Mid-Morning Look

Thursday, January 04, 2024

U.S. stocks open lower following weakness in the tech sector and rising Treasury yields (10-yr near 4% again) amid better jobs data, but major averages have bounced off lows, with the S&P moving into positive territory, recovering off the 4,700 level for SPX. The Nasdaq Composite also pared losses but underperforms broader markets after logging its worst two-day start to the year since 2005 (down 1% both days). Bond yields rose after economic data showed the labor market remains resilient. The ADP employment report showed the private sector added 164,000 jobs in December, above the 130,000 expected while weekly jobless claims came in at the lowest level since mid-October, suggesting the labor market remains strong (comes ahead of tomorrow’s nonfarm payroll report). The data points add to the narrative of a “soft-landing” for the economy, but also likely pushes out expectations of aggressive rate cuts by the Fed. The S&P, Nasdaq, and Dow came into the week with 9-week winning streaks but remain in jeopardy after a rough start Tuesday/Wednesday. Wednesday marked the end of the traditional Santa Claus rally period (which includes the final five trading days of 2023 and the first two trading days of 2024) as the SPX lost -0.92%. Note the S&P 500 index stalled just shy of its January 3, 2022 record close of 4,796.56 last week (12/28 4,783.35 closing high) and January 4, 2022 record intraday high of 4,818.62 (12/28 intraday high was 4,793.30). Early market leaders Financials, Healthcare for a 3^rd day and Industrials while Technology slips.

• Weekly Jobless Claims fell to 202K from 220K prior week and below est. 216K; the 4-week moving average fell to 207,750 from 212,500 and continued claims fell to 1.855M from 1.886M prior week; the insured unemployment rate fell to 1.2% from 1.3% prior week (prev 1.3%).
• S&P Global December final composite PMI at 50.9 (vs flash 51.0) and U.S. S&P Global December final services PMI at 51.4 (vs flash 51.3).

• In Solar/Renewables: ENPH and RUN both downgraded to Sector Weight from Overweight at Keybanc in sector 2024 outlook noting declining interest rates and equipment inventory glut are both positives for downstream players including residential installers RUN and NOVA, as well as HASI which participates in the space financially.  On the other hand, equipment manufacturers such as SEDG and ENPH appear to have their hands full with inventory issues for the time being, (RUN downgrade due to a recent valuation rebound). Raymond James upgraded GTLS to Strong Buy, XYL upgraded to Market Perform and downgraded both SPWR, ITRI to Market Perform saying after three years of rotation out of story stocks and resulting multiple compression, RAJA’s benchmark index forecast for 2024 is a gain of 20-30% – but, as always, clean tech is a stock picker’s market.
• In Insurance: Evercore/ISI with several changes as they downgraded CNO from In Line to Underperform following a strong ’23 year for the stock; downgraded AFL from In Line to Underperform as think the stock as expensive vs most peers on a price to free cash flow basis; while firm upgraded PFG from Underperform to In Line saying fundamental trends have been mixed in ’23 but not what Evercore would describe as bad with softer flows. Morgan Stanley upgraded ALL from Equal Weight to Overweight and up tgt to $171 from $117 saying higher personal auto growth and lower underwriting losses will drive stronger earnings growth in 2024 and beyond.
• In Consumer Finance/Credit cards: JP Morgan with several changes as they upgrade AXP to Overweight as see as safe-haven from deteriorating household balance sheets; the firm downgraded RKT to Underweight (said already fully discounts potentially higher volumes in 2024/25), SLM to Neutral (financial outlook fully in estimates/valuation), and COF to Neutral following rally on positive credit outlook. Goldman Sachs said they remain constructive on credit card stocks into 2024 as credit losses are poised to peak, and focus has now shifted to normalization in EPS and returns (top picks: AXP, COF, ALLY).
• Retailers: GES and SHOO downgrade to Hold from Buy at Jefferies saying entering ’24, sees risks to the space, driven by a more price-sensitive consumer and are particularly cautious on the wholesale channels. Evercore upgraded FIVE from In Line to Outperform and raised tgt to $245 citing rising spend intention across their survey work, potential benefits from initiatives (helium/remodels) medium to long term, and improvement in its RSLI. Wells Fargo a broad sector call in Staples, Retail, Food sector as downgraded BJ, FIVE, UNFI saying they see choppiness ahead for a defensive sector given fundamental concerns and soft-landing optimism.

• ALL +3%; near all-time highs after Morgan Stanley upgraded to Overweight saying higher personal auto growth and lower underwriting losses will drive stronger earnings growth in 2024 and beyond.
• EPAM +4%; after Wolfe upgraded to Outperform with $355 tgt citing the potential for demand stabilization and continued supply-side progress.
• CPE +5%; APA has agreed to buy CPE in a stock-swap deal valued at about $4.5 billion, including assumed debt; APA will issue 1.0425 shares, worth $38.31 based on APA’s Wednesday closing price of $36.75, for each share of Callon, a nearly 14% premium to Callon’s closing price of $33.65. http://tinyurl.com/3wbrym6w
• LW +3%; boosted its annual adj. EPS outlook to $5.70-$6.15 from prior $5.50-$4.95 and said continue to benefit from inflation-driven price strategies primarily initiated last year.
• MRK +2%; upgraded to outperform from market perform at TD Cowen citing visible growth and a compelling valuation and raised tgt to $135 from $125.
• OMGA +94%; as NVO said it entered research collaboration agreements with OMGA and Cellarity on new treatments for obesity management.

• CGNX -2%; after saying conducting a search for new CFO as Paul Todgham to resign, effective March 15
• ENPH -3%; and RUN both downgraded to Sector Weight from Overweight at Keybanc in sector 2024 outlook.
• MBLY -24%; said it expects that Q1 revenue will be significantly below same period last year (forecasts Q1 revs down about 50% y/y) and will see revenue normalized during the remainder of 2024. MBLY cited excess inventory at customers, which they believe to be 6-7mn units of EyeQ® SoCs. MBLY forecasts 2024 operating loss to be in range of ($468M-$378M) – shares of ON, NXPI, AMBA, STM, WOLF were pressured.
• RPM -2%; Q2 adj EPS $1.22, in-line with consensus and reports Q2 revenue $1.79B vs. consensus $1.84B.
• WBA -10%; posted Q1 revenue and EPS ahead of street, though operating results were mixed with stronger US Pharmacy and Int’l Retail, balanced by weaker US Retail, reaffirmed its FY24 guidance; said it was “evaluating all strategic options to drive sustainable long-term shareholder value” cuts quarterly dividend 48%.
• WW -12%; after LLY launches website for weight-loss drugs.