Mid-Morning Look

Friday, November 18, 2022

U.S. stocks opened higher, looking to rebound from the prior day losses and pare weekly declines into option expiration, but instead saw immediate profit taking, paring gains as remains stuck in same range for most of the week. Among early sector laggards, energy falls over 2% alongside a tumble in oil prices on renewed concern about weakening demand in China and further interest rate rises by the Fed. Technology also slips, with the Nasdaq giving up 125-point bounce in the early moments despite a handful of positive earnings reports last night (AMAT, PANW, KEYS) in the semi and software space. Defensive utilities the top S&P sector leader up over 1%. Data this morning showing more weakness in the U.S. economy with tumbling Existing Home Sales (housing been the hardest hit due to surging rates) helping case for Fed to slow rate hike pace. Treasury yields modestly higher while the dollar is flat. Fed speaker’s slowdown next week in the holiday shortened week, with all eyes on next month jobs, CPI and FOMC meeting as mostly likely next market catalysts.

Economic Data

·     Leading indicators fell -0.8% vs. est. -0.4% weakest m/m since April 2020 – (February was the only positive month this year for LEI)

·     Existing Home Sales fell -5.9% m/m to 4.43M unit rate, down from 4.71M in Sept and vs. est. 4.43M; Oct inventory of homes for sale 1.22 mln units, 3.3 months’ worth; the national median home price for existing homes $379,100, +6.6% from Oct 2021

Sector Movers Today

·     Software movers: Internet security names get a bounce after PANW delivered consensus beating 1Q23 revenue and EPS, strong cashflow, and improved guidance – led by billings growth of +27% y/y, NGS ARR growth of +67% y/y (vs +60% last qtr), and Adj FCF margin of 76.6% while kept or raised previously established longer-term guidance metrics; SAP downgraded to Underperform at Jefferies saying mgmt is responding to the softer macro through strict cost control to deliver FY22 guidance and similar control is required in FY23; JD rises after earnings results; KEYS delivered clean F4Q22 results / upside and provided better-than-expected guide

·     Hardware, Components & Services: several Wall Street analysts making estimate changes in PC demand heading into earnings, with HPQ downgraded to neutral from outperform at Credit Suisse on macro risks to its near-term revenue and margin outlook; Citigroup said PC weakness getting worse; Enterprise remains resilient for now, but warning signs are flashing as they cut estimates on HPQ and DELL based on weakening conditions in PCs; and Bank America taking a more cautious view on PC, Print demand; lowering F23 ests, PO to $27 for HPQ; CLFD posts 3^rd straight quarterly beat as backlog continued to increase albeit at a slower rate, up to $161M organically vs $157M last Q, and up 149% y/y

·     Housing & Building Products: according to Redfin, U.S. homebuyer must now earn $107,281 to afford typical $2,682 monthly mortgage payment, up 45.6% from $73,668 a year ago per; in home furnishing retail, WSM Q3 EPS beat with comps +8.1% above expectations, but gross margin missed (fell -220bps) on worse than expected supply chain pressure, B2B growth slowed to just 17% YoY (vs. 40%+ in 1H) and declined sequentially – OM was 15.5%, down -80 bps y/y; RH was downgraded to neutral at Wedbush, moving to the sidelines as evidence mounts of a course-correction to its strategy of “climbing the luxury mountain.”

Stock GAINERS

·     AMAT +2%; report a good OctQ Rev/EPS of $6.7B/$2.03, and guided JanQ to $6.7B/$1.93 (above consensus $6.3B/$1.79) despite China restrictions

·     APLS +19%; as the FDA accepted additional clinical data related to ongoing review of co’s experimental drug to treat an advanced eye disorder causing vision loss

·     CLFD +22%; posts 3^rd straight quarterly beat as backlog continued to increase albeit at a slower rate, up to $161M organically vs $157M last Q, and up 149% y/y

·     EVH +12%; to buy CNC’s specialty benefit management business for $650M upfront

·     FL +9%; beat third-quarter sales and profit estimates and raised full-year sales and profit forecasts – sees sales down (4%-5%) vs. prior view of (6%-7%) decline

·     ISEE +25%; after the FDA granted breakthrough-therapy designation to its investigational product avacincaptad pegol for a degenerative eye disease

·     PANW +9%; delivered consensus beating 1Q23 revenue and EPS, strong cashflow, and improved guidance – led by billings growth of +27% y/y, NGS ARR growth of +67% y/y (vs +60% last qtr), and Adj FCF margin of 76.6%

·     ROST +12%; after reducing guidance significantly last qtr, trends improved in 3Q and the company beat the qtr and raised 4Q EPS forecast to $1.13-$1.26 from $1.04-$1.21 projected earlier, and FY EPS outlook to $4.21-$4.34 from $3.84-$4.12

·     STNE +17%; reported strong 3Q22 results, as total revenue grew 71% YoY to R$2.5B, 4.5% above management’s guidance floor of R$2.4B

Stock LAGGARDS

·     COIN -3%; downgraded to Neutral at Bank America saying they think likely faces several new headwinds over the near/medium-term due to the recent collapse of rival crypto exchange FTX

·     FANG -5%; among top decliners in broad energy weakness early on sliding oil prices – EOG, MRO, DVN, XOM, PXD among worst S&P movers

·     FTCH -12%; missed Q3 sales and EBITDA and lowered FY guide below consensus saying weakness stems primarily from FX and macro headwinds while expects FY adj EBITDA margin of -3% to -5% vs previous forecast of breakeven adj EBITDA

·     IOVA -12%; on skin therapy app delay – said it plans to address the FDA’s comments “promptly,” and the application is now expected to be completed in the first three months of next year

·     SI -6%; extends recent declines on crypto fallout from FTX bankruptcy

·     SPB -6%; turned in a mixed FQ4 earnings report as organic sales fell (-7.3%), significantly impacted by lower replenishment orders due to higher retail inventory, softer demand, negative forex

·     WSM -7%; Q3 EPS beat with comps +8.1% above expectations, but gross margin missed (fell -220bps) on worse than expected supply chain pressure, B2B growth slowed to just 17% YoY (vs. 40%+ in 1H) and declined sequentially