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Market Snapshot
briefing.com
| Dow | 33521.91 | -430.53 | (-1.27%) | | Nasdaq | 10946.64 | -233.15 | (-2.09%) | | SP 500 | 3933.09 | -66.17 | (-1.65%) | | 10-yr Note | +7/32 | 3.51 |
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| | NYSE | Adv 868 | Dec 2147 | Vol 979 mln | | Nasdaq | Adv 1382 | Dec 3204 | Vol 4.6 bln |
Industry Watch
| Strong: Utilities |
| | Weak: Communication Services, Consumer Discretionary, Information Technology, Financials |
Moving the Market
-- S&P 500 getting rejected at the 4,000 level
-- Deepening inversion along the Treasury yield curve
-- JPMorgan Chase CEO Jamie Dimon said that he thinks a mild to more pronounced recession is likely ahead
-- Weak mega cap stocks dragging on the broader market
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Closing Summary
06-Dec-22 16:30 ET
Dow -350.76 at 33601.68, Nasdaq -225.05 at 10954.74, S&P -57.58 at 3941.68
[BRIEFING.COM] The stock market retreat continued this session, carrying over yesterday's downside momentum. Today's sell-off saw the S&P 500 get rejected at the 4,000 level and give back all the post-Powell speech gains.
Concerns about a slowdown in the global economy, along with the market's technical deterioration, were the main driving factors for the continued pullback in equities.
Price action in the Treasury market reflected a belief that inflation is going to come down further, but stocks didn't rally off that price action due to the understanding that the improvement in inflation is apt to be catalyzed by a significant slowdown in economic activity. The 10-yr note yield, which is more sensitive to inflation, fell nine basis points to 3.51%.
A material slowdown in growth, if not an actual recession that is triggered by the Fed's ongoing rate hikes, has piqued concerns that 2023 earnings estimates are too high.
Cautious-sounding remarks about consumers and/or the economic outlook from the CEOs of JPMorgan Chase (JPM 131.59, +0.22, +0.2%), Walmart (WMT 149.89, -1.76, -1.2%), and Union Pacific (UNP 211.14, +0.08, +0.04%) in CNBC interviews this morning contributed to the market's slowdown worries.
Today's sell off was orderly in nature, but fairly broad based. Declining issues outpaced advancing issues by a greater than 2-to-1 margin at both the NYSE and the Nasdaq.
Ten of the 11 S&P 500 sectors suffered losses today that ranged from 0.7% (consumer staples) to 2.7% (energy). Utilities (+0.7%), meanwhile, was the lone sector in positive territory.
Other notable laggards among the sectors included communication services (-2.6%), information technology (-2.1%), and consumer discretionary (-1.6%), which felt the pressure of their underperforming mega cap components. The Vanguard Mega Cap Growth ETF (MGK) closed down 2.1%.
Growth stocks were another spot of notable weakness today, feeling the added pinch perhaps of tax-loss selling efforts. The Russell 3000 Growth Index fell 1.8% versus a 1.2% loss in the Russell 3000 Value Index.
- Dow Jones Industrial Average: -7.6% YTD
- S&P Midcap 400: -12.7% YTD
- Russell 2000: -19.3% YTD
- S&P 500: -17.3% YTD
- Nasdaq Composite: -29.6% YTD
Today's economic data was limited to the October Trade Balance, which showed that the deficit widened in October to $78.2 billion (Briefing.com consensus -$77.2 billion) from a downwardly revised $74.1 billion (from -$73.3 billion) in September. That was the result of exports being $1.9 billion less than September exports and imports being $2.2 billion more than September imports.
The key takeaway from the report is that the pickup in imports speaks to a relatively strong U.S. economy in October versus other economies.
Looking ahead to Wednesday, market participants will receive the following economic data:
- 7:00 a.m. ET: Weekly MBA Mortgage Applications Index (prior -0.8%)
- 8:30 a.m. ET: Revised Q3 Productivity (Briefing.com consensus 0.3%; prior 0.3%) and Unit Labor Costs (Briefing.com consensus 3.5%; prior 3.5%)
- 10:30 a.m. ET: Weekly EIA Crude Oil Inventories (prior -12.58 million barrels)
- 3:00 p.m. ET: October Consumer Credit (Briefing.com consensus $26.5 billion; prior $25.0 billion)
Market clings to narrow range into the close
06-Dec-22 15:30 ET
Dow -473.56 at 33478.88, Nasdaq -269.69 at 10910.10, S&P -73.32 at 3925.94
[BRIEFING.COM] The market is little changed heading into the close.
Looking ahead to Wednesday, market participants will receive the following economic data:
- 7:00 a.m. ET: Weekly MBA Mortgage Applications Index (prior -0.8%)
- 8:30 a.m. ET: Revised Q3 Productivity (Briefing.com consensus 0.3%; prior 0.3%) and Unit Labor Costs (Briefing.com consensus 3.5%; prior 3.5%)
- 10:30 a.m. ET: Weekly EIA Crude Oil Inventories (prior -12.58 million barrels)
- 3:00 p.m. ET: October Consumer Credit (Briefing.com consensus $26.5 billion; prior $25.0 billion)
Mega caps continue to lead market lower
06-Dec-22 15:05 ET
Dow -430.53 at 33521.91, Nasdaq -233.15 at 10946.64, S&P -66.17 at 3933.09
[BRIEFING.COM] The main indices continued to inch lower recently.
Mega cap stocks are driving the indices lower. The Vanguard Mega Cap Growth ETF (MGK) is down 2.2% versus a 1.6% loss in the S&P 500.
Meanwhile, the U.S. Dollar Index continues to climb, up 0.3% to 105.55.
WTI crude oil futures settled 3.7% lower at $74.44/bbl and natural gas futures fell 3.4% to $5.43/mmbtu.
Company conference comments drive losses among select S&P 500 constituents
06-Dec-22 14:30 ET
Dow -459.58 at 33492.86, Nasdaq -254.47 at 10925.32, S&P -71.22 at 3928.04
[BRIEFING.COM] The S&P 500 (-1.78%) is still in second place on Tuesday afternoon, hovering now near session lows.
S&P 500 constituents Paramount Global (PARA 18.14, -1.37, -7.02%), Meta Platforms (META 114.27, -8.16, -6.67%), and Bank of America (BAC 32.62, -1.85, -5.37%) dot the bottom of today's action. PARA slips after comments at today's UBS conference suggesting the Q4 ad business was tracking below Q3, while big tech stocks like META fall on a broader pullback in the group, and BAC dips after comments at today's Goldman conference suggested waning results in investment banking.
Meanwhile, Textron (TXT 73.22, +3.32, +4.75%) is today's top performer owing to news that the company's Bell V-280 Valor tiltrotor was chosen by the U.S. Army's Future Long-Range Assault Aircraft (FLRAA) program.
Gold modestly higher, finishes below $1,800 level
06-Dec-22 14:00 ET
Dow -431.07 at 33521.37, Nasdaq -221.34 at 10958.45, S&P -64.73 at 3934.53
[BRIEFING.COM] With about two hours to go on Tuesday the tech-heavy Nasdaq Composite (-1.97%) holds the "lead", lower by more than 220 points.
Gold futures settled $1.10 higher (+0.1%) to $1,782.40/oz, a lid kept on gains by a modest rise in the dollar while yields fall modestly.
Meanwhile, the U.S. Dollar Index is up about +0.2% to $105.53.
Page One
Last Updated: 06-Dec-22 09:04 ET | Archive
Market on guard for growth slowdown
The new week got off to a rough start for the stock market, which deferred its optimism about China relaxing its COVID restrictions and turned its attention back to the idea of the Fed taking rates higher than expected and holding them there for longer.
The market's attention to those considerations was triggered by a Wall Street Journal article discussing the possibility that wage inflation could compel the Fed to take the target rate above 5.00% in 2023 and a stronger-than-expected ISM Non-Manufacturing Index for November.
Selling efforts were broad based, but to be fair, they followed in the wake of broad-based rebound efforts that began in mid-October. The market, therefore, gave in to the possibility that it had gotten ahead of itself in thinking about a potential Fed pivot.
The selling activity knocked the S&P 500 back below its 200-day moving average (currently 4,042) and back below the 4,000 level by the closing bell.
There hasn't been a concerted comeback effort today, partly because participants are waiting to see how the market responds today. At the same time, there is a prominent undercurrent of concern that the Fed is going to overtighten and trigger a deeper economic setback.
Currently, the S&P 500 futures are down one point and are trading roughly in-line with fair value, the Nasdaq 100 futures are up 16 points and are trading 0.2% above fair value, and the Dow Jones Industrial Average futures are down 33 points and are trading 0.1% below fair value.
The growth concerns are flowing from the deepening inversion along the Treasury yield curve. The 2s10s spread, for instance, is the most inverted it has been (82 basis points) since the early 1980s. The 2-yr note yield is unchanged at 4.37% and the 10-yr note yield is up five basis points to 3.55%.
A breakdown in oil prices ($75.75, -1.18, -1.5%), even though there is a $60.00 per barrel price cap on Russian oil and China could be poised for better growth with its relaxed COVID restrictions, has contributed to the worries about a deteriorating global economic environment.
On a related note, in CNBC interviews this morning JPMorgan Chase (JPM) CEO Jamie Dimon said that he thinks a mild to more pronounced recession is likely ahead, Walmart (WMT) CEO Doug McMillon reiterated that the low-end consumer is still feeling pressure, and Union Pacific (UNP) CEO Lance Fritz said the economy and consumer are slowing.
We know from the October Trade Balance Report that exports slowed. Specifically, the trade deficit widened in October to $78.2 billion (Briefing.com consensus -$77.2 billion) from a downwardly revised $74.1 billion (from -$73.3 billion) in September. That was the result of exports being $1.9 billion less than September exports and imports being $2.2 billion more than September imports.
The key takeaway from the report is that the pickup in imports speaks to a relatively strong U.S. economy in October versus other economies.
Nonetheless, the lag effect of rising interest rates around the globe has the market on guard for a more meaningful slowdown in growth for the U.S. economy in 2023.
-- Patrick J. O'Hare, Briefing.com
NRG Energy looks to power growth with acquisition of Vivent, but risk profile also increases (NRG)
Major M&A deals have been few and far between in recent months due to volatile market conditions, but NRG Energy (NRG) and Vivint Smart Home (VVNT) made a sizable splash today. Power company NRG, which sells electricity to residential and commercial customers in Texas, announced that it will acquire VVNT for $12/share in cash. That offer price represents a steep 34% premium for VVNT based on yesterday's closing price.
- There may be some sticker shock over that $5.2 bln price tag (inclusive of $2.4 bln in debt) from NRG's investors, explaining why the stock is getting hit hard on the acquisition news.
- At about 3x estimated FY23 sales, the buyout price doesn't seem too egregious at first blush. However, when considering that VVNT isn't profitable, posting a net loss of nearly $(72) mln for the nine months ended September 30, 2022, the offer price begins to look much more generous.
Furthermore, some may be questioning the timing of acquiring a consumer-based company with exposure to the slowing housing market in this economic climate.
- For some quick background, VVNT sells, installs, and monitors smart home security products that sync up with other devices such as Amazon (AMZN) Echo and Google (GOOG) Home.
- VVNT is coming off a pretty solid Q3, though, in which it easily beat EPS estimates as average monthly recurring revenue per user increased to an all-time high of $69.76. Additionally, the attrition rate improved by 40 bps to 11.0%, near a record low.
While VVNT's Q3 performance was encouraging, the concern is that the economy will slip into a recession in 2023 as the Fed continues to raise rates, causing demand for VVNT's products to erode.
- That makes this acquisition a risky proposition, especially if NRG's free cash flow shrinks due to lower electricity demand in a recessionary environment.
- Relatedly, NRG intends to use excess free cash flow in 2023 to finance the deal and pay down acquisition-related debt.
- Although NRG plans to return to its dividend growth policy in 2024, there's likely some disappointment that the company is deviating from its typical capital allocation strategy as macro-related risks increase.
From NRG's perspective, the company likes the fact that VVNT will diversify its customer base while adding a subscription-based model to the mix. There will also be significant cross-selling opportunities that increase the customer lifetime value. Overall, though, this acquisition adds considerable risk to a steady, dividend paying stock, and that isn't going over too well with NRG's investors.
Signet Jewelers' Q3 results dazzle investors, a good sign ahead of the critical holiday season (SIG)
Signet Jewelers (SIG +19%) looks like a crown jewel today after dazzling investors with its massive beat-and-raise in Q3 (Oct). There were still a few weak points from the quarter, including same-store sales slipping -7.6%, missing analyst forecasts, and downbeat Q4 (Jan) revenue guidance. However, in combination with the relatively high short interest of 14%, the market is shrugging these blemishes off, focusing on the many highlights delivered in Q3 by the world's largest diamond jewelry retailer, which operates banners including Kay, Zales, and Jared.
- With analysts expecting sales to contract yr/yr in Q3, SIG's moderate 2.9% sales growth yr/yr to $1.58 becomes much more of a bright spot. Meanwhile, although SIG saw a sizeable 48.3% drop in adjusted EPS yr/yr, it was still well ahead of consensus.
- SIG's same-store sales underperformance becomes less glaring given that it was primarily attributed to softness from lower-priced items, an issue the retailer has been dealing with for multiple quarters.
- The good news is that higher-priced items continue to see strong performance, evidenced by average transaction value in North America climbing 8% yr/yr. The higher transaction value also reflects SIG's focus on broadening its reach into more accessible luxury with targeted customer acquisitions.
- With bridal being a critical component of SIG's overall growth, comprising about 40% of the firm's sales mix, its comments on what it expects in this category over the next two years are reassuring. Although SIG is expecting a slight downtick related to sales in this business for next year, it anticipates it to normalize the year after, calling the current dip a COVID-induced blip as there was a considerable uptick in engagement after 2020.
- Another crucial aspect of SIG's business is the holiday season. SIG has commented that Q3 is a prep quarter for the holidays, offering clues on what to expect for Q4 and Valentine's Day in Q1 (Apr). The company noted that it is well stocked but not overstocked like much of the retail industry. Inventory in Q3 was down 2% yr/yr, excluding acquisitions, with clearance at the lowest levels in recent history. Coupling this with almost 30% of SIG's assortment being new for the holidays should lead to robust sales over the next two quarters.
- SIG raised its FY23 guidance, expecting EPS of $11.40-12.00, up from its previously lowered forecast of $10.98-11.57, and revs of $7.77-7.84 bln, up from $7.60-7.70 bln. Although SIG's raised outlook is not back to its initial forecast, it includes its acquisition of Blue Nile, which operated at a loss in Q3 and is not expected to be accretive until 3Q24.
Overall, SIG is showing off its diamond in the rough status, shooting up toward August highs of around $71. Still, uncertainty remains as rising interest rates and inflationary pressures dampen discretionary spending. However, its Q3 results underpin resilience to these macroeconomic pressures, a bullish sign ahead of the vital holiday season.
GitLab is getting it done today as upside report highlights its impressive resiliency (GTLB)
Lengthening sales cycles and tightening customer budgets have been common themes for cloud software stocks lately, but DevSecOps company GitLab (GTLB) is bucking these trends and is delivering impressive financial results. Coming off a strong beat-and-raise 2Q23 earnings report in early September, the company topped EPS and revenue expectations again in 3Q23, fueled by a 69% surge in revenue and a huge seventeen percentage point yr/yr increase in Non-GAAP operating income to (19%).
Considering the recent struggles of other cloud software companies, such as Elastic (ESTC), Salesforce (CRM), and CrowdStrike (CRWD), it may seem surprising to see GTLB mostly overcome the challenging macro-related headwinds. During the earnings call, CEO Sytse Sijbrandij provided some color on why the company is still excelling despite the rough business climate.
- In some ways, GTLB is actually benefitting from the weakening global economy. For instance, slowing growth is forcing companies to do more with less and drive greater productivity with reduced workforces. This puts GTLB's platform in the wheelhouse for many companies because it enables them to quickly develop revenue-generating or cost-saving software with limited human resources.
- The rapid growth of the company's customer base -- both large and small -- reflects the healthy market acceptance of its platform. In Q3, customers with more than $5K of ARR increased by 59% to 6,469, and customers with more than $100K of ARR grew by 49% to 638.
- Many IT managers are shifting approaches regarding software development, moving away from a patchwork process that incorporates several different tools. For the sake of speed and simplicity, they are opting for a single application in order to improve efficiency and lower development costs.
- Due to the factors listed above, GTLB's platform provides a very fast payback on investment of less than six months. As its customers realize this value proposition, many expand their usage on the platform, as illustrated by GTLB's robust dollar-based net retention rate of 130%+.
In addition to capitalizing on these broader trends, GTLB's business model is also playing a major role in its success.
- A very small amount of revenue is based on consumption since GTLB implements a subscription-based model. This makes the business more predictable due to the high amount of recurring revenue.
- GLTB's land-and-expand strategy is fueling its growth. Initially, the company offers a free version of its platform which then becomes entrenched within a customer's software development team. At that point, many companies choose to upgrade to its Premium or Ultimate paid tiers. Notably, Ultimate continues to be the fastest growing tier, representing 39% of ARR in Q3.
- Growth is a priority for GTLB, but not at any cost as expanding margins and moving towards profitability is a focal point. In fact, GTLB's new FY23 guidance implies Non-GAAP operating margin improvement of about 1,525 bps yr/yr. Looking further out, the company expects to be free cash flow breakeven in FY25.
The main takeaway is that GTLB has distanced itself from the cloud software pack, exhibiting remarkable resilience in a deteriorating demand environment. Its DevSecOps platform is tailormade for the growing number of companies looking to simplify, streamline, and accelerate their software development.
AutoZone ticks lower despite another solid quarter as investors take profits today (AZO)
Despite another big earnings beat in Q1 (Nov), AutoZone (AZO -4%) is ticking lower today. The aftermarket auto parts retailer has yet to miss earnings estimates for 19 straight quarters, with same-store sales growth surpassing expectations for 11 consecutive quarters.
AZO's NovQ results directly contrast with rival Advance Auto Parts (AAP), whose high exposure to commercial customers has acted as a margin headwind. AAP's Professional business represented 58% of FY21 sales, whereas AZO's domestic Commercial unit comprised around 29% of FY22 (Aug) sales. As a result, even though AZO shares slipped following AAP's disappointing Q3 report last month, we do not think expectations were lowered drastically, leading into AZO's NovQ report.
Instead, with the stock up nearly 25% on the year, shares may have become overextended, fueling a possible profit-taking-induced pullback. Gross margins also slipped yr/yr. Still, nothing glaring stood out in NovQ, as results were mostly consistent with what we have come to expect from AZO this year.
- The headline numbers were solid. Domestic comps jumped +5.6%, despite lapping an unfavorable +13.6% in the year-ago period. Meanwhile, sales growth of 8.6% yr/yr to $3.99 bln was similar to the +8.9% posted last quarter, even though AZO was up against a more challenging comparison of +16.3% growth in 1Q22 than the +8.1% delivered in 4Q21 (Aug).
- Gross margins did contract 242 bps yr/yr to 50.1%, mainly due to rising freight costs and accelerating growth in AZO's Commercial business, which carries volume discounts. Nevertheless, solid top-line growth helped expand adjusted EPS by 6.9% yr/yr to $27.45.
- AZO's Commercial business maintaining a high gear is no accident. Although Commercial's 15% growth did cool off from the six-straight quarters of 20+% growth, it still highlights AZO's success in its focus on accelerating Commercial growth over the years. The core of this strategy centers on bringing inventory closer to the customer, which AZO expects will sustain the momentum of its Commercial business.
- As a side note, AAP's primary focus in the short run is to bring its inventory closer to the customer to improve its margin profile. It reduced its free cash flow outlook due to the need to pour capital into carrying out this initiative. With shares down around 35% on the year, this investment could be a critical difference maker, helping turn around its stock in the coming quarters.
The main takeaway is that even though investors are yawning at AZO's consistent numbers in NovQ, the company is still firing on all cylinders. Favorable long-term trends remain intact, such as an aging fleet of vehicles and a continual recovery in miles driven. It is worth noting that inflationary pressures will likely persist for the foreseeable future. However, as competitor O'Reilly Automotive (ORLY) pointed out, very little demand in the automotive aftermarket industry is genuinely discretionary, as repairs can only be put off for so long. Rising interest rates are also dampening new car purchases, keeping the attention on maintaining one's current vehicle.
Dollar General keeps its head above water today as shares find support after a weak Q3 report (DG)
Dollar General (DG) is keeping its head above water today as one of a handful of S&P 500 components trading in positive territory after a hot ISM Non-Manufacturing Index report sent the markets downward. Shares recently slid considerably after a double-digit Q3 (Oct) earnings miss and downbeat Q4 (Jan) earnings guidance last week.
However, beginning in the year's second half, the stock has found support around the $236 mark, further evidenced by a quick jump off these levels the day after DG's underwhelming Q3 report. There were also a few highlights from Q3, explaining why shares are still up around 4% on the year.
- Same-store sales jumped +6.8%, edging past estimates, despite DG encountering softer-than-anticipated discretionary spending and a reduction in basket size during the quarter. DG also saw store traffic climb.
- DG also commented that it is seeing a continual increase in customers with household incomes up to $100K, underscoring the company's value and convenience proposition.
- The combination of value and convenience should not be understated as it plays into the current demand for lower-price-point products while keeping miles driven to take advantage of these values low, a plus given the relatively high gas prices. DG boasts around 19,000 stores within just five miles of about three-quarters of the U.S. population.
- DG also reaffirmed its FY23 sales growth forecast of +11% yr/yr. Meanwhile, its expectation of around +6-7% comp growth in Q4 translates to FY23 same-store sales growth toward the upper end of its target of +4.0-4.5%.
Still, although the stock has built a floor over the past few months, by that same token, it has also found a ceiling, right around the $260 mark. Challenges have kept shares in check, including intense inflationary pressures, which could have been why DG exceeded analysts' comp expectations in the quarter. DG also noted that it experienced significantly higher-than-expected cost pressures in Q3, including internal supply chain strife, sales mix pressures, and higher inventory damages, which dented gross margins, leading to Q4 EPS missing estimates. On the plus side, DG remarked that some capacity pressures have already been alleviated by opening additional warehouses.
Bottom line, economic woes are taking their toll on DG. However, some of the company's issues are internal. DG is already taking the necessary steps to improve its supply chain, which should boost margins after Q4. Meanwhile, DG has focused on many strategic initiatives to bolster its margin profile even further, including enhancing private brand sales and global sourcing. With bargain-hunting still gaining popularity due to inflationary pressures, DG and its massive footprint are positioned to potentially gap above previous highs.
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