Mid-Morning Look

Monday, May 22, 2023

U.S. stocks open mostly higher, looking to build on last week gains as markets await a 5:30 PM meeting between President Biden and House Leader McCarthy to discuss the debt limit. There are several key economic data points this week, but nothing cooking today as all focus on the debt talks. Fed speakers again lay out a “hawkish” outlook for rates (Harker, Kashkari) but again markets ignoring commentary. More strength early in the Technology (XLK) and Communications (XLC) sectors in the S&P, adding to massive 2023 outperformance (up 26% and 30% YTD respectively), while other market sectors continue to lag (Utilities, REITs, Staples, Healthcare all down YTD). The Nasdaq 100 is now up 33% from the October lows, at its highest level since April 2022. The Federal Reserve may still need to raise its benchmark interest rate by another 50-bps this year, St. Louis Fed President James Bullard said (normally “hawkish”), suggesting that any decision to pause on any increase at the upcoming June meeting won’t mark a full stop to the Fed’s tightening cycle. Treasury yields edge slightly higher, and the U.S. dollar is flat. The S&P 500 Index (SPX) is fighting around the 4,200 level, a level that has proved difficult to breach and hold over the last year. Several M&A deals were announced this morning in the financial, energy, and healthcare sectors, with details below.

Sector Movers Today

·     In Rails: Citigroup upgraded railroads CSX, NSC, UNP to Buy from Neutral (CNI downgraded to Neutral) and upgraded KNX to Buy as believe Transport fundamentals are running at/near lows for this cycle and second-derivative improvement in 2H23 will be a catalyst. Ultimately, CITI sees upside to valuation and stock prices as the 2024 recovery story builds. NSC was upgraded to Overweight from Equal Weight at Wells Fargo and raised its price target to $250 from $225 saying service driven pricing and accelerating intermodal volume can drive growth.

·     In Retail: Williams Trading downgrades FL, HIBB, NKE. NKE cut from Hold to Sell saying NIKE’s business in the U.S. has become far more difficult than what was expected when 3Q23 earnings were reported in March, and the turnaround in China appears to be choppy. HIBB was downgraded to Hold from Buy and FL cut to Sell. DDS Announces $500m Share Buyback. RVLV was downgraded from Outperform to Market Perform at TD Cowen.

Stock GAINERS

·     DKNG +6%; upgraded to buy from neutral at UBS, based on stronger revenue growth and greater flow through to Ebitda.

·     GHL +115%; after Mizuho agreed to buy the company for $15 per share in cash for a total value of ~$550 mln including debt; deal is expected to close by year end https://on.mktw.net/42dY36p

·     HEPA +38%; said a Phase II study of its lead drug candidate rencofilstat met its key goals in the chronic liver condition nonalcoholic steatohepatitis, commonly known as NASH.

·     PACW +9%; agreed to sell a $2.6B portfolio of 74 real estate construction loans to KW for about $2.4B as part of its previously announced plan to sell assets to shore up liquidity. https://on.mktw.net/3BO2KZS

·     PDCE +7%; to be acquired by CVX in an all-stock deal valued at $6.3B or $72 per share, roughly a 10% premium to PDCE Friday close; deal expected to increase Chevron’s proved reserves by 10% https://on.wsj.com/3pVYrbX

·     PLUG +6%; said it landed three deals in Europe for its green hydrogen-producing electrolyzers.

·     VECT +38%; IRWD said it was acquiring Swiss biotech company VECT in an all-cash transaction for $17 a share totals an estimated $1 billion, net of cash and debt; deal expands pipeline of drugs that can advance the treatment of gastrointestinal diseases – https://on.mktw.net/3MssQ9n

Stock LAGGARDS

·     AAL -3%; after Judge ruled late Friday must end Northeast Alliance with JBLU.

·     FL -4%; downgrade by two analysts after Friday earnings miss and lower guidance.

·     ICPT -18%; after a panel of FDA advisers said late Friday study data suggested that the benefits of Intercept’s drug, obeticholic acid (OCA), did not outweigh the risks in patients with NASH (non-alcoholic steatohepatitis) and fibrosis, or scarring.

·     MU -3%; after China says that the memory-chipmaker’s products have failed to pass a cybersecurity review in the country.

·     NKE -2%; downgraded from Hold to Sell at Williams Trading saying NIKE’s business in the U.S. has become far more difficult than what was expected when 3Q23 earnings were reported in March, and the turnaround in China appears to be choppy.

·     RAIN -88%; said its lead drug candidate, milademetan, did not meet main goal in a late-stage study in patients with dedifferentiated liposarcoma; said does not expect to pursue further development of the drug in the particular indication.