Mid-Morning Look

Monday, March 28, 2022

U.S. stocks open the week higher led by strength in defensive sectors with Healthcare, REITs, Utilities pacing the S&P advance, while energy and financials fall the most despite stocks coming off a second straight week of gains last Friday amid several cautious analyst sector calls this morning. Financials declined after Morgan Stanley downgraded its industry view to In-Line while downgrading shares of FITB, C, and MTB (upgrade BAC, BK) saying higher for longer inflation increases credit risk, an inverted curve could slow growth, ’23 EPS down 3% on higher provisions, less buybacks and shift bear case to recession (note the 10-yr slips to 2.44% after hitting overnight 3-year highs above 2.55%). In tech, semiconductors were mostly lower after Goldman Sachs removed AMD from its conviction buy list and downgraded MCHP, QRVO and TER to Neutral from Buy as expects macro headwinds to pressure smartphone sell-through (did upgrade KLAC to buy). Energy stocks slide as oil prices drop after Shanghai entered a two-stage lockdown to curb Covid infections; Shanghai is home to ~26m people, while OPEC is set to meet Thursday to discuss lifting production targets for May. Shanghai said it will lock down the city in two phases to conduct a mass testing blitz for COVID-19, amid a spiraling outbreak that’s challenging China’s zero-tolerance approach to the virus like never before. In Europe, Ukrainian and Russian negotiating teams plan to meet in Turkey this week with big differences remaining on terms for a potential cease-fire deal after more than a month of fighting Benchmark 10-year Treasury note yields held firmly above the 2.5% mark in overnight trading, while the yield on five-year notes rose past 30-year bonds, another ‘inversion’ of the yield curve that suggests near-term recession pressures. The dollar rises to fresh 7-year highs against the have Japanese yen. Later today, President Biden is expected to formally reveal his tax plan targeting wealthiest individuals.

Economic Data

·     February International Trade in Goods: -$106.6B vs. -$107.6B prior, as imports were $263.7B, up from $262.5B in January and exports were $157.2B, up from $154.8B in the previous month. Advance wholesale inventories were estimated to be $814.8B at the end of February, up 2.1% from the prior month and +19.4% from Feb. 2021.

Sector Movers Today

·     Semiconductors: Goldman Sachs with several changes as they upgraded KLAC to Buy with a $430 tgt in the equipment space, while removed AMD from its conviction buy list and downgraded MCHP, QRVO and TER to Neutral from Buy as expects macro headwinds to pressure smartphone sell-through; also not helping semi’s was a report out of the Nikkei this weekend saying AAPL plans to cut production of the iPhone SE model next quarter amid lower demand for consumer electronics

·     Bank movers; AIG announces strategic partnerships with BLK to manage certain AIG and Life & Retirement Assets; BlackRock will manage certain liquid fixed income and private placement assets representing up to $60B of assets on behalf of AIG and up to $90B of assets on behalf of AIG’s Life & Retirement business; in research, banks FITB downgraded at Morgan Stanley to Equal weight while downgraded MTB and Citi (C) to underweight saying war changes everything as fatter tail risks require more capital and liquidity. Higher for longer inflation increases credit risk. An inverted curve could slow growth. ’23 EPS down 3% on higher provisions, less buybacks. Shift bear case to recession. Downgrading industry view to In-Line (upgraded BK and BAC to EW)

·     Industrial & Machinery; DE upgraded to Neutral from Underweight, ITW upgraded to Overweight from Neutral and KMT downgraded to Underweight at JPMorgan – add ITW to the Analyst Focus List, along with OW-rated AGCO and removing CAT from the AFL following the recent rally. DE upgraded on belief that the Ag upcycle will be extended through 2023 driven by current geopolitical events and high grain prices; Oppenheimer updates most Industrial Machinery & Flow Control models to better capture an increasingly complex macro backdrop (Russia/Ukraine/China) as favor Americas-weighed revenue, capital deployment optionality, and reasonable valuations with top-pick CSL firmly meets each of these criteria while downgrade ITT on potential 2022 earnings downside

·     Auto sector; TSLA shares jumps after company asks shareholders to vote on authorizing additional shares; stock buyback; RBC Capital raised TSLA 1Q22 delivery forecast to 325.5k, +3% vs. prior and ~6% above consensus (expect to be announced on April 2); XPEV Posts Q4 revenue of 8.56 billion yuan ($1.34 billion), up 200% y/y and says delivered 41,751 cars in Q4, up 222%; GM and F tgts cut at Citigroup (to $95 from $100 and to $18 from $23 respectively) after latest data points; NIO announced the start of deliveries of its ET7 sedan; MULN announces today that it expects to report in excess of $65 million in cash and cash equivalents when it files Form 10Q for the Company’s second quarter ending March 31, 2022

·     Consumer Staples; tobacco stocks weak (BTI, PM) after RBC Capital downgraded MO to neutral, while WSJ reported WMT is ending sales of cigarettes in some stores, prompting concern other retailers may do the same; RBC Capital overall with several changes in Staples sector as updated focus list, with top picks in order being STZ, NAPA, KO, EPC, COTY, KDP after adding NAPA and upgrading while removing EL from focus list, due to near-term risks in China, but reiterating our Outperform rating and downgrade MO and CPB to Sector Perform; Piper downgraded BYND to Underweight and cut tgt to $29 from $50 as remain bearish on key fundamentals, as competitive intensity is growing have lower U.S. MCD expectations, and continues to burn cash, with no clear path to positive EBITDA

Stock GAINERS

·     AXSM +5%; agreed to buy the sleep-disorder drug Sunosi from fellow biopharmaceutical company Jazz Pharmaceuticals PLC for an initial $53 million

·     COIN +5%; Bitcoin leveraged stocks MARA, RIOT, MSTR, advance as Bitcoin prices top highest levels since late January above $47,500 as crypto rebounds; Ethereum up 7.5% above $3,300

·     NP +3%; and SWM agreed to combine in an all-stock merger valued at about $3B where Neenah shareholders will receive 1.358 shares of Schweitzer-Mauduit for each share held as SWM holders will own about 58% of the combined company

·     POLY +50%; after HPQ agreed to acquire Poly, the conferencing hardware and headset company, for $40 a share, or $3.3 billion including debt, a 53% premium to Poly’s Friday close of $26.20

·     SONO +12%; will replace GTLS in the S&P SmallCap 600 effective prior to the opening of trading on Wednesday

·     STAA +13%; after the FDA approved the company’s EVO/EVO+ Visian Implantable Collamer Lens for the correction of myopia and myopia with astigmatism.

·     TSLA +4%; shares jumps after company asks shareholders to vote on authorizing additional shares; stock buyback

Stock LAGGARDS

·     AAPL -1%; following a Nikkei report this weekend that the tech giant plans to cut production of the iPhone SE model next quarter amid lower demand for consumer electronics

·     BYND -6%; downgraded to Underweight at Piper and cut tgt to $29 from $50 as remain bearish on key fundamentals, as competitive intensity is growing have lower U.S. MCD expectations, and continues to burn cash, with no clear path to positive EBITDA.

·     CAPR -23%; after saying that while a Phase 2 study of its lead asset, CAP-1002, as a potential treatment option for hospitalized patients with advanced symptoms of Covid-19 met its primary objective of safety, it is evaluating its next steps for the program

·     FITB -3%; as financials/banks among top decliners early on MSCO sector downgrade

·     IONS -1%; and BIIB said topline results from their phase 1 ALS study of BIIB078 did not meet any secondary efficacy endpoints and did not demonstrate clinical benefit and to be discontinued

·     MCHP -1%; downgraded to Neutral along with QRVO, TER at Goldman Sachs, and reduces estimates across its coverage of chip stocks amid a more challenging macro backdrop

·     MO -3%; RBC Capital downgraded MO to neutral, while WSJ reported WMT is ending sales of cigarettes in some stores, weighing on tobacco stocks today

·     OXY -3%; weakness in energy stocks as oil prices slide over 7%

·     SE -6%; as Shopee, the e-commerce platform of Sea Ltd., is closing its India operations less than a year after expanding into the populous South Asian nation; Shopee said in a statement Monday that it will exit India “in view of global market uncertainties.”

·     VIR -2%; and GSK announced that FDA has revised the Emergency Use Authorization (EUA) for Sotrovimab based on FDA’s determination that the currently authorized 500 mg dose is “unlikely to be effective” against the Omicron BA.2 variant