Market Snapshot
briefing.com
| Dow | 33706.06 | -240.56 | (-0.71%) | | Nasdaq | 13488.43 | -142.56 | (-1.05%) | | SP 500 | 4347.35 | -35.81 | (-0.82%) | | 10-yr Note | +4/32 | 3.74 |
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| | NYSE | Adv 894 | Dec 1990 | Vol 2.6 bln | | Nasdaq | Adv 1447 | Dec 2940 | Vol 8.0 bln |
Industry Watch
| Strong: -- |
| | Weak: Information Technology, Consumer Discretionary, Communication Services, Materials, Energy |
Moving the Market
-- Global growth concerns stoked by a slate of weak Manufacturing PMIs from overseas
-- Lingering sense that the market is due for a pullback after a big run of late
-- Reconstitution of the Russell Indexes
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Closing Summary
23-Jun-23 16:30 ET
Dow -219.28 at 33727.34, Nasdaq -138.09 at 13492.90, S&P -33.56 at 4349.60
[BRIEFING.COM] The stock market closed the week on a downbeat note. Ongoing consolidation efforts contributed to some of the weakness, although concerns about global growth prospects were another contributing factor. The major indices hit their best levels in the early afternoon trade as a few mega cap stocks recovered from opening losses, yet selling picked up again to interrupt that rebound effort.
Ultimately, the major indices all closed in negative territory with losses ranging from 0.7% to 1.4%.
The downside moves followed a slate of disappointing preliminary June manufacturing PMIs for Japan, Germany, the UK, the eurozone, and the U.S., all of which came in below 50 (i.e. the dividing line between expansion and contraction). Following yesterday's central bank rate hikes, those reports fueled worries that prior rate hikes may be adversely impacting economic activity, specifically in the manufacturing sector.
Growth concerns manifested themselves in falling commodity prices, the outperformance of the dollar, and sliding Treasury yields. The U.S. Dollar Index rose 0.5% today to 102.91. WTI crude oil futures fell 0.4% to $69.18/bbl and copper futures fell 2.0% to $3.80/lb. The 2-yr note yield fell five basis points to 4.75% and the 10-yr note yield fell six basis points to 3.74%.
Today's retreat in the stock market was broad and orderly. Decliners led advancers by a greater than 2-to-1 margin at both the NYSE and the Nasdaq. 24 of the 30 Dow components logged declines and all 11 S&P 500 sectors closed in the red.
The communication services (-0.3%) sector saw the slimmest loss, boosted by a gain in Meta Platforms (META 288.73, +3.85, +1.4%). Other sectors exhibiting relative strength included the health care (-0.3%) and financials (-0.4%) sectors. Meanwhile, the utilities (-1.5%) and consumer discretionary (-1.1%) sectors fell to the bottom of the pack.
Trading volume was extremely heavy today, reflecting the reconstitution of the Russell Indexes.
- Nasdaq Composite: +28.9% YTD
- S&P 500: +13.3% YTD
- Russell 2000: +3.4% YTD
- S&P Midcap 400: +3.5% YTD
- Dow Jones Industrial Average: +1.8% YTD
Reviewing today's economic data:
- June IHS Markit Manufacturing PMI - Prelim 46.3; Prior 48.4
- June IHS Markit Services PMI - Prelim 54.1; Prior 54.9
There is no U.S. economic data of note on Monday.
Indices remain near session lows
23-Jun-23 15:35 ET
Dow -210.23 at 33736.39, Nasdaq -131.56 at 13499.43, S&P -32.46 at 4350.70
[BRIEFING.COM] The major indices are trying to climb off their recently lows, but still sport sizable losses.
Treasury yields settled the session lower. The 2-yr note yield fell five basis points to 4.75% and the 10-yr note yield fell six basis points to 3.74%.
There is no U.S. economic data of note on Monday. Ahead of Monday's open, Carnival Cruise Line (CCL) will report earnings.
Main indices decline; small caps underperform
23-Jun-23 15:05 ET
Dow -240.56 at 33706.06, Nasdaq -142.56 at 13488.43, S&P -35.81 at 4347.35
[BRIEFING.COM] The major indices have been in a slow, steady decline recently. The S&P 500 and Dow Jones Industrial Average trade near their lows of the day.
Small cap stocks are underperforming now, driving the Russell 2000 down 1.3%.
Energy complex futures settled the session mixed. WTI crude oil futures fell 0.4% to $69.18/bbl while natural gas futures rose 4.3% to $2.72/mmbtu.
S&P 500 in second place on Friday afternoon
23-Jun-23 14:30 ET
Dow -181.00 at 33765.62, Nasdaq -94.49 at 13536.50, S&P -25.29 at 4357.87
[BRIEFING.COM] The S&P 500 (-0.58%) is in second place to this point on Friday.
S&P 500 constituents Assurant (AIZ 124.53, -6.75, -5.14%), DXC Technology (DXC 25.80, -1.01, -3.77%), and Qorvo (QRVO 97.30, -3.72, -3.68%) pepper the bottom of the S&P. AIZ slips after announcing it finalized its 2023 property catastrophe reinsurance program, while DXC and QRVO fall with broader
Meanwhile, New Jersey-based diagnostics firm Quest Diagnostics (DGX 143.46, +4.67, +3.36%) is among today's top gain getters, aided in part by relative outperformance in the healthcare space (XLV -0.1%) vs the S&P 500's -0.5% losses today.
Gold slides -2% this week despite modestly higher Friday finish
23-Jun-23 14:00 ET
Dow -132.63 at 33813.99, Nasdaq -69.39 at 13561.60, S&P -17.78 at 4365.38
[BRIEFING.COM] The tech-heavy Nasdaq Composite (-0.51%) is the top laggard today, this while also viewing that the Nasdaq is the shallowest decliner this week among the major averages -- DJIA -1.4%, S&P -1.1%, NDAQ -1.0%.
Gold futures settled $5.90 higher (+0.3%) to $1,929.60/oz, finishing down about -2.1% this week, as the expectations for three rate cuts this year have come down with Chairman Powell saying recently that two cuts were expected.
Meanwhile, the U.S. Dollar Index is up about +0.5% on Friday to $102.86.
Could be quitting time on the winning streak
If the S&P 500 and Nasdaq Composite are going to maintain their weekly winning streaks (S&P 500 up five straight and Nasdaq up eight straight), they are going to have their work cut out for them today. Entering today, the S&P 500 is down 0.6% for the week and the Nasdaq Composite is down 0.4%.
Their work, though, promises to be a little more taxing today seeing that the futures for the major indices are all indicating a lower start.
Currently, the S&P 500 futures are down 34 points and are trading 0.8% below fair value, the Nasdaq 100 futures are down 173 points and are trading 1.1% below fair value, and the Dow Jones Industrial Average futures are down 200 points and are trading 0.6% below fair value.
That negative disposition is wrapped up in some skittishness about global growth prospects after a batch of preliminary June manufacturing PMI readings for Japan, Germany, France, the UK, and the eurozone all printed contractionary readings (i.e., less than 50.0).
This understanding has fostered some favoritism for the dollar (U.S. Dollar Index +0.5% to 102.85), some weakness in WTI crude futures $68.46, -1.05, -1.5%) and copper futures ($3.82, -0.07, -1.7%), and some strength in Treasuries.
The 2-yr note yield is down eight basis points to 4.72% and the 10-yr note yield is down eight basis points to 3.72%. Those are decent moves, although they are taking place within the confines of a nine-month trading range, which is to say they are not "trend shifting" moves even though they are an offshoot of growth concerns.
The preliminary June IHS Markit Manufacturing PMI and Services PMI readings for the U.S. will be out at 9:45 a.m. ET. They aren't typically market moving, yet they will help round out today's interpretation of the global economic outlook.
On a related note, Treasury Secretary Yellen told Bloomberg News that she sees a lower risk of a U.S. recession on account of inflation coming down and the labor market's resilience.
Her assessment of matters seems to align with the stock market's breakout effort in recent weeks, although the Treasury market is seemingly less convinced. Since May 24, the Invesco S&P 500 Equal-Weight ETF (RSP) is up 4.3%, the Russell 2000 is up 4.6%, and the market-cap weighted S&P 500 is up 6.5%, yet the 2s10s spread over the same period has widened to 100 basis points from 63 basis points.
Seeing is believing for the stock market, though, and it just hasn't seen enough in the data yet to convince it that the economy is destined for a hard landing. That point notwithstanding, the flight to safety into the mega-cap stocks this year reflects at least some type of slowdown concern.
Sidenote: there are only three sectors that are outperforming the S&P 500 this year: information technology (+39.6%), communication services (+35.4%), and consumer discretionary (+30.6%). Any guesses as to the sectors in which Apple (AAPL), Microsoft (MSFT), NVIDIA (NVDA), Alphabet (GOOG), Meta Platforms (META), Tesla (TSLA), and Amazon.com (AMZN) are housed?
Those stocks are in play this morning as drags on the major indices as they are all indicated lower after most of them finished higher yesterday. Today's weakness can be chalked up to the same idea hanging over the broader market this week: they are due for a cooling off period after their big gains.
Separately, CarMax (KMX) is heating up in pre-market action, trading 7.7% higher following its much better than expected fiscal Q1 earnings report. Another mover of note is Dow component 3M (MMM). It is up 3.3% after the company announced a settlement in the "forever chemicals" matter that calls for the contribution up to a present value of $10.3 billion, payable over 13 years.
These individual winners are the outliers at the moment, however. The broader market is headed lower on the opening shift and will have to work hard to get positive for the week; otherwise, it will be quitting time on the winning streak.
-- Patrick J. O'Hare, Briefing.com
Under Armour continues to shed market value following a downgrade at Wells Fargo today (UAA)
Under Armour (UAA -2%) extended its lengthy downward action today after Wells Fargo downgraded the sports apparel firm to "Equal-Weight" from "Overweight," citing risks to its sales outlook and a challenging North American wholesale channel. Including today's adverse reaction, shares of Under Armour have shed over 40% since February highs as two consecutive earnings reports proved quite disappointing.
Briefing.com notes that shares are ticking down to potentially retest multi-year lows from October 2022. However, although headwinds abound, with the stock significantly depressed, Under Armour might be shaping up to be a reasonable buy.
- Under Armour's recent stock decline was kicked off following Q3 (Dec) earnings in early February, only to persist after issuing downbeat FY24 (Mar) guidance in early May. The biggest concern plaguing Under Armour going forward is margins, which may encounter lingering pressures as consumer discretionary spending wanes, triggering a heightened promotional environment. However, competitor lululemon athletica (LULU) commented earlier this month that although it anticipates further marketplace discounting, it does not expect it to be worse than it has been, underpinning some stabilization.
- An area where Under Armour has underperformed compared to its peers is e-commerce. For instance, in MarQ, Under Armour delivered just a 6% improvement in e-commerce revenue yr/yr, while NIKE (NKE) registered a 24% jump in digital sales in FebQ. However, after tapping former Marriott (MAR) President Stephanie Linnartz to be its CEO in December, Under Armour is focusing on ensuring its online platform becomes a showcase for the brand. Given CEO Linnartz's prior duties involved leading a technology transformation program and reinvigorating the brand at Marriott, we would not discount Under Armour's capacity to swiftly enhance its online offerings and improve brand recognition.
- With Under Armour emphasizing its e-commerce offering, the company could begin seeing its direct-to-consumer (DTC) sales return to positive growth after several quarters of low to negative yr/yr growth, helping margins in the process. Furthermore, consumers may reduce their trips to physical retail shops as they tighten their budgets, paving the way for increased e-commerce traffic.
Still, Under Armour's ailing stock price reflects numerous hurdles standing in its way. The company's FY24 guidance did not paint a rosy picture, expecting North American sales to be down slightly yr/yr. Also, although Under Armour did project International revs to grow at a mid-single-digit percentage rate, deteriorating economic conditions overseas could lead to the company missing this target.
Bottom line, FY24 will be a re-building year for Under Armour as its newly appointed CEO looks to reinvigorate the brand despite sour economic conditions. However, with shares trading around multi-year lows, the market may have already priced in much of Under Armour's current woes.
Apogee Enterprises surprises with strong EPS upside, Glass segment was impressive (APOG)
Apogee Enterprises (APOG +8%) is trading nicely higher after kicking off FY24 on a strong note with an upside Q1 (May) earnings report this morning. We like to keep an eye on Apogee because it is a major supplier and installer of windows for commercial buildings. As such, we view APOG as a gauge on conditions in the non-residential construction market generally.
- Apogee beat handily on EPS with its largest beat in the past three quarters and it reported nice revenue upside. Just as important, APOG raised full year EPS guidance by a good amount to $4.15-4.45 from $3.90-4.25. This raised guidance was by more than the Q1 upside, which implies EPS upside for Q2-Q4. However, APOG did maintain its full year outlook for sales being flat to slightly down, citing market forecasts of a potential slowdown in non-res construction in 2HFY24.
- The star of the show was its Architectural Glass segment where sales jumped 27.5% yr/yr to $97.2 mln. What stands out is that not only did this segment see strong sales growth, but APOG recently made a strategic shift to emphasize premium, high-performance products. APOG says this shift is transforming Glass from an underperforming business to an economic leader. That means higher margins and segment results really showed the benefit.
- Glass segment operating margin soared to 17.0% from 6.8% last year. This likely was responsible for much of the EPS upside in the quarter. However, APOG concedes this margin level is likely not sustainable for the full year. Nevertheless, the company raised its FY24 margin expectations for Glass to 10-15%, which is well above last year's level.
- APOG's largest segment, Architectural Framing Systems, posted minimal sales growth of 0.5% to $164.2 mln. Improved pricing and mix offset lower volume as the segment continued to increase focus on target markets. Segment operating margin dipped to 12.1% from 14.5% last year. However, the year ago period benefitted from the favorable timing of inventory flows and aluminum prices, which did not repeat this year. The laggard segment was Architectural Services, which posted a 13.5% sales decline to $89.4 mln, primarily reflecting lower project volume.
Overall, this was a solid quarter from APOG and better than feared. It follows on the heels of a strong report from another construction-related company yesterday, Commercial Metals (CMC). Also, last week, Steel Dynamics (STLD) said the non-residential construction sector remains solid. We think APOG's decision to focus on higher margin areas, especially in Glass, was a smart move and it's showing up in the financials.
CarMax speeds up after showing further signs of stabilization in the retail car market in Q1 (KMX)
CarMax (KMX +9%) is driving right through previous resistance today after crushing analysts' earnings estimates in Q1 (May) on better-than-expected top-line growth. Management's commitment to maintaining margins at the potential expense of market share is paying off. Although unit sales fell meaningfully yr/yr in the quarter, gross profit per retail and wholesale units remained constant. Meanwhile, CarMax noted that its market share bottomed out in December, enjoying sequential gains starting in January and extending through April.
- By emphasizing margins over market share, CarMax's EPS dropped just 7.7% yr/yr to $1.44, marking its widest beat since 1Q21. Gross profit per retail used and wholesale unit held relatively steady yr/yr at $2,361 and $1,042, respectively, even as average selling prices ticked 5.5% lower in retail and 17.9% in wholesale yr/yr.
- Buoying margins in Q1 was CarMax's attention on controlling the expense side of the equation, aligning its costs with its slowing sales figures. As a result, even though total revenue tumbled by 17.4% yr/yr to $7.69 bln, by implementing cost and efficiency actions surrounding staffing and marketing, CarMax was able to reduce its adjusted SG&A expenses by 5.7%, helping consolidated gross margins expand by 120 bps to 10.6%.
- Given the low costs associated with CarMax Auto Finance (CAF), the company's financing division, this business tends to provide a margin cushion. During Q1, the total interest margin contracted by 140 bps yr/yr to 6.1% as interest expenses shot up considerably. However, it was encouraging to see penetration edge up to 42.7% net of 3-day payoffs from 39.3% in the year-ago period despite increasing credit tightening, particularly amongst higher-risk clients.
- Continuously improving inventories was another notable highlight from Q1. CarMax bought 343,000 vehicles from consumers and dealers, just a 5.2% decline compared to the year-ago period but a massive 31.1% jump sequentially.
Headwinds are still present, however. The used car market remains depressed, with depreciation becoming a minor issue in some parts of CarMax's business, mainly wholesale. Furthermore, the resumption of student loan payments could negatively affect the retail auto market, especially as interest rates keep the cost of financing elevated. CarMax touched on this potential hurdle, saying that it is likely that most of its customers do not have significant student loan debt while its CAF arm skews to a higher credit customer.
Overall, CarMax sounded increasingly optimistic that near-term trends will continue to improve after registering accelerating performance across the board in Q1. We commented ahead of CarMax's report that if the stabilization witnessed last quarter carried over into Q1, it could help lift shares. We continue to believe that the worst of CarMax's struggles are likely in its rearview mirror, especially with its market share starting to experience sequential growth from January through April. Still, a few concerns lingering down the road could put the brakes on CarMax's recent gains.
Lastly, CarMax's Q1 report is a good sign ahead of peers' JunQ reports coming up over the next couple of months, including AN, LAD, SAH, and CVNA.
Hello Group's attractive fundamentals set the stage for solid upside as China recovers (MOMO)
A new addition to our Value Leader rankings in early May, Hello Group (MOMO) sits atop our most recent list, boasting a free cash flow yield of 18.4%, net cash per share of $5.86, and a long-term debt-to-equity ratio of zero. Hello Group's typically-strong financials did not mean much when shares remained in perpetual decline throughout 2021 and 2022. However, after a few encouraging quarterly earnings reports, the worst of Hello Group's woes may finally be a thing of the past, making its attractive valuation of 6x forward earnings seem like quite the bargain.
- What is Hello Group? The China-based firm is known for its social media app Momo and online dating offering Tantan. Momo represents most of Hello Group's total revs, as Tantan comprises just ~11%. With most social media applications, monthly active users (MAU) are closely monitored. Unfortunately for Hello Group, it has been bleeding MAUs for a while, explaining why shares have lost around 80% of their market value over the past five years.
- However, MAUs finally grew on a qtr/qtr basis in Q1, the first time since seeing a 0.3% sequential improvement in 2Q22, climbing 12.6% to 106.5 mln, potentially marking a bottom in 4Q22. Furthermore, Tantan delivered its first quarterly profit at the operating level in Q1.
- Helping Hello Group achieve these milestones was a long-awaited recovery from the pandemic. Although China has not entirely rebounded since COVID-19, the gradual reopening of the economy and normalization of outdoor activities bodes well for Hello Group going forward. Management remarked earlier this month that after COVID cases peaked in January, MAUs across various regions gradually grew, rebounding rapidly after Chinese New Year. CEO Yan Tang added that the extent of the recovery following the holiday was better than in previous years.
- Hello Group has implemented structural changes, shaking up its management team and outlining strategic priorities, to improve user acquisition efficiency, a critical factor in Tantan reaching profitability in Q1. Specifically, Hello Group cut down investments in low return-on-investment marketing channels. After seeing success in Q1, Hello Group is stepping on the gas, focusing on product innovation to improve average revenue per user growth.
- These moves are already generating meaningful gains; management anticipates Q2 revs of RMB 3.0-3.1 bln, representing a drop of just 3.5-0.3% yr/yr, a stark improvement from the four-straight quarters of double-digit declines.
As a Chinese-based tech company, Hello Group is not without its share of hurdles. Regulatory risks remain a concern, especially after the Chinese government cracked down significantly on tech giants in late 2020. The region is also not entirely out of the woods regarding COVID, which could lead to restrictions down the road, resulting in Hello Group's MAUs reverting to sequential declines.
Nevertheless, Hello Group boasts an attractive valuation and healthy financials, including no long-term debt, allowing it to weather potential storms ahead.
KB Home issues strong results as widely expected, but stock succumbs to sell-the-news reaction (KBH)
Following in the footsteps of Lennar (LEN) and D.R. Horton (DHI), homebuilder KB Home (KBH) crushed quarterly revenue and earnings expectations on strengthening demand and fewer cancellations. Also like those homebuilding peers, KBH raised its full-year guidance, forecasting FY24 homebuilding revenue of $5.80-$6.20 bln versus its previous guidance of $5.20-$5.90 bln. Given the strong results and outlooks from LEN and DHI, expectations were sky-high heading into KBH's report, as illustrated by the stock's 50% run higher since mid-March.
- Those lofty expectations and accompanying rally for the stock set the stage for an initial sell-the-news reaction as traders locked in profits. The results themselves were solid with the only real blemish being a 390 bps decrease in housing gross profit margin to 21.4% due to a 3% average selling price to $479,500. KBH cited higher construction costs as another headwind.
- The main storyline, though, is that after showing initial signs of a recovery in February, demand continues to improve with KBH achieving monthly sequential increases in net orders during Q2. On a sequential basis, net orders surged by 84% as buyers adjusted to higher mortgage rates.
- During the earnings call, CEO Jeffrey Mezger echoed the bullish sentiments of LEN's executives regarding the new home construction market. Mr. Mezger noted that the housing market is characterized by an under supply of existing home inventory -- a point that LEN CEO Stuart Miller highlighted last week. Availability is even more scarce at KBH's price points which skew towards the first-time and affordable first move-up segments.
- This limited supply, combined with a greater sense of urgency from buyers, is putting upward pressure on new home prices. In Q2, KBH was able to raise prices in about two-thirds of its communities, which will provide a positive impact in early 2024 when those homes are delivered.
- Another factor working in KBH's favor is its diversification strategy as it expands in the southeast region of the U.S. Total revenue in this region is now approaching the 20% level compared to just 11% five years ago. 4
- Even in its home state of California, which is plagued by a challenging regulatory environment, the outlook remains pretty bright due to a more severe shortage of homes. Homebuilders have shied away from the state, as reflected by the fact that 75% of homes there were built before 2000.
Overall, KBH delivered impressive results, as widely anticipated. The heightened expectations are working against the stock today as traders lock in profits, but KBH's fundamentals are strengthening, and the long-term view remains positive amid a favorable supply and demand dynamic.
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