Mid-Morning Look

Wednesday, June 28, 2023

U.S. stock indexes opened lower as semiconductor chip stocks tumbled after a report that Washington lawmakers are considering new curbs on export of chips for AI to China (chips have already pared losses in another buy the dip moment early). Stocks immediately bounced, then quickly faded as the central bank panel taking place in Portugal containing Federal Reserve Chair Jay Powell, ECB’s Lagarde, BoE’s Bailey, and BoJ’s Ueda began. US Fed Chairman Powell reiterated comments last week at the FOMC policy meeting, saying majority wanted two more hikes and said wouldn’t take moving at consecutive meetings off the table. Stocks dipped initially on the comments, but have since recovered, trading near highs of the morning as month, quarter and 1H portfolio positioning continues to dominate broader market action. Software names a standout to upside early in tech (MDB, SNOW, DDOG) and transports extending gains after dominating to upside yesterday behind DAL, FDX strength). Consumer Staples a drag led by weakness in food and beverage after GIS quarterly results disappoint. Defensive Utilities also decline. Oil prices pop on inventory data, gold prices soften and VIX still bleeding lower (no fear). Later this afternoon (4:30 PM ET), bank stress test results from the Fed.

Economic Data

·     May International Trade in Goods (Advance) deficit have narrowed to -$91.13B vs. -$92.5B consensus and -$97.1B in April (revised from -$96.8B). Exports of goods for May were $162.8B, $1.0B less than April exports and Imports for May were $254.0B, $6.9B less than April imports.

·     May Wholesale Inventories (Advance) declined -0.1% to $912.9B vs. -0.2% consensus and -0.3% in April (revised from -0.1%). May Retail Inventories (Advance) rose +0.8% to $778.7B vs. +0.2% prior; on a Y/Y basis, retail inventories climbed 7% in May.

Sector Movers Today

·     Semiconductors slip early, with the SOX -1.5% back under 3,600 led by AI leaders NVDA, AVGO, AMD after reports overnight the Biden administration is weighing tougher restrictions on exports of computer chips that process AI software, the Wall Street Journal reported. The new restrictions would also apply to Nvidia’s less powerful A800 AI chips, which were designed to avoid curbs. However, the Philly semi-index (SOX) continues to pare losses, -0.35% at 3,628 (off lows 3,580).

·     In software: early strength in names such as DDOG, MDB, SNOW, TWLO as software a bright spot early; SNOW price tgts raised by analysts following Investor Day citing some increased optimism on Snowpark and AI; VEEV downgraded from Equal Weight to Underweight with $181 tgt at Morgan Stanley as expects Veeva’s lock on the Life Sciences CRM market to be tested by Salesforce, representing the most formidable threat yet. Needham initiates ZI with a Buy rating and $35 price target as it views the current valuation as an attractive entry point for investors who are willing to wait for a recovery in broader demand trends for the company’s solutions.

·     Gold miners (AEM, GFI, GOLD, NEM) extended their recent slide as gold prices fell to fresh 3-month low, nearing $1,900 per ounce as expectations for more central-bank interest-rate hikes later this year have diminished the appeal of the yellow metal. Federal Reserve Chairman Jerome Powell acknowledged last week there are more interest-rate hikes to come. Gold is now sharply lower from its second-highest settlement on record on May 4^th of $2,055.70 an ounce.

·     In Forest and Wood Products: Truist upgraded both BCC and LPX to Buy from Hold, raising ests and price tgts to $100 from $66 (on BCC) and to $82 from $49 (on LOX) as they believe that the US housing market, especially single-family starts, is poised for a recovery. Firm remained Hold rated on shares of PCH, RYN, and WY given their lower beta.

Stock GAINERS

·     AVAV +5%; as Q4 mixed (EPS slight miss but revs $186M well ahead of ests) while record funded backlog of $424.1m as of April 30, 2023; and guides FY24 EPS $ $2.30-$2.60 ahead of consensus $2.04 and revs $630M-$660M vs. est. $600.24M.

·     CIR +4%; after Private equity firm Arcline Investment Management proposes to acquire the company for $57 per share in an all-cash deal, which represents a premium of ~12% to the $51 per share offered by KKR https://tinyurl.com/yck2jz6h

·     JOBY +23%; said it received a special airworthiness certificate for the first aircraft built at its pilot production line in Marina, California.

·     KLR +38%; as Tata Communications entered into an agreement to acquire the mobile communications services company for about $100 million, paying $7.25 per share.

·     OSTK +7%; after a U.S. bankruptcy judge approved the company’s $21.5M purchase of troubled retailer Bed Bath & Beyond’s brand name, intellectual property, and ecommerce platform.

·     PINS +7%; upgraded to Overweight at Wells Fargo and tgt raised to $34 from $23 saying they expect upside from a partnership with AMZN and improved engagement.

·     RETA +4%; said it received regulatory approval from the FDA to offer its drug for the treatment of Friedreich’s ataxia, Skyclarys, in the U.S.

·     ZI +6%; Needham initiates with a Buy rating and $35 price target as it views the current valuation as an attractive entry point for investors who are willing to wait for a recovery in broader demand trends for the company’s solutions.

Stock LAGGARDS

·     AMD -2%, along with weakness in NVDA and other chip related AI plays after the Biden administration is weighing tougher restrictions on exports of computer chips that process AI software, the Wall Street Journal reported. The new restrictions would also apply to Nvidia’s less powerful A800 AI chips, which were designed to avoid export curbs.

·     ASTS -28%; shares tumbled as 12.5M share Spot Secondary priced at $4.75.

·     AXSM -10%; priced 3M share offering of common stock at $75.00 per share.

·     COHR -3%; downgraded to Neutral from Buy at B Riley, saying the stock lacked meaningful catalysts in the near-term and is unlikely to benefit from Nvidia’s AI spending.

·     ETON -14%; said it received a Complete Response Letter (CRL) from the FDA to its New Drug Application for dehydrated alcohol injection for the treatment of methanol poisoning.

·     GIS -4%; posted a steep decline in profit and weaker-than-expected sales for Q4 ($1.03/$5.03B in sales vs. est. $1.07/$5.17B) and said gross margin fell 189 basis points to 34.4% of sales.

·     VEEV -2%; downgraded from Equal Weight to Underweight with $181 tgt at Morgan Stanley as expects that Veeva’s lock on the Life Sciences CRM market to be tested by Salesforce, representing the most formidable threat yet.