Today's brief

Closing Summary - S&P 500 closes below 50-day moving average

The S&P 500 fell 0.9% on Friday, as investors digested some negative-sounding headlines and hedged for further weakness. The Nasdaq Composite declined 0.9%, and the Dow Jones Industrial Average declined 0.5%. The Russell 2000, however, increased 0.2% amid the quadruple witching-options expiration activity into the close. 

Ten of the 11 S&P 500 sectors closed lower, with the materials (-2.1%), information technology (-1.5%), utilities (-1.6%), communication services (-1.3%), and industrials (-1.1%) sectors losing more than 1.0%. The health care sector (+0.1%) was saved by Thermo Fisher (TMO 596.80, +36.36, +6.5%), which provided upbeat FY22 EPS guidance.

Risk sentiment seemed to be partially influenced by news that President Biden was unable to get Senator Manchin (D-WV) on board with the $3.5 trillion infrastructure plan, a warning from the White House that not increasing the debt limit could cause a recession, and the FDA advisory committee voting against Pfizer's (PFE 43.88, -0.59, -1.3%) COVID-19 booster vaccine for people 16 and older.  

While none of the news was viewed as surprising, it presumably reminded investors about some of the growth-oriented headwinds the market is facing. The S&P 500 breached support at its 50-day moving average (4436) on a closing basis.  

The tech sector weighed on the market amid weakness in its top-weighted components and the semiconductor stocks. BofA Securities downgraded both Cree (CREE 85.70, -2.60, -2.9%) and Cirrus Logic (CRUS 84.73, -3.45, -3.9%) to Underperform from Neutral. The Philadelphia Semiconductor Index declined 1.5%.

Separately, the consumer sentiment report showed a smaller-than-expected gain following last month's shocking decline. The preliminary September reading for the University of Michigan Index of Consumer Sentiment increased to 71.0 (Briefing.com consensus 72.0) from 70.3 in August. 

The negative backdrop seemed to provoke some cash-raising efforts. The U.S. Dollar Index rose 0.3% to 93.21 while the 10-yr yield increased four basis points to 1.37% amid increased selling interest. The CBOE Volatility Index (20.81, +2.12, +11.3%) closed above the 20.00 level. 

The 2-yr yield was unchanged at 0.23%. WTI crude futures decreased 1.0%, or $0.70, to $71.92/bbl.

Reviewing Friday's economic data:

  • The preliminary September reading for the University of Michigan Index of Consumer Sentiment increased to 71.0 (Briefing.com consensus 72.0) from the final reading of 70.3 for August.
    • The key takeaway from the report is the recognition that high prices have led to a decline in assessments of buying conditions for homes, vehicles, and household durables. That could lead to slower spending activity in the future if consumers hold off on purchases either because they think prices will come down if they wait longer or if they resist paying persistently high prices altogether in the absence of offsetting income gains.

Looking ahead, investors will receive the NAHB Housing Market Index for September on Monday. 

  • S&P 500 +18.0% YTD
  • Nasdaq Composite +16.7% YTD
  • Dow Jones Industrial Average +16.0% YTD
  • Russell 2000 +13.3% YTD

Overseas: 

  • Europe: DAX -1.0%, FTSE -0.9%, CAC -0.8%
  • Asia: Nikkei +0.6%, Hang Seng +1.0%, Shanghai +0.2%

Commodities: 

  • Crude Oil -0.65 @ 72.08
  • Nat Gas -0.25 @ 5.05
  • Gold -3.60 @ 1752.30
  • Silver -0.47 @ 22.39
  • Copper -0.02 @ 4.24

Spotlight Comment: Seagate has been successful supplying mass capacity storage markets; looks poised to continue

We wanted to highlight a Yield Leader that has outperformed its primary competitor despite selling more outdated technology. Seagate Tech (STX) climbed to number 3 on our Yield Leaders rankings this week for its superb 3.2% dividend yield, its retirement of over 13% of its outstanding shares in FY21, and its attractive forward P/E ratio of 10.3x.

STX is one of the largest suppliers of hard disk drives (HDD), which are devices used to store data. Newer tech has emerged since HDDs were first introduced decades ago, such as solid-state drives (SSDs) and solid-state hybrid drives (SSHDs). However, STX has succeeded with HDDs by supplying the devices to mass capacity storage markets (e.g., enterprises, cloud service providers, etc.), where companies prefer storage capacity to speed -- the main difference between HDDs and SSDs. Plus, HDDs are much cheaper to produce than are SSDs.

STX's main rival, Western Digital (WDC), derives over half of its revenue from SSDs and other flash-based storage. About half of its sales are made to the consumer devices market. Meanwhile, STX derives nearly 70% of its total revenue from OEMs, primarily comprised of enterprises and cloud service providers.

Although WDC has experienced success with its approach, STX's stock outperformed WDC thus far by nearly 30% year-to-date. Here is why we believe this outperformance may continue:

  • We think STX is in a solid competitive position, especially as edge computing use cases, such as autonomous vehicles and smart cities, continue to expand. HDDs' primary advantage over SSDs is their ability to store much more data for much cheaper.
    • With edge computing relying on storing massive amounts of data, companies will be looking for the lowest cost, highest storage capacity options.
  • This trend is already showing in STX's HDD exabytes shipped to mass capacity markets. An exabyte is about the same amount of storage as nearly 8 mln base capacity iPhones. Over the past two years, total mass capacity exabytes shipped has more than doubled to 417, whereas it only grew by about 50% over the two years before that.
    • This is evidence that the need for more storage is only ramping up. STX is in a prime position to benefit.
  • Lastly, as many other companies are already competing in the SSD space, STX has looked to diversify its HDD business with a non-HDD solution: Seagate Lyve. This data transfer-as-a-service offering allows companies to transfer mass-capacity data sets quickly and securely.
    • Companies already frequently move data from one endpoint to another at the edge of the cloud. As edge computing grows in popularity, the need to transfer data quickly without the risk of data loss will also continue to grow.

STX may not be a high-growth company like NVIDIA (NVDA) with its data centers, or like Apple (AAPL) with its consumer devices. Still, STX has continued to see steady growth as demand for its mass capacity storage solutions continues. STX has also been excellent at returning capital to shareholders through a combination of a solid 3.2% dividend yield and stock buybacks. STX also still has about $4.2 bln remaining in its share repurchase program.

Bottom line, there is still a need for HDDs, even as most consumer devices have phased them out in favor of SSDs. As edge-computing continues gaining momentum, we think STX is a great option for value investors. If entering a position, use a 15-20% stop loss limit, as always.

Today's News Summary:

For a full rundown of today's market and after hours developments, see Live In Play

  • Earnings/Guidance (Full Earnings Calendar):
    • Biophytis SA (BPTS) reports H1 results
    • ChannelAdvisor (ECOM) provides long-term financial targets and announces share repurchase program for up to $25 mln
    • Edison (EIX) establishes in-line 2021 EPS guidance following favorable GRC final decision
    • Intl Flavors (IFF) issues upside FY21 revenue guidance, appoints Glenn Richter as CFO and Executive Vice President
    • Manchester United (MANU) misses by GBP 0.06, misses on revs
    • MasterCraft (MCFT) lowers Q1 net sales and EPS guidance; reaffirms FY22 guidance
    • Thermo Fisher (TMO) sees FY22 EPS above consensus
    • Union Pacific (UNP) discloses financial impact-including revenue, operating expenses and capital investment, of Winter Storm Uri, California wildfires, and heavy rains in the South and Southeast part of the Company's network-exceeds $100 million so far this fiscal year
    • USANA (USNA) issues preliminary Q3 results and lowers FY21 guidance; increases share repurchase program
    • U.S. Steel (X) guides Q3 adjusted EBITDA slightly above consensus; expects a stronger for longer steel market
  • General News:
    • President Biden failed to persuade Senator Joe Manchin (D-WV) to support $3.5 trln budget reconciliation bill. Mr. Manchin wants to cut specific programs and lower price to $1.5 trln, according to Axios
    • FDA panel fails to authorize Pfizer COVID-19 booster shots for 16 and older; 3 people voted in favor; 15 voted against
    • House Majority Leader Steny Hoyer (D-MD) in letter says that House will vote on short term funding bill with debt ceiling suspension attached next week; he also says House will consider $1 trln bipartisan infrastructure bill on September 27
    • White House tells CNBC that failing to increase the debt limit will cause a recession
    • US aiming to sanction ransomware payments made in cryptocurrencies, according to WSJ
    • President Biden will use next week's UN speech to call for global summit on COVID-19 and 70% global vaccination goal by September of 2022, according to NY Times
    • Department of Transportation proposes new opportunity for low- or ultra-low cost carrier to serve Newark-Liberty International Airport
    • Big box stores expect strong holiday retail sales, according to the Wall Street Journal
    • EMA Meeting highlights from the Committee for Medicinal Products for Human Use (CHMP) 13-16 September 2021
    • King County in Washington will require vaccination proof to enter restaurants, theaters, and gyms, according to Seattle Times
    • India Prime Minister Modi will hire technology companies to increase agricultural output, according to Bloomberg
    • AbCellera (ABCL): Emergency Use Authorization of AbCellera-Discovered Bamlanivimab Administered with Etesevimab Expanded by the FDA to Include Post-Exposure Prophylaxis for the Prevention of COVID-19
    • Align Tech (ALGN) announces exclusive supply and distribution agreement with Ultradent Products
    • AppFolio (APPF) appoints Fay Sien Goon as CFO, effective Oct 18, 2021
    • Ballard Power (BLDP) announces launch of the FCmove-HD+, designed for buses and medium and heavy-duty trucks; is the latest product in Ballard's 8th generation heavy duty power module portfolio
    • Bristol-Myers (BMY) confirms Positive CHMP Opinion for Opdivo + Chemotherapy for patients with HER2-Negative advanced or metastatic gastric, gastroesophageal junction or esophageal adenocarcinoma whose tumors express PD-L1 with CPS = 5
    • Canadian Nat'l Rail (CNI) announced details of strategic plan "Full Speed Ahead - Redefining Railroading"
    • Coherus (CHRS) and Junshi Biosciences to Present Positive Progression Free Survival and Overall Survival Results from JUPITER-06, a Phase 3 Clinical Trial Evaluating Toripalimab in Combination with Chemotherapy as First-Line Treatment for Advanced Esophageal Squamous Cell Carcinoma
    • Diamondback Energy (FANG) approves up to $2.0 bln in new repurchase program, effective immediately
    • Eli Lilly (LLY) announces that the U.S. Food and Drug Administration has expanded the Emergency Use Authorization for bamlanivimab 700 mg and etesevimab 1400 mg administered together to include post-exposure prophylaxis in certain individuals for the prevention of SARS-CoV-2 infection
    • Galapagos NV (GLPG) confirms that the European Medicines Agency's Committee for Medicinal Products for Human Use has issued a positive opinion for Jyseleca
    • General Motors (GM) plans to make changes to supply chain amid chip shortages, according to Reuters
    • Glatfelter Co (GLT) will increase prices for all composite fibers products by 12% or as customer contracts permit, effective immediately
    • Grifols, S.A. (GRFS) entered into a share purchase agreement with Tiancheng International Investment Limited
    • Gritstone bio (GRTS) announces positive clinical data with GRANITE during ESMO 2021 and launch of randomized clinical trial program in colorectal cancer with registrational intent
    • Innate Pharma (IPHA) announces that AstraZeneca (AZN) presented results from the randomized COAST Phase 2 trial during the European Society for Medical Oncology Congress 2021
    • Intl Game Tech. (IGT) wins a facilities management lottery contract from the Connecticut Lottery
    • Johnson & Johnson (JNJ) Janssen unit confirms it received positive CHMP opinion for BYANNLI for the maintenance treatment of schizophrenia in adults
    • Johnson & Johnson (JNJ) unit Jansen presents results from Phase 1b/2 NORSE Study
    • Merck (MRK) confirms CHMP Opinion for KEYTRUDA (pembrolizumab) in combination with chemotherapy for certain patients with locally recurrent unresectable or metastatic triple-negative breast cancer whose tumors express PD-L1
    • Methanex (MEOH) announces 5% share repurchase program
    • Nexa Resources (NEXA) selects its new CEO Ignacio Rosado to replace current CEO Tito Martins
    • Novartis AG (NVS) reports new data for 177Lu-PSMA-617 radioligand therapy in patients with advanced prostate cancer
    • Novavax (NVAX) to participate in University of Oxford Com-COV3 study comparing mixed COVID-19 Vaccine Schedule in 12-16 year olds
    • Pebblebrook Hotel Trust (PEB) provides update on recent operating trends; has seen roughly 10-20% of corporate groups cancel for Sept and Oct with many rebooking for late 2021 or 2022
    • PG&E (PCG) filed an application with the California Public Utilities Commission requesting cost recovery of ~$1.47 bln of recorded expenditures related to wildfire mitigation, certain catastrophic events, and a number of other activities
    • Protagonist Therapeutics (PTGX) receives Clinical Hold from FDA on Rusfertide clinical development program
    • Roche Hldg (RHHBY) confirms positive CHMP opinion for Gavreto (pralsetinib) for the treatment of adults with RET fusion-positive advanced non-small cell lung cancer
    • Scientific Games (SGMS) appoints Connie James as CFO, effective October 15
    • ServiceNow (NOW): Chief Accounting Officer stepping down to pursue another career opportunity
    • Tanger Factory (SKT) increases quarterly dividend by 2.8% to $0.1825/sh
    • TCR Therapeutics (TCRR) Announces Positive Interim Results from Ongoing Phase 1/2 Trial of Gavo-cel for Treatment Refractory Mesothelin-Expressing Solid Tumors
    • Turning Point Brands (TPB) receives MDO on PMTA process
    • U.S. Steel (X) announces an exploratory site selection process to build new estimated $3 bln mini mill in the US
    • Vascular Biogenics (VBLT) announces independent data safety monitoring committee provides clearance to continue the OVAL phase 3 registration-enabling study of VB-111 in Ovarian Cancer
    • Zumiez (ZUMZ) approves $150 mln stock repurchase authorization

Notable Ratings

(see Upgrades/Downgrades calendar for full list):

  • Upgrades:
    • Accolade (ACCD) upgraded to Outperform from Neutral at Robert W. Baird; tgt lowered to $54
    • DTE Energy (DTE) upgraded to Outperform from In-line at Evercore ISI; tgt $127
    • Eni S.p.A. (E) upgraded to Overweight from Underweight at JP Morgan
    • HSBC Holdings (HSBC) upgraded to Outperform from Sector Perform at RBC Capital Mkts
  • Downgrades:
    • Cirrus Logic (CRUS) downgraded to Underperform from Neutral at BofA Securities; tgt $92
    • Cree (CREE) downgraded to Underperform from Neutral at BofA Securities; tgt $93
    • Equinor (EQNR) downgraded to Underweight from Neutral at JP Morgan
    • Great Western Bancorp (GWB) downgraded to Sector Perform from Outperform at RBC Capital Mkts; tgt lowered to $33
  • Others:
    • ChampionX (CHX) initiated with a Sell at Goldman; tgt $22
    • Chart Industries (GTLS) initiated with a Neutral at Goldman; tgt $193
    • Eos Energy (EOSE) initiated with a Buy at Johnson Rice; tgt $20

Upcoming Events:

  • Econ data (Monday):
    • 10:00 ET: September NAHB Housing Market Index (Briefing.com consensus 74.0; Prior 75.0)
  • Earnings:
    • Monday (Sept. 20)
      • Pre-Market: CGNT
      • After-Hours:LEN
    • Tuesday (Sept. 21)
      • Pre-Market:  APOG AZO CBRL NEOG
      • After-Hours:  ADBE FDX SFIX
    • Wednesday (Sept. 22)
      • Pre-Market:  GIS
      • After-Hours: BB FUL KBH SCS
    • Thursday (Sept. 23)
      • Pre-Market:  ACN DRI DAVA RAD
      • After-Hours: AIR CAMP COST NKE PRGS TCOM MTN
    • Friday (Sept. 24)
    MDU Resources raises FY20 EPS guidance
    MDU Resources raises FY20 EPS guidanceMDU Resources raises FY20 EPS guidance
    TSA screened 1,284,599 airline passengers on Sunday, highest level since March (higher than any day during the Thanksgiving travel period)TSA screened 1,284,599 airline passengers on Sunday, highest level since March (higher than any day during the Thanksgiving travel period)