Mid-Morning Look

Friday, June 11, 2021

The S&P 500 adds to record gains as growth sectors continue to advance this month (technology and healthcare, though industrials/materials slide), with financials pressured the last few sessions as Treasury yields tumble to their lowest levels since March with inflation fears having calmed dramatically. Investors have scaled back expectations for early policy tightening by the Fed (and pulling back on asset purchases) after May’s consumer price data suggested a recent spike in inflation would be transitory (even though CPI came in at 5% YoY, highest since 2008). The question remains (and the Fed has yet to clarify) exactly how long in transitory? Markets have now seen three months of soaring prices (used autos, homes, food, metals, airfares) and there was a recent commentary that prices are expected to remain elevated through the summer (which would be 6 months) while several companies continue to announce price hikes. But so far, there remains no fear in stock or bond markets as Treasury yields have tumbled to lowest levels since March (10-year also down over 30 bps from highs just a month ago). Note the S&P 500 posted its 27th record close for 2021 and the 10-year yield is currently on pace to put in its biggest weekly drop since June 2020. Industrial stocks shave pulled back this week amid doubts over whether President Joe Biden’s $2.3 trillion infrastructure spending plan would pass. Oil prices rise along with a bounce in Treasury yields (still down big on the week) and the dollar as gold prices slide to lows.

Sector Movers Today

·     Semiconductors; MX jumps as received an unsolicited proposal from Cornucopia Investment Partners to be acquired for $35 a share in cash. Recall on March 25, MagnaChip entered into merger agreement with Wise Road Capital for $29 a share https://on.mktw.net/2TmGcwh; in hard-disk drive space, STX upgraded from Negative to Neutral with $100 tgt at Susquehanna, increasing estimates to account for better HDD ASP/ Margin trends and WDC tgt raised to $155 from $125 saying checks suggest WDC is finally able to increase 18TB HDD shipments to above 3M/Q; overall Philly semi index (SOX) moves back around the 3,200 level

·     Housing & Building Products; Wells Fargo cautious on homebuilders saying the recent downdraft could continue as estimate their coverage universe has further downside of 3% to 13% before stabilizing – says stocks at continued higher risks are CCS, LGIH, TOL and PHM in this order while stocks that are already closer to finding support are TMHC, MTH, NVR, MDC and FOR (recall yesterday Zelman Associates’ homebuilder survey shows a fourth straight month of weaker-than-seasonal order activity in May (and downgraded BZH, CCS, DFH, NVR)

·     Casinos, Gaming, Lodging & Leisure sector; cruise lines active after RCL said two guests who were sharing a room onboard its Celebrity Millennium ship had tested positive for COVID-19. Celebrity Millennium was one of the first cruises in North America to restart sailing last week; in lodging, Wells Fargo said hotel EBITDA margins could normalize more than 150bps above 2019 levels in 2023 and including returns on 2018/19 ROI projects, 2023 EBITDA may be 14% above consensus (said would imply considerable share price upside to 2023 remains for the lodging REITs, led by HT, SVC, PEB, XHR, and SHO); ELY to replace GrubHub in the S&P 400 at open on 6/15

·     E&P and Majors; Goldman said higher oil prices provide a constructive backdrop for Energy equities and raised their longer-term mid-cycle oil price assumptions by $5 per bbl, and upgraded CNQ to Buy with a $44 pt from $38 as they expect it to generate 20% FCF yield in 2022 that would enable deleveraging and their US focus is on Buy-rated XOM as they expect positive consensus earnings revisions; Truist initiated GPOR with a Buy rating and $79 target after it recently emerged from re-structuring with revised management, a strong balance sheet, improved firm transportation, and solid assets; Bank of America upgraded OGE to Buy on the view that potential incremental capex is on the way with the potential to accelerate RAB growth above 6% and EPS growth to the industry standard of 5-7% from 4-6%

·     REITs; Morgan Stanley raises KIM price targets by 6.4%/8.1%/8.7% on increased conviction that Strip REITs can recover a portion of revenue from cash tenants from prior periods that hadn’t been collected yet. This results in a higher trough than anticipated, but occ. gains are the key to mid-2023e NOI normalization; UBS said the NAREIT conference was highlighted by an optimistic outlook among both the REITs and investors in attendance, and they remain very bullish on industrial REITs remain as strong US retail sales growth and inventory shortages across the supply chain are driving robust demand for warehouse space, while RBC’s takeaways from the conference included seeing improving fundamentals and demand/activity in nearly every space, and they favor sectors best positioned to thrive in the new post-COVID environment such as industrial (FR, STAG), life science (ARE, PEAK), seniors housing (VTR), and single family (AMH, INVH); Wells lifted their EBITDA estimates on lodging REITs, led by HT, SVC, PEB, XHR, SHO

Economic Data

·     University of Michigan sentiment prelim June 83.8 (above consensus 79.0) and tops final May 78.8; the consumers current conditions index prelim June 90.6 (vs. est. 92.3) and vs final May 89.4 and expectations index prelim June 83.8 (vs. consensus 79.0) and vs final May 78.8

Stock GAINERS

·     ATC +3%; after Reuters reported MKSI has approached the specialty chemicals group with an acquisition offer https://reut.rs/3ziVRNA

·     ICON +26%; entered into a definitive agreement and plan of merger to be acquired by Iconix Acquisition Corp., an affiliate of Lancer Capital, LLC in an all-cash transaction that values Iconix at approximately $585M, including net-debt ($3.15 per share cash) https://bit.ly/2SjpHkv

·     MX +12%; after saying it received an unsolicited proposal from Cornucopia Investment Partners to be acquired for $35 a share in cash. Recall on March 25, MagnaChip entered into merger agreement with Wise Road Capital for $29 a share https://on.mktw.net/2TmGcwh

·     NOVN +85%; after announcing positive topline efficacy and safety results for the phase 3 clinical study of SB206, a topical antiviral gel, for the treatment of molluscum contagiosum

·     PGEN +18%; after saying its phase 1b/2a study of AG019 ActoBiotics, a novel therapy designed to address the underlying cause of type 1 diabetes, met primary endpoint

·     PLAY +2% after better-than-expected Q1 results and forecasting Q2 revenue above consensus ($335M-$350M vs. est. $287.4M) as Raymond James said EBITDA expected to fully recover in 2Q21 vs. 2Q19 and 2021 EBITDA now expected to exceed 2019 levels

·     UBER +1%; as Didi Chuxing, China’s biggest ride-hailing firm, made public the filing for its long-anticipated U.S. stock market listing (note UBER sold its China business to Didi in 2016, retains a roughly 13% stake in the company).

·     WDC +3%; tgt raised to $155 from $125 at Susquehanna saying checks suggest WDC is finally able to increase 18TB HDD shipments to above 3M/Q; overall Philly semi index (SOX) moves back around the 3,200 level

Stock LAGGARDS

·     APTO -29%; after announced updates on its clinical program for Luxeptinib currently undergoing two Phase 1 a/b trials in blood cancers

·     CHWY -4%; posted Q1 EPS $0.09 vs. est. ($0.03) on sales $2.14B vs. est. $2.13B, guided Q2 revs $2.15-2.17B (est. $2.14B) and FY revs $8.9-9B that sandwiched est. $8.95B

·     CRIS -30%; announces updated data from ongoing phase 1/2 study of ca-4948 monotherapy in patients with relapsed or refractory acute myeloid leukemia

·     CVAC -8%; slips following a Bloomberg report Germany will drop the company’s Covid-19 shot from its current vaccination campaign

·     SNOW -3%; shares fall following investor event where company gave long-term targets for revenue and operating margins, but analysts lower price tgts on view the margin target was disappointing, although many suggested it could be conservative

·     VRTX -8%; after abandoning further development of VX-864 for alpha-1 antitrypsin deficiency saying that the treatment benefit seen in a phase 2 study “is unlikely to translate into substantial clinical benefit” – shares of ARWR rises in reaction (RBC said VRTX’s decision to discontinue VX-864 is a clear positive for ARWR as it may now be first and best in class)

Syndicate:

·     Agree Realty (ADC) 4M share Secondary priced at $71.50

·     Cheesecake Factory (CAKE) 3.125M share Secondary priced at $56.00

·     Enthusiast Gaming (EGLX) 8M share Secondary priced at $5.75

·     Janux Therapeutics (JANX) 11.4M share IPO priced at $17.00

·     Kanzhun (BZ) 48M share IPO priced at $19.00

·     Livent (LTHM) 13M share Secondary priced at $17.50

·     REV Group (REVG) 5.5M share Secondary priced at $15.50

·     TaskUs (TASK) 13.2M share IPO priced at $23.00