Mid-Morning Look

Monday, August 28, 2023

U.S. stocks start the trading week strong, with all eleven S&P sectors pushing higher initially, led by strength in Asia markets overseas after the Chinese government said it would reduce a tax on trading and take other steps to boost its capital markets (marks the first time it has lowered the tax since 2008), while a flurry of M&A headlines this morning in the US also helped boost sentiment (see all below). The Western part of Florida is on alert with Hurricane/Tropical Storm Idalia set to make landfall late tomorrow night and work its way to the east coast after (restaurants, retailers, insurers on watch). Stocks managed to avoid pitfall last week, with the S&P and Nasdaq snapping three-week losing streaks after better NVDA results mid-week and no news from the Jackson Hole Economic Symposium last Friday that ‘significant’ interest rate rises are imminent, boosting risk sentiment. While the economic calendar on Monday is quiet, investors are facing a week of data that will include reports on U.S. inflation and nonfarm payrolls. Treasury yields are down slightly to start ahead of the US Treasury auctioning off $127B in notes this week, including $45B in 2-year notes and $46B in 5-year notes today and $36 B in 7-year notes Tuesday. A more than 6:1 lead for advancers over decliners with 1% gains for Materials, Communications, Energy, Industrials, and REITs early. Small caps early strength as well.

Sector Movers Today

·     In Industrials: ETN said invests more than $500 million in North American manufacturing to support electrification, energy transition and digitalization across industries; EMR reinstated EW and $105 tgt at Barclay’s and upgraded to buy from Hold at Argus with $110 price target; MMM shares rise on reports that have tentatively agreed to pay more than $5.5 billion to resolve over 300,000 lawsuits claiming it sold the US military defective combat earplugs, people familiar with the deal said https://tinyurl.com/mryrwey4

·     In Insurance: the WSJ reported that homeowners are increasingly forgoing home insurance (ALL, TRV), gambling that the likelihood of a disaster isn’t high enough to justify the cost of a policy; Barron’s reported this weekend ALL, ACGL, RYAN, GWRE are among companies’ that could capitalize on strong demand for insurance according to Barron’s. Notes backed by nearly $1T in capital and rising premiums, insurers might profit from the coming wave of catastrophic weather.

·     In Aerospace & Defense: SPCE announces flight window for third commercial spaceflight; said flight window opens Sept 8^th; LHX downgraded from Outperform to Market Perform at Bernstein and cut tgt to $210 from $239 noting the co remains a “show me” story as the problem remains on margins with supply chain issues, inflation on fixed-price contracts, and execution; BA tgt raised to $260 at TD Cowen saying it is likely China delivery restart & upcoming expected favorable update on the 737-bulkhead issue offer upside given the stock’s 7% recent dip.

·     In Utilities: HE shares surge after the utility said Maui county’s lawsuit is “factually and legally irresponsible”, pointing to the county’s responsibility; said the fire caused by downed power lines was later reported “100% contained” and declared “extinguished” by County Fire Department. In research, Wells Fargo upgraded UGI to Overweight saying the risk/reward favors investors following underperformance, noting shares have lagged peers by 18% last year and ~30% YTD. Wells downgraded ATO to equal weight on valuation and continue to like the story and more constructive on relative pullbacks.

Stock GAINERS

·     BABA +2%; US listed China stocks rose after China asked some mutual funds to avoid selling equities on a net basis a day after financial regulators announced measures to boost its markets.

·     BSX +5%; after saying its heart disease treatment, Farapulse system, meets main goal of study as non-inferiority trial showed 73.3% treatment success in PFA versus 71.3% in the thermal arm (current standard of care), meeting the 65% efficacy threshold.

·     HE +42%; after the utility said Maui county’s lawsuit is “factually and legally irresponsible”, pointing to the county’s responsibility; said the fire caused by downed power lines was later reported “100% contained” and declared “extinguished” by County Fire Department.

·     HT +56%; announced an agreement to be acquired by private equity firm KSL Capital Partners LLC in a cash deal valued at $1.4 billion. Under the terms of the deal, KSL will pay $10 in cash for each Hersha share outstanding, which represents a 59.2% premium. https://tinyurl.com/2rh75rxu

·     HZNP +5%; as the Federal Trade Commission suspended its challenge of AMGN’s $27.8B acquisition of HZNP, giving the agency time to weigh a settlement that would allow the deal to close with conditions – WSJ https://tinyurl.com/yt5eetbd

·     MMM +5%; on reports that have tentatively agreed to pay more than $5.5 billion to resolve over 300,000 lawsuits claiming it sold the US military defective combat earplugs, people familiar with the deal said https://tinyurl.com/mryrwey4

·     RPT +19%; to be acquired by KIM in an all-stock transaction valued at about $2 billion. RPT Realty shareholders will receive 0.6049 of a newly issued Kimco stock for each share held, or $11.34. https://tinyurl.com/5dauvde7

·     THRN +28%; agreed to be taken private in a $680 million deal by private-equity firm L Catterton for $10.20 a share in cash, a nearly 31% premium to Friday’s closing price https://tinyurl.com/4vtuxhm3

·     XPEV +2%; and DiDi have formed a strategic partnership to accelerate the adoption of Smart EV and technologies in the mass market segment.

Stock LAGGARDS

·     ABCM -3%; to be acquired by DHR for $24.00 per share in cash, or a total enterprise value of approximately $5.7 billion including assumed indebtedness and net of acquired cash.

·     BBIO -5%; announced detailed results from its Phase 3 ATTRibute-CM study of acoramidis for patients with ATTR-CM. A highly statistically significant result, demonstrated by a Win Ratio of 1.8, was observed on the primary endpoint.

·     CRWD -2%; downgraded to Equal Weight from Overweight at Morgan Stanley and cut tgt to $167 from $178, cautious into the fiscal Q2 earnings report this week.

·     NVCR -31%; said a phase 3 study of its Tumor Treating Fields therapy in combination with paclitaxel missed its primary endpoint of overall survival in patients with platinum-resistant ovarian cancer.

·     NVDA -1.3%; as few large cap tech names lag early (AMZN, NFLX).