What Samsung’s Reaction to a Putrid Print May Mean: Taking Stock

(Bloomberg) -- Tech is, oddly enough, starting to show shades of its pre-meltdown days.

Two of the best S&P 500 performers last year prior to October, Amazon and Netflix, are in parabolic bounce mode. The former is now atop the market cap leaderboard at just under $800 billion.

What Samsung’s Reaction to a Putrid Print May Mean: Taking Stock

The Philadelphia Semiconductor Index, or SOX, is up more than 9 percent in 8 sessions. That’s even more impressive when you realize it includes a brutal one-day pullback of nearly 6 percent last week on the back of the Apple warning heard around the world.

Speaking of the once trillionaire, it looks like bad news is either being punished lightly, like how Apple (now with a market value of just over $700 billion) has recovered almost 6 points since last Thursday’s revenue outlook cut, or immediately bought, like Samsung’s quickfire bounce on terrible numbers (shares fluctuated above and below the flat-line for almost the entire session before ending the day modestly lower).

The headline miss from South Korea’s most-valuable company and the world’s smartphone leader was horrific -- fourth quarter operating profit was 10.8 trillion won ($9.65 billion), or about 3 trillion below the average estimate and below the lowest surveyed by a mile, while sales missed consensus by almost 5 trillion won -- and the forward-looking commentary wasn’t much better, with a near-term outlook for the memory business that may spell trouble for the semicap equipment names of the world.

What Samsung’s Reaction to a Putrid Print May Mean: Taking Stock

One argument is that the negatives are all, or mostly, priced in. The tech bulls, who are still scarred from the recent carnage, might argue that the action in the sector from October to December accounts for much of this weakness, and Micron’s mid-December capex cut, Apple’s guidance reduction, and Samsung’s mammoth miss are only helping to wipe the slate clean.

The fact that Samsung didn’t tank off of this putrid print could be a signal to some that a bottoming process is in full effect for the global tech space. Many sell-siders have already been pumping their buys and/or upgrading their lesser-rated named in the belief that valuations may have gotten too out of whack for both old-school tech (S&P 500 info tech index) and new-school tech (the still somewhat fresh communication services sector).

For example, ever since the Apple debacle last week, we’ve seen two upgrades for Alphabet, one for Apple, Salesforce (and a separate addition to a bank’s "best ideas" list), Intel, Micron, Expedia, Etsy, and Dish as well as a buy initiation for Amazon (plus an addition to JPMorgan’s focus list this morning) and Goldman adding Netflix to its conviction list.

And the moves in this morning’s pre-market are only adding to the sentiment. My pre-market single-stock monitors are either blacked out (meaning zero trades have hit the tape yet) or lit bright green. But the interesting part is that the latter is almost entirely for stocks in the tech arena, like Nvidia +2% (despite a bull cutting estimates on inventory concerns), Advanced Micro +1.9%, Amazon +1.4%, and Microsoft, Netflix, Micron, Roku, Square, PayPal, and Twilio all up ~1%.

But before everyone gets giddy and starts buying anything tech-slash-momentum hand over fist in the hopes of a V-shaped recovery, I’d just brace for what could be a barrage of tape bombs that could 1) put a stop to the incessant melt-up, or 2) give pause to the bounce and offer dip buyers an even better opportunity to snatch up some of these value plays.

These could come in the form of ugly preannouncements (a la Apple), weak earnings (a la Samsung, though we still have a week and change before Netflix kicks things off), global economic downshifts (Germany just posted its worst year-over-year drop in industrial production since the end of the financial crisis), and any setbacks in the China trade negotiations, which could come fast with the completion of the two-day talks in Beijing.

Sectors in Focus Today

  • Semicap equipment stocks (like Lam Research, KLA-Tencor, and Applied Materials) in reaction to Samsung memory comments, as mentioned above
  • Airlines in focus on the potential for several majors to preannounce results this week (United announced $206m in special impairment charges last night)
  • Healthcare, energy, and tech stocks given a plethora of sell-side conference presentations today (biggest ones are laid out in the tick-by-tick guide at the bottom of this column)
  • Homebuilders ahead of earnings tomorrow from Lennar and KB Home

Notes From the Sell Side

Goldman is out cautious on the semiconductors and downgrading smidcap name Entegris. The analysts call for another challenging year for the group, especially in the first half, but they do see some possible bright spots (in keeping with the theme mentioned above of sell-siders scouring for valuation discounts): "By sub-sector, we are least negative on Semi Cap Equipment as the stocks already seem to be pricing in a downturn that is significantly worse than what’s embedded in consensus estimates."

There’s a lot of opinions published on the bank sector today: 1) Wolfe Research is downgrading universal and trust banks to a market weight thanks to a "valuation rethink," with ratings on Wells Fargo, Northern Trust, and Lazard all getting slashed; 2) Morgan Stanley is reducing estimates across the board for the large cap banks in a giant preview note, though still regards the group as cheap; and 3) Evercore ISI’s 2019 outlook piece has three shifts, with State Street lifted to outperform while Franklin and Invesco move to underperform and in-line, respectively.

Credit Suisse sounds positive on the steels, talking about how the near-term outlook for the U.S. Industry "actually looks constructive in our view as seasonal weakness and aggressive destocking should fade by early 1Q-19." The analysts upgrade both Nucor and Steel Dynamics to outperform and downgrade U.S. Steel to neutral.

Tick-by-Tick Guide to Today’s Actionable Events

  • Today -- U.S./China trade talks in Beijing (day two of two)
  • Today -- Prescience Point to issue report on undervalued company
  • 8:00am -- COP, HES, CVX, SU at Goldman energy conference
  • 8:30am -- Trade Balance
  • 8:45am -- EOG, APC, OXY at Goldman energy conference
  • 9:00am -- HELE earnings call
  • 10:00am -- JOLTs job openings
  • 10:15am -- PXD, CXO, FANG at Goldman energy conference
  • 10:30am -- GSK at JPMorgan healthcare conference
  • 10:30am -- Eli Lilly CEO Dave Ricks on Bloomberg TV
  • 10:50am -- NVDA at JPMorgan tech forum at CES
  • 11:00am -- VZ at Citi Global TMT West conference
  • 11:00am -- GE, BSX, DHR at JPMorgan healthcare conference
  • 11:00am -- MPC, PSX, PBF at Goldman energy conference
  • 11:00am -- Takeda Pharma CEO Christophe Weber on Bloomberg TV
  • 11:10am -- CVS CEO Larry Merlo on Bloomberg TV
  • 11:30am -- IBM CEO Ginni Rometty gives keynote at CES
  • 11:30am -- AMGN at JPMorgan healthcare conference
  • 11:40am -- Verizon CEO Hans Vestberg on Bloomberg TV
  • 11:45am -- XOM CEO Darren Woods keynote at Goldman energy conference
  • 11:45am -- DISCA at Citi Global TMT West conference
  • 12:00pm -- MU at JPMorgan tech forum at CES
  • 12:00pm -- NKTR at JPMorgan healthcare conference
  • 12:00pm -- APTI extraordinary shareholders meeting
  • 12:30pm -- ON at Citi Global TMT West conference
  • 1:00pm -- BMY at JPMorgan healthcare conference
  • 1:00pm -- IMPV extraordinary shareholders meeting
  • 1:00pm -- PAAS extraordinary shareholders meeting
  • 1:15pm -- COG, RRC, EQT at Goldman energy conference
  • 1:30pm -- INTC at JPMorgan tech forum at CES
  • 2:00pm -- WWE at Citi Global TMT West conference
  • 2:00pm -- MYL, CVS at JPMorgan healthcare conference
  • 2:00pm -- WMB, ET at Goldman energy conference
  • 2:00pm -- Verizon CEO Hans Vestberg on Bloomberg TV
  • 2:30pm -- Hulu CEO Randy Freer on Bloomberg TV
  • 2:45pm -- RIG, NE, ESV at Goldman energy conference
  • 2:45pm -- IBM CEO Ginni Rometty on Bloomberg TV
  • 3:00pm -- Consumer Credit
  • 4:05pm -- SGH, EXFO earnings
  • 4:10pm -- KSHB earnings
  • 4:15pm -- Gundlach hosts "Just Markets" webcast
  • 4:15pm -- ZG at Citi Global TMT West conference
  • 4:30pm -- API oil inventories
  • 5:00pm -- PVTL at Citi Global TMT West conference
  • 5:00pm -- PRGO at JPMorgan healthcare conference
  • 5:30pm -- BLUE, HSIC at JPMorgan healthcare conference
  • 6:00pm -- LLY at JPMorgan healthcare conference
  • 7:00pm -- VZ CEO Hans Vestberg gives keynote at CES
  • 7:30pm -- CLVS at JPMorgan healthcare conference
  • 9:00pm -- Trump to address the nation on national security

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