Mid-Morning Look

Friday, December 15, 2023

Ahead of one of the largest quadruple option expirations at the close ever, (options tied to single stocks, ETFs and indexes will expire, alongside index-tracking futures contracts), which ties in with the rebalancing of the S&P 500 and Nasdaq-100 – and after a massive weekly move higher (Russell +6% WTD, S&P, Dow, Nasdaq all +2% WTD), equity markets are little changed as traders/investors hold the recent market advance. The tech heavy Nasdaq is higher, but the S&P is flat! Massive moves this week in several sectors including solar, housing, real estate (all sectors that tend to benefit in a low-rate environment) along with semis (+9% this week) and transports (+5%) as the Fed appears to have pivoted to substantial rate cuts in 2024, as per Fed Chairman Powell on Wednesday (which was in-line with mkt thinking prior anyway). NY Fed President Williams, in a CNBC interview tried to backtrack, or downplay some of the dovish commentary from Wednesday saying, “Fed must be ready to hike again if needed” and that it is “premature to be thinking about March rate cut”. Stock markets thus far taking his comments in stride as well as Treasury markets (10-yr spiked to 3.97% after his initial comments, but back to 3.91% now). Major averages now up 7-straight weeks heading into the holiday season! Some interesting stats last 2-days: 1) Bespoke Invest noted “the small-cap Russell 2,000 made a new 52-week high today after hitting a 52-week low just 48 days ago. That’s the shortest turnaround time in the index’s history to go from 52-week low to 52-week high dating back to the 1970s” 2) the TLT is up 19.2% in a little over 2 months and is still not back to where it was at the start of August; 3) @spotgamma noted “yesterday was a record 43mm in call volume, beating the 40mm on 2/2/23.”

Economic Data

·     NY Empire State current business conditions index weaker, down -14.5 in December vs. consensus +2.0 and vs +9.1 in November while new orders index -11.3 in December vs -4.9 in November, prices paid index +16.7 in December vs +22.2 in November, employment index at -8.4 in December vs -4.5 in November, and the six-month business conditions index +12.1 in December vs -0.9 in November.

·     Industrial Production for November rises +0.2%, missing the consensus +0.3% and better than Oct (-0.9%); Nov capacity utilization rate 78.8% below consensus 79.1% and above Oct 78.7%.

·     S&P Global December flash composite PMI at 51.0 and S&P Global December flash services PMI at 51.3 (vs 50.8 in November).

Sector Movers Today

·     Semiconductors: Bank America upgraded MU, AMD, INTC downgraded GFS, TER: MU upgraded to Buy from Neutral (tgt to $95 from $77) as believes the latest memory down cycle is now generally behind US, and MU should benefit from rising spot/contract prices of DRAM/NAND into CY24/25E. AMD upgraded to Buy (tgt to $165 from $135) as views well-positioned to gain incremental share of the hugely profitable $100B+ accelerator market. MTSI upgraded to Buy with $105 tgt and raised estimates following completion of acquisition of Wolfspeed’s RF operations. INTC upgraded to Neutral as now sees faster than anticipated growth in its Automotive/Mobileye (INTC has 88% stake) and foundry (Intel 18A node ramp in CY25/26E) businesses. GFS downgraded to neutral from Buy and lower ests as sees elevated inventories at mobile/consumer (I.E. QCOM) and automotive customers pressuring near-term growth into 1H24E. TER downgraded to underperform on valuation as it sees limited upside from current levels.

·     Consumer Staples: Bank America several changes here too: CLX was upgraded to Neutral at Bank America and increased its tgt to $150 from $120 prior believes initial signs are encouraging and see a balanced risk/reward ahead. KMB downgraded to Underperform from Neutral at BAML and decreased its tgt to $115 from $135 as sees the gross margin landscape as less certain as pricing benefits wane. CHD upgraded to Neutral at BAML and increase its tgt to $100 from $85 prior based on view their poised to benefit from the consumer trade-down with its value portfolio. In Food: HSY downgraded from Buy to Neutral at Bank America and cut tgt from $250 to $200 saying it’s a best in class snacking franchise that has delivered consistent EPS upside in recent years – but sees limited upside potential in FY24.

·     In Defense sector: LHX was upgraded to Buy from Hold at Deutsche Bank (tgt to $240 from $184) while downgraded NOC to Hold from Buy as it finds its previous investment thesis increasingly untenable in the face of what appears to be incremental cost challenges on the Sentinel program. BA tgt rose to $315 from $275 and reit Buy at UBS saying strong November deliveries indicate supply chain improvement on the MAX. The DoD announced that it has awarded PLTR a $115M OTA (other transaction authority modification) to extend its work on the Army Vantage contract.

·     In Industrials: GE was upgraded to overweight from equal weight at Wells Fargo while raising its price target to $144 a from $115 noting their attractive business with high aftermarket mix, along with solid management and a clean balance sheet. CMI downgraded to Neutral at Bank America as shares approach their price target and sees a more balanced risk/reward as shares move closer to mid-cycle valuation territory. AMRC downgraded to Neutral from Buy at Bank America noting after reaching a multi-year low in early November following a disappointing 3Q update, shares have traded up ~65% and now appear fairly valued.

Stock GAINERS

·     ATNI +11%; announced that it is expanding its shareholder return program by raising the quarterly dividend by 14% to $0.24 as well as raising the repurchase authorization to $25M.

·     AVGO +3%; rises a 7th straight day (from $903 low on 12/7 when streak began), while semi-index (SOX) tops 4,150 (+11% this month and +61% YTD), in what has been an incredibly strong sector.

·     BA +2%; extending its runoff the 10/25 low – up another 1.6% to make +48% since that Oct low; price tgt raised to $315 from $275 at UBS saying strong November deliveries indicate supply chain improvement on the MAX.

·     COST +3%; hits new all-time highs after announces a special cash dividend of $15 per share; Q1 adj EPS $3.58 vs. est. $3.42, with EBIT ~1% above consensus, while gross margin expansion was partly offset by SG&A expense deleverage from slower comp sales growth and wage investments.

·     JD +5%; US listed China stocks (BABA, BIDU, JD, PDD), advanced after the People’s Bank of China offered commercial lenders a net 800B yuan ($113B) in one-year loans Friday—a record cash injection into the banking system.

·     STLD +4%; guided Q4 EPS $2.60-$2.64 vs. est. $2.40 saying that steel order activity remains solid as evidenced by extended order lead times and recent pricing increases heading into the first quarter.

·     VRCA +11%; after development and commercialization partner, Torii Pharmaceutical, reported positive top-line results from its Phase 3 trial of its potential treatment for molluscum contagiosum in Japan.

Stock LAGGARDS

·     AADI -55%; after saying its experimental cancer therapy in a mid-stage study showed a 26% overall response rate, the proportion of patients whose cancers disappeared or shrinks.

·     DRI -2%; Q2 sales of 42.73B just below consensus and lowered the top end of its year comp store sales growth to 2.5%-3.0% vs prior forecast of 2.5%-3.5% but noted higher menu prices and easing input costs helped company raise its annual profit estimates.

·     EXC -6%; 52-week lows along with weakness in AEE after the ICC issued its decisions in AEE’s and EXC multiyear rate cases, which came in with ROEs below consensus expectations (EXC and AEE both downgraded on Wall Street).

·     LEN -2%; little profit taking after massive run this week on lower rate outlook and better earnings results last night with stronger orders and deliveries.

·     ROKU -4%; downgraded to Sell from Hold at MoffettNathanson saying even with an aspirational 2025 GAAP EBITDA margin of 18%, it simply cannot get anywhere near current stock levels in its valuation framework.

·     SCHL -9%; after results/guidance; Q2 adj EPS $2.45 vs est. $2.65 on revs $562.6Mm vs est. $625.23Mm; guides FY revs in-line to slightly below prior year vs previous +3-5%.

·     TSCO -2%; downgraded to Underperform from Neutral at Bank America and cut tgt to $171 from $207 saying they see headwinds to demand and pricing that will pressure both earnings and investor sentiment.