Closing Recap

Thursday, April 04, 2024

Stocks closed on lows amid a late day pullback on geopolitical concerns (S&P 100-point reversal)! U.S. equity futures strengthened overnight and held gains after initial weekly jobless claims came in a bit above forecast. Markets have had a crisis of confidence recently between the Baltimore bridge collapse, the Taiwan earthquake, and questions around the Fed rate-cuts scenarios. On rates, at least, investors seem to have overcome their concerns for now, with about a 60% implied probability of a cut in June and an implied December rate now standing at about 4.62%. Early breadth was strongly in favor of advancers at about 7:2, with Real Estate, Financials and Technology the outperforming sector ETFs, while Utilities and Health Care were primary laggards, hovering around flattish. Small caps gained a little better than 1%, outperforming both QQQ and SPY. On a Fear and Greed basis, investor sentiment is holding up well at 66 – Greed versus 71 a week ago and 75 a month ago but still ahead of last year’s 60.

In data of interest, @bespokeinvest reminds us not to let politics interfere with our investing, noting going back 70 years, $1,000 invested in the US market only when a Republican was President would be worth $27,400, while $1,000 invested only while a Democrat was President would be worth $61,800 …. but those stayed invested throughout would have $1.69Mm. Meanwhile, the folks at @DataTrekMB note that while energy stocks are playing catch-up, history points to more near-term gains. Lastly, @KobeissiLetter reminds us how tough the housing market is right now, with affordability falling to record lows and even the average rental now costs over $24,000 per year. That said, Kobeissi also points out the S&P 500 has not experienced a weekly drop of 2% or more since October 2023, with only two weekly drops all year-to-date. 

By mid-afternoon, after hearing from a host of Fed speakers and headlines going around about a potential Iran strike on Israel in the not-too-distant future, US equities rolled off highs and headed sharply into negative territory. Reports of an imminent attack by Iran on Israel for the recent consulate attack weighed on sentiment, lifting oil prices/energy names while investors also await the non-farm payrolls report tomorrow. Breadth slipped with decliners flipping to a 2:1 advantage over advancers. IWM held its lead, but still went negative along with SPY and QQQ. The Nasdaq posted a more than 300-point roll off the highs above 16,450, while the Dow Jones Industrial Average made it a 4^th straight day of losses. On the sector side, Energy (XLE) held up better than other sectors as oil prices jumped on Middle East tension fears.  All eleven sectors were “green” by midday, all finished in the “red” by days end with seven of them down over 1%. Growth outperformed value modestly, with the Russell 1000 Growth gaining 0.16% versus its Value counterpart -0.11% with Technology and Communications relative outperformers. There was also a roll into bonds late day as yields ended near their lows (10-yr at 4.30%).

• U.S. Feb exports +2.3% vs Jan +0.1%, imports +2.2% vs Jan +1.2%; U.S. Feb exports $263.01B vs Jan $257.18B, imports $331.91B vs Jan $324.79B; U.S. Feb capital goods imports $75.69B vs Jan imports $75.01B; U.S.-China Feb trade deficit $19.88B vs Jan deficit $23.72B.

• After holding in negative territory much of the day, May WTI crude futures gained $1.16, or +1.36%, to settle at $86.59. Brent similarly added $1.30, or %1.45, to $90.65 pushing through $90. The move extended a four-day winning streak in WTI (yesterday hitting the highest level since late October) on the back of headlines going around on a possible Iran strike on Israel in retaliation for the consulate strike. Adding support on the demand side, US gasoline prices climbed to their highest level in six months. On the supply side, beyond the geopolitical, all eyes now may turn to whether OPEC+ chooses to pull back on production cuts later this year.

• In Retail: LEVI delivers a better quarter and a guidance raise as Q1 EPS $0.26 vs. est. $0.20; Q1 revs fell -8% y/y to $1.56B vs. est. $1.55B; boosts FY24 EPS view to $1.17-$1.27 from $1.15-$1.25 (est. $1.21) and affirms FY24 revenue growth view of up 1% to 3%. ULTA, ELF, small bounce after sharp selling yesterday after ULTA noted yesterday there has been a slowdown in the total beauty category which came earlier/bigger than planned. LULU cautious mention by Jefferies as remains Underperform with $240 tgt and lower CY25 estimates -25% below the Street and believe P/E could contract to mid-to-high teens as the analyst compared the waning of UAA’s business as a case study to LULU’s current trajectory.
• In Sporting Goods/Specialty Retail: VSTO was upgraded to Buy at RothMKM as it sees multiple ways for investors to win, noting in a base case scenario, Vista should eventually sell its Ammo segment to CSG, leaving a stand-alone outdoor products business with a good set-up (VSTO owners get $12.90/share cash, a share of Revelyst with ~$7/share in cash, implying ~$13/share valuation for a company that has EPS potential of ~$2/share). SPWH shares jumped following quarterly results last night.
• In Home Improvement/Online retail: Wayfair (W) shares rise early after Evercore/ISI upgraded to Outperform from In-line and raised tgt to $80 from $65 saying sees Wayfair as a market share gainer in a cyclically recovering home furnishing market and sees risk/reward attractive.

• In Car Rental: CAR was upgraded to Neutral from Sell at Goldman Sachs saying they believe its thesis has now played out, while continues to see pricing and residual value pressures on the industry but believes Avis will fare better than peers. Goldman downgraded HTZ from Neutral to Sell as believes the full extent of pricing, cost and DPU pressures have not been priced in.
• In Autos: Ford (F) provided an update for its EV, Hybrid plans, readies manufacturing plants – said it will delay launch of new three-row electric vehicles, which it will build at assembly complex in Oakville, Ontario, to 2027 from 2025. Also expects to offer hybrid powertrains across entire ford blue lineup in North America by the end of the decade. RACE downgraded from Overweight to Equal Weight at Barclays, noting shares now on 12M-fwd P/E parity with Hermes again and will likely continue to caution the market.

• In Oil Stocks: XOM signaled Q1 operating results would drop over the prior quarter on weaker oil, gas prices and a big loss in fuel derivatives, a securities filing showed; overall, the snapshot shows about $6.65B in operating profit for the quarter, compared to $11.6B in the same quarter a year ago and $7.63B in the fourth quarter.
• In Containers/Chemicals: CE, BALL both downgraded to Equal Weight from Overweight at Barclay’s citing a modest recovery emerging, against valuations at multi-year highs and firm favors AXTA, CCK, MEOH, LIN vs rest of Coatings, Ball, most of commodity chems, and APD. RPM shares dipped after results, guidance as sees Q4 revenue outlook to be approximately flat and adjusted EBIT growth of high-single-digits.
• In Paper & Packaging: IP provided an update on its possible offer for DS Smith Plc, pursuant to which the company confirmed that significant progress has been made in reciprocal due diligence as facilitated by the DS Smith Board and Management, and that it is now in a position to provide shareholders with more detail on the type and quantum of synergies it believes would arise from the Combination.
• In Utilities: UBS with several ratings changes: ES upgrade to Buy from Neutral saying its 18% discount valuation on ’25 $4.85 EPS forecast ignores the renewed focus on the core delivery business and debt reduction. CWT upgraded to a Neutral from Sell to reflect regulatory clarity from the completion of the California rate case and top quartile 8.5% EPS growth. CMS downgraded to Neutral from Buy noting stock trades at a one of the highest premiums in its coverage at 11% or 16.5x versus the group average of 14.9x, and SO downgraded to neutral from Buy after stock re-rating as now trades at an 11% premium vs peers.

• In Mortgage Insurance: MTG and RDN both downgraded from Outperform to Market Perform at KBW Inc. saying despite the overall weakness in the residential mortgage market, mortgage insurance stocks have rallied 47% on average over the last 12 months and 10% over the last month (versus 27% and 1%, respectively, for the S&P 500). While KBW continues to like the sector, it believes shares are moving closer to fair value.
• In Financial Services: RDDT was initiated at Underperform and $40 price tgt at Bernstein saying beyond 2024, there are too many questions as they say they have seen the demand constraints that smaller social platforms have faced — the structural limitations to ad targeting, measurement, and consumer purchasing intent is real.
• In Banks: Raymond James upgraded BOKF to Outperform from Market Perform with a $103 price target and OSBC to Strong Buy from Outperform with an unchanged price target of $17 while downgraded TCBI to Market Perform from Outperform saying net, believes bank stocks are attractive overall although credit risk remains the largest hurdle to overcome for investors and should be analyzed on a bank-by-bank basis.

• EFTR shares tumbled after saying it won’t continue developing its Tomivosertib lung cancer treatment after phase 2 trial data showed no significant differences versus placebo.
• MGNX provided an update on the Phase 2 TAMARACK study of vobramitamab duocarmazine (vobra duo, previously known as MGC018) in patients with metastatic castration-resistant prostate cancer. Analysts noted initial data from TAMARACK was not chosen for presentation at ASCO, with BMO saying was not surprised as it contained only safety and no efficacy measure (though notes safety data is encouraging)
• SNY – a type 2 diabetes medication, lixisenatide made by Sanofi, appeared to slow the progression of Parkinson’s disease symptoms in a small, mid-stage trial funded by the French Ministry of Health and others, the New England Journal of Medicine reported on Thursday.

• In CRO Industry: ICLR announces departure of CFO Brendan Brennan; initiates search for new CFO; reaffirms FY24 guidance. Brendan Brennan will leave his role at ICON in quarter four this year for a new opportunity outside of the CRO industry. Brendan has held the role since 2012.
• In Medical Equipment: STAA reported prelim Q1 revenue more than $77M, topping consensus $72M and said cash, cash equivalents and investments available for sale was approximately $248M and accounts receivable was approximately $70M (vs. $232.4M and $94.7M, respectively) end of 2023. AXNX shares dropped after the FTC requested BSX provide further information related to its $3.7B deal to buy the company.
• Life Sciences & Diagnostic Tools: Jefferies initiated coverage on AZTA at Hold saying transformation underway w/ above margin expansion on tap, yet valuation already discounts a lot of this; BLFS at a Buy calling it a cleaner story post pending freezer divest w/ structurally higher revs/margins supporting multiple; under-appreciated pipeline and buy rated on LAB which is focused on platform building for scale & profitability, w/ solid progress to date; also transfer coverage of Buy-rated CYRX.

• In Media: PARA shares erased yesterday’s gains after comments by David Faber on CNBC saying a David Ellison-led bid for Paramount would require a new equity raise of up to $3B. The equity raise would be part of an agreement with David Ellison’s Skydance, Faber said, who added that Ellison and his partners would step to purchase a "good amount" of that equity.
• In Digital Advertising Survey (META, PINS, GOOGL, AMZN): Wedbush completed its Q124 Digital Advertising Survey, receiving responses from 200 U.S. based marketers across ad agencies and in-house advertisers saying results are broadly positive, as the percentage of advertisers expecting to increase ad spend in 2024 has increased significantly compared to the results of its Q423 survey (conducted early January).
• In Online Dating: BMBL was downgraded from Outperform to Market Perform at Raymond James in conjunction with initiations of MTCH (MP rated) and GRND (OP rated $14 tgt). While firm believes that its brand is among the best-positioned in the space in terms of relevance with young people, it does see near-term headwinds stemming from changing user habits, which require significant rethinks among apps built in the Millennial era.

• In IT Hardware: Goldman Sachs updated estimates and recapped investor sentiment for select IT hardware stocks (DELL, SMCI, HPQ, HPE). For DELL, raised F2025 ISG estimates on higher AI server revenue forecasts (~$7 bn) while reducing its traditional server (+3% YoY) and storage (+1% YoY) revenue estimates; said HPE should benefit from growing APU server shipments, but networking remains an overhang; HPQ should benefit from a PC recovery; although CQ1 to-date trends are improving QoQ, and said sentiment is mixed on SMCI on valuation.
• In Software/Services: BB better Q4 results as non-GAAP EPS $0.03 vs. est. loss (-$0.03); Q4 revs rose 15% y/y to $173M vs. est. $154.78M and CEO said the company was making good progress toward separating its divisions and driving profit (FY25 guidance was below consensus).
• In Electrical Equipment: APH positive catalyst watch opened at Citigroup and raise ests as they factor in the acquisition of Carlisle Interconnect Technologies ($900mln in annualized sales, ~$0.10-$0.15 potential EPS impact) and views APH as a beneficiary of rising AI-related broader infrastructure spend.
• In Semiconductors: AXTI shares tumbled after J Capital announced a short position on its website saying AXT "may be on the brink of collapse" with Chinese headlines declaring its local initial public offering has failed; MXL shares jumped after being upgraded to buy from Neutral as sees enhanced prospects for a material ramp in 800G PAM4 integrated circuits in the second half of 2024 for AI data center connectivity.