stands at $24.29 per share, still lower than JBLU’s offer at $33.50 per share. Proxy advisory firm Institutional Shareholder Services Inc (ISS) also urged SAVE shareholders to vote for proposed merger with ULCC; in trucking, ODFL upgraded from Equal Weight to Overweight at Wells Fargo and raised tgt to $300 PT as walked away from mgmt meeting more constructive and confident about the LTL freight environment.

·     Software movers; INFA was downgraded from Buy to Neutral at Goldman Sachs and cut tgt to $28 PT from $40 as take a more cautious view on when such changes will fully materialize and reach an inflection point within the model; ALTR also downgraded from Neutral to Sell at Goldman Sachs and cut tgt to $41 PT from $62 saying macro susceptibility puts top line at line, creating downside risk, while Goldman upgraded TEAM from Neutral to Buy and up tgt to $300 from $279 as have become incrementally more positive as the company reaches a pivotal moment in its cloud transition

Stock GAINERS

·     AXSM +43%; after saying it received proposed labeling from the U.S. FDA for its depression drug candidate, AXS-05; AXSM is reviewing proposed labeling and will reply to FDA to secure final labeling agreement

·     CHWY +4%; upgraded to Buy at Needham with a $55 PT saying after 4 quarters of missing consensus EBITDA (and 3 quarters of missing consensus Sales), CHWY beat expectations in 1Q22, and they think the positive momentum continued into 2Q22

·     DVN +4%; as energy among leaders in the S&P 500 early – OXY, VLO, MRO

·     HOOD +1%; upgraded to Neutral from Sell at Goldman Sachs but lower tgt to $9.50 from $11.50 saying fundamentals are still very weak as continued declines in retail trading risk appetite have weighed on active users and margin balances

·     MOS +3%; along with strength in CF after positive RBC comments earlier – said expect both to continue benefiting from a tight potash market

·     TEAM ; Goldman upgraded to Buy from Neutral and up tgt to $300 from $279 as have become incrementally more positive as the company reaches a pivotal moment in its cloud transition

Stock LAGGARDS

·     ALB ; initiated at Underperform and $185 tgt at Credit Suisse noting spot lithium prices have surged 150% YTD, and believes further price gains are highly speculative

·     COIN -9%; downgraded to sell from neutral at Goldman Sachs with price target of $45 citing the continued downdraft in crypto prices and drop in industry activity levels

·     DWAC -9%; after discloses in 8K that U.S regulators have issued subpoenas to each member of its board of directors and request for co’s due diligence and other documents related to its SPAC merger

·     ETSY -4%; downgraded from Buy to Hold at Needham saying while shares have lagged and some near-term volatility is arguably in the stock, in the near term, they view the discretionary nature of the Etsy model increasingly at risk

·     SAVE 8%; after urging its shareholders to back a merger deal with ULCC after ULCC raised its offer for co to $4.13 per share, along with 1.9126 of co’s shares in the cash-and-stock deal. ULCC’s revised offer stands at $24.29 per share, still lower than JBLU’s offer at $33.50 per share

·     SIGA -14% along with CMRK, TNXP after the WHO ruled on Saturday that monkeypox is not yet a global health emergency, weighing on shares of smallpox drug and vaccine makers