Mid-Morning Look

Wednesday, March 22, 2023

U.S. stocks continue to push higher ahead of the FOMC meeting later this afternoon, where bets are still for a 25-bps hike, though some see a small chance of a pause in rates. Markets have had to adjust from higher rate expectations just a week ago (initial calls for a 50-bps hike) as the recent turmoil in the banking system created a massive thrust of liquidity into the financial system. The Fed has been in its “blackout period” over the last week and a half, so markets are banking on bets of more caution by the Fed. Regardless, investors have shown zero fear, with major U.S. averages rising 6 of the last 7 days and now actually trading higher than prior to the failure of SIVB and SBNY. The CBOE Volatility index has tumbled 10-points from highs around 31 after the bank failures, back down near the 20-level. Treasury yields are much lower that prior to the bank failures, with the 2-yr and 10-yr down sharp. Technology again leading markets, lifted by semi strength all year (SOX +24% YTD) with NVDA shares up a 7^th straight day after its developers conference yesterday. Interest rate sensitive sectors have seen the most selling pressure with Utilities, Telecom, and REITs among biggest S&P drags. A wait and see game ahead of the FOMC policy announcement and dot plots at 2:00 PM and Fed Chairman Powell presser at 2:30 PM ET.

Sector Movers Today

·     In AdTech: META and DV both upgraded to Overweight at Keybanc saying as the ad market settles on more stable footing, they shift their rating distribution back toward Overweight as now have five of nine Platform and AdTech stocks rated OW. View is that companies with product cycles (DV, TTD) and a combination of expense discipline/operational improvement/controversy (META, GOOGL, PINS) stand best positioned to benefit from an eventual recovery. In music: SPOT and WMG upgraded to Buy from Neutral at Guggenheim saying they believe that the global music industry—including labels, platforms, and artists—has the potential for market-leading financial growth over the next several years.

·     In Solar: ENPH upgraded from Neutral to Positive at Susquehanna saying they believe the setup has become much more attractive since they downgraded the stock to Neutral in mid-December. Following an almost 40% decline in share price since early December, valuation has become more rational, especially considering the longer-term growth potential. ARRY 4Q adj EPS $0.10 vs est. $0.08 on revs $402.1Mm vs est. $366.8Mm, gr mgn 20%, adj EBITDA $51.7Mm vs est. $44.9Mm; guides FY revs $1.8-1.95B vs est. $1.89B, adj EBITDA $240-265Mm vs est. $248.8Mm.

·     Consumer Staples: In packaged food: UBS said they have a cautious near-term outlook on the US Packaged Food sector (CAG, HSY, NOMD given their expectation for the broad inflationary environment to weigh on consumers’ purchasing power and retailers’ (WMT, TGT, KR) desire to keep costs down. In restaurants: DNUT upgraded from Hold to Buy at Truist and raise tgt to $20 as believe DNUT is one of the few packaged good companies that will post meaningful volume growth in 2023, while most companies will face decelerating or declining growth.

Stock GAINERS

·     AVDL +12%; said the FDA approved its pre-launch activities request (PLAIR) for Lumryz drug, which will be used for the treatment of excessive daytime sleepiness in adults with narcolepsy.

·     CVNA +12%; said it sees core loss to narrow in Q1 to $50M-$100M, down from $348M a year earlier and announces private exchange offers relating to existing notes.

·     ETNB +38%; said its experimental treatment (pegozafermin) for nonalcoholic steatohepatitis (NASH) led to NASH resolution compared to placebo in a Phase 2b clinical trial; 89bio said it plans to move the drug into Phase 3 research.

·     GBX +11%; receives orders for 4,500 railcars with value of $580M in Q2 and guides Q2 prelim revs about $1.1B vs. est. $782.4M and guides prelim Q2 EPS to $0.95-$1.00 vs. est. $0.37.

·     GME +39%; reported Q4 beats for revenue and EPS relative to Street expectations driven in large part by hardware sales and cost control.

·     OLLI +11%; posts better-than-expected Q4 sales, profit and guides annual sales, adj EPS above estimates, while sees 2023 gross margin in the range of 39.1% to 39.3% vs est. of 38.7%.

·     NVDA +2%; a 7^th straight day of gains following upbeat analyst commentary after its 2023 Spring GTC keynote amidst growing optimism as Generative AI drives the next leg of growth.

·     WGO +6%; Q2 adj EPS $1.88 vs. est. $1.25 and revs fell -25.6% y/y to $866.7M but above ests. $806.9M; Q2 adj Ebitda $88.4M and gross margin 16.9%.

Stock LAGGARDS

·     BA -2%; CFO said commercial unit margins says likely will get worse in Q1 versus Q4 on lower volumes; says defense margins to be negative in Q1 and reiterates 2023 FCF goal of $3B-$5B.

·     CCI -2%; weakness early in high dividend paying sectors (telco, towers, REITs, Utes), with DLR, EQIX, SBAC, AMT, BXP all lower.

·     HST -3%; downgraded to Neutral from Buy at Compass Point, along with SHO and APLS

·     NKE -1%; Q3 results beat with constant-FX +19% (vs. est. +LDD), with EPS of $0.79 above consensus $0.55. They raised FY reported revenue guidance to +HSD (vs. +MSD prior) but lowered the FY gross margin outlook to -250bps.

·     SCHW -2%; Barclays lowers ests well below the Street on SCHW, where they think near-term cash borrowing will weigh on F23/F24 EPS & balance sheet growth.

·     WOOF -6%; after slightly misses Q4 estimates for revenue and profit and guides 2023 net revenue between $6.15B-$6.27B, below analysts’ estimate of $6.38B.