Mid-Morning Look

Wednesday, March 30, 2022

U.S. stocks open in the “red” lower, but rebounding off lows as stocks look to extend recent gains, rising sharply over the last two-weeks into month and quarter end with absolutely no market concerns shown by investors despite several warning signs. Energy stocks rebounding along with oil prices, which are up over 3% as markets await further details from peace talks between Ukraine and Russia (positive commentary yesterday, but no follow-thru today). Stock markets have been ripping since March 15th, with the S&P up 11%, rising 9 of the last 11 trading days and closing at or near the highs on all 9 of those days as the S&P and Dow trying for a 5th straight day of gains (AAPL trying to make it 12-straight days of gains). Over that stretch, ARKK up 33%, consumer discretionary +17%, Technology +16% then Staples next at +6%. A truly remarkable rally despite the negative headline back drop. Some potential headwinds into Q2 earnings season (3^rd week of April), include possible growth slowdown amid cost pressures (food & energy), Ukraine commodity impact and aggressiveness from the Fed on rising interest rates (making borrowing more expensive). Treasuries slipped, with the two- to 10-year Treasury curve briefly inverting late yesterday (raising recession fears) but wider by about 6 bps now. The U.S. dollar lost ground and the euro climbed to the highest in four weeks while the yen rebounded from a six-year low. Russia overnight said there’s no breakthrough in talks with Ukraine and a lot of work remains to be done, slightly different than the positive picture painted yesterday.

Economic Data

·     ADP Employment Change Actual 455k slightly above forecast 450k but below previous 475k

·     Gross Domestic Product (GDP) Q4-Final reported at +6.9% vs. +7.1% consensus and prior estimate of +7.0%. in Q3, GDP rose 2.3%; Q4 final core PCE price index +5.0% vs prelim +5.0% and Q4 final PCE price index +6.4% vs prelim +6.3%

Sector Movers Today

·     Housing related industry: The housing boom continues with US home prices hitting a record high for the 36th month in a row – prices have increased 19% over the last year and more than doubled over the last 10 years; RH with mixed results as EPS of $5.66 beat the $5.58 estimate but sales of $902M missed the $931.8M est. and issued weaker rev outlook of up 5%-7% or $3.95B-0$4.02B vs. est. $4.15B while also announced a three-for-one stock split; MBA said the U.S. mortgage market index falls 6.8% in latest week, purchase index rises 0.6% and refinancing index falls 14.9% as the 30-year mortgage rate rises 30 bps to 4.80%, highest rate in over three years; in building products in research, MHK, JELD downgraded to Underweight, MAS, BECN upgraded to Neutral at JPMorgan driven by outlook for several headwinds currently impacting valuations to remain in place over the near to medium term, and reducing price targets by an average of 20% and taking a less constructive, more selective approach to the building products sector

·     Consumer Staples: PG was downgraded to neutral as part of JPMorgan U.S. Beverages and Household product sector calls as they expect demand to remain resilient (elasticities have been low so far), and consumers continue to prefer brands over private label. That said, with the protracted Russia/Ukraine conflict and its impact on commodities costs, transportation, and FX, they reduce estimates as top picks (KO, STZ, EL, OLPX), while remain cautious on companies that have more commodity exposure (KMB, CLX) or more exposure to Europe (TAP). FRPT upgraded to Buy from Neutral at Goldman Sachs and raise tgt to $136 from $111 as believe the cold-state pet food market is on the cusp of an inflection; CALM 3Q EPS $0.81 vs est. $0.83 on revs $477.5Mm vs est. $468.8Mm; net average selling price for all eggs increased 29.4% to $1.612 per dozen compared with $1.246 per dozen in the prior-year period

·     Retailers; LULU 4Q adj EPS of $3.37 came in ahead of expectations (Street $3.27) driven by better-than-expected GPM and lower expenses, while sales were roughly in line with the Street (up 23% YOY and up 23% on a 2-year CAGR basis) and better guidance; specialty retailer CHWY slumps as guided to revenue between $2.40b to $2.43b, below consensus at $2.52b and 2022 sales guidance was initiated at $10.2b to $10.4b, below consensus at $10.6b on weaker Ebit margin outlook; PVH Q4 EPS $2.84 topped est. $2 on sales $2.43B vs est. $2.375B, sees Q1 EPS $1.90-1.95 below est. $2.09 but sales +4% vs est. +3.1% and FY sales +6-7% vs est. +4.4%; FIVE Q4 EPS $2.49 vs est. $2.48 on sales $1.96B vs est. $2.01B, comp sales +3.4% vs est. +3.85% and guided Q1 and FY23 sales below consensus expectations while saying it is planning to double its sales and more than double its EPS by 2025; BJ launched Same-Day Select service as an add-on service for the membership-based warehouse retailer’s Same-Day Delivery service (for minimum orders of $60, the Same-Day Select Unlimited service, a $100 add-on, is for unlimited same-day grocery deliveries); SPWH Q4 adj EPS 49c vs est. 46c on revs $416.3M vs est. $407M and guided Q1 adj EPS (1c)-1c vs est. (2c) on sales $300-310M whose midpoint is in-line with est. $305.5M

Stock GAINERS

·     ADGI +40%; announces ADG20 is the first monoclonal antibody to meet primary endpoints with statistical significance across pre- and post-exposure prophylaxis and treatment for covid-19 and plans to seek U.S EUA

·     BNTX +4%; Q4 and FY’21 revenues of EU5.5B and EU19B; expects to authorize share repurchase program of up to $1.5B and will propose a special cash dividend of €2/share; reiterates FY’22 vaccine revenue guidance of EU13B to EU17B

·     LAC +9%; lithium, battery related names FREY, LTHM, ALB, MP, WWR were among early movers after President Biden said is poised to use cold-war powers to develop battery metals

·     LULU +5%; 4Q adj EPS of $3.37 came in ahead of expectations (Street $3.27) driven by better-than-expected GPM and lower expenses, while sales were roughly in line with the Street (up 23% YOY and up 23% on a 2-year CAGR basis) and better guidance

·     MU +2%; Q2 profit and revenue beat estimates and forecasts Q3 revenue higher than analyst expectations saying the Ukraine crisis will bump up costs, but sees no impact on near-term production expected

·     OXY +3%; rebound today in energy VLO , materials MOS , defense stocks LHX as rotation continues in names leveraged to Ukraine/Russia conflict

·     SRAD +13%; delivered quarterly earnings and sales that topped estimates as the U.S. sports betting field grew

Stock LAGGARDS

·     AER -4%; after Q4 profit missed while sales, boosted by the completion of the GECAS acquisition beat forecasts; said it has terminated the leasing of all aircraft and engines with Russian airlines

·     CHWY -12%; as guided to revenue between $2.40b to $2.43b, below consensus at $2.52b and 2022 sales guidance was initiated at $10.2b to $10.4b, below consensus at $10.6b on weaker Ebit margin outlook

·     IGMS -2%; prices 8.695M share offering at $23.00 per share; shares down -9% (pricing is 22% discount to stocks last sale $29.49)

·     PSO -4%; after U.S. investment firm Apollo drops its bid for the company after the two sides failed to agree on price; rejects third takeover proposal from Apollo for 884.2p per share, saying it undervalued Co – Reuters

·     RH -11%; with mixed results as EPS of $5.66 beat the $5.58 estimate but sales of $902M missed the $931.8M est. and issued weaker rev outlook of up 5%-7% or $3.95B-0$4.02B vs. est. $4.15B while also annou8nced a three-for-one stock split

·     W -6%; downgraded to Sell at Loop Capital with $90 tgt saying there is additional risk to model, especially if interest rates and inflation remain on the rise and geopolitical events impact demand