Mid-Morning Look

Wednesday, June 29, 2022

U.S. stocks choppy again, bouncing off overnight lows with the S&P 500 trying to hold the 3,800, though still down sharply from prior day highs around 3,950, as investors continue to weight the impact of higher interest rates from the Fed (75-bps in July and 50-bps are expected) and their impact on the economy. Economic data confirmed what we knew prior, a contraction in growth in Q1 GDP, falling (-1.6%), mostly in-line with consensus and sharply down from the 6.8% growth in Q4. Consumer discretionary the biggest drag in the S&P behind weakness in cruise lines, leisure, and retailers, along with weakness in industrials, materials, REITs, and info tech (semis), with pockets of strength in defensive utilities, staples (GIS earnings help) and energy, which remains the top gainer in 1H of the year with only two-trading days left. The benchmark S&P 500 is on track for its biggest 1H percentage drop since 1970 (roughly -20% YTD) and all three indexes on course for two straight quarterly declines for the first time since 2015. Nasdaq on track for MTD drop of over -7% and YTD drop around -29%, while the Russell 2000 down -7.5% MTD and -22.5% YTD. Overseas, investors digested comments from several global central bankers at a panel in Europe that provided insight into their views on the economy, inflation, and the path of monetary policy. Cleveland Federal Reserve Bank President Loretta Mester pushed for another 75 bps interest rate hike at the U.S. central bank’s July meeting, if economic conditions remain the same. The benchmark 10-yr yield tumbles to lows down over 8 bps at 3.12%.

Economic Data

·     Gross domestic product (GDP) fell at a (-1.6%) annualized rate last quarter, the government said in its third GDP estimate, revised down from the (-1.5%) pace of decline reported last month and a sharp contraction compared to the robust growth of 6.9% pace in the fourth quarter. Personal Consumption for Q1 rose 1.8%, below the 3.1% estimate while the GDP deflator reading rose 8.2% above the 8.1% estimate and core PCE inflation +5.2% vs. est. +5.1%.

Sector Movers Today

·     Utilities & Solar; in solar space, Roth Capital noted they learned today that there has been a new UFLPA detention of a large Tier 1, and CBP is requiring documentation showing the source of the quartzite. Firm said they believe this is a major problem for the U.S. solar industry because checks suggest none of the module vendors have quartzite documentation – firm said FSLR benefits the most with its CdTe module technology and U.S. manufacturing base while see this as an incremental negative for those exposed to the U.S. solar industry, especially the utility scale segment, including ARRY, CSIQ, JKS, FTCI, MAXN, SHLS, SOL will replace CMC Materials in the S&P MidCap 400 on 7/7

·     Semiconductors: cautious analyst comments at Bank America as the firm lowers the industry outlook but flagging opportunities as downgrade SWKS, QRVO, TER, TXN – but upgrade CDNS, SNPS to Neutral saying pricing strength could help cushion cyclical downturn. Said tighter global monetary policy, geopolitical turmoil and consumer weakness is likely to pressure 2HCY22/CY23E chip demand but unit weakness could be cushioned by richer non-consumer mix, robust pricing, expanding content, and constrained supply.

·     Media & Telecom movers; FCC Commissioner Brendan Carr said today on Twitter that TikTok is not just another video app, that’s the sheep’s clothing. It harvests swaths of sensitive data that new reports show is being accessed in Beijing. He said he called on Apple & Google to remove TikTok from their app stores for its pattern of surreptitious data practices https://bit.ly/3OQ4lTf ; CCI downgraded from Buy to Hold at Deutsche bank and cut tgt to $183 PT as see a tougher near-term path to upside for shares, with slight downside to consensus expectations and AFFO/share growth likely to fall short of CCI’s 7%-8% Target range; DIS Board of Directors unanimously voted to extend Bob Chapek’s contract as Chief Executive Officer for three years

·     Retailers; BBBY CEO steps down, reported Q1 adj EPS loss (-$2.83) vs. est. loss (-$1.33) as sales of $1.46B misses the $1.51B estimate, adjusted gross margin 23.8%, below estimate 31.6%, while comp sales fell (-23%), said in quarter there was an acute shift in customer sentiment and, since then, pressures have materially escalated; BBWI downgraded to Neutral from OW at JPMorgan, cut tgt to $30 and lower ests noting incremental downside potential risk in a FY23 consumer-led recession scenario; JOAN downgraded from Buy to Hold at Loop Capital and lower tgt from $10 to $8 incorporating lower sales and a higher expense rate into their discounted NOPAT model; BNED shares slipped as well following quarterly results and guidance

Stock GAINERS

·     GIS +5%; Q4 adj EPS $1.12 vs. est. $1.01; Q4 revs rose 8% to $4.89B vs. est. $4.8B; raises quarterly dividend 6% to 54c per share; sees 2023 organic net sales +4% to +5%, vs. est. +3.72%

·     GS +2%; upgraded to Buy from Neutral at Bank America and raise tgt to $380 as see the stock as well-positioned to outperform in what is likely to be a worsening economic backdrop that could weigh more materially on the EPS outlooks for its balance sheet lending heavy peers

·     ORA +8%; will replace CMC Materials in the S&P MidCap 400 on 7/7

·     PINS ; longtime CEO is stepping down and a Google (GOOGL) commerce executive is taking over the top job, the social-media company said

·     TWOU +21%; after Bloomberg reported India’s Byju’s said to offer about $15 per share to buy 2U, or more than $1B citing a person familiar with the matter. Byju’s made the offer, which represents a 61% premium to 2U’s closing price https://bloom.bg/3nmpvwG

·     XAIR +4%; receives FDA approval for LungFit, its device for treating a type of respiratory failure in newborn babies; says the first phase of U.S. commercial launch of the product has begun

Stock LAGGARDS

·     ARRY -5%; Roth Capital noted they learned today that there has been a new UFLPA detention of a large Tier 1, and CBP is requiring documentation showing the source of the quartzite. Firm said they believe this is a major problem for the U.S. solar industry (SHLS, CSIQ, SOL, MAXN, FTCI)

·     AVAV -7%; after Q4 miss (EPS $0.30/$132.6Mm vs est. $0.39/$135.3Mm) and guides FY revs $490-520Mm, mid-point below est. $514Mm and FY adj EPS $1.35-1.65 below est. $1.75

·     BBBY -21%; CEO steps down, reported Q1 adj EPS loss (-$2.83) vs. est. loss (-$1.33) as sales of $1.46B misses the $1.51B estimate, adjusted gross margin 23.8%, below estimate 31.6%, while comp sales fell (-23%)

·     CCL -15%; despite a bullish init at Barclays (named top pick with OW and $14 tgt) following a report out of Morgan Stanley saying CCL shares can plunge to zero in a bear case scenario/in event of another demand shock

·     DLR -3% and EQIX shares fall after Jim Chanos said in a Financial Times interview that he is gambling against legacy data centers as they now go head-to-head with what was once some of their largest clients

·     MKC -4%; after Q2 adj EPS $0.48 missed the $0.65 est. on weaker Q2 sales -1.3% Y/Y to $1.54B vs. est. $1.61B and lowers year EPS view to $3.03-$3.08 from $3.17-$3.22 (est. $3.15)

·     NIO -3%; fall a second day after short seller Grizzly Research on Tuesday claimed that the Chinese electric-vehicle maker exaggerated revenue and profit margins (NIO denied the report)

·     TSLA -3%; closes office in San Mateo, California and lays off about 200 employees working on its Autopilot driver-assistant system as part of a move to rein in costs – Reuters

·     UPST -10%; downgraded at Morgan Stanley to underweight from equal weight amid rising cyclical headwinds and increasing required returns from institutional partners as cut tgt to $19 from $88