Research Calls II
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Upgrades:
- Block (SQ) upgraded to Outperform from Mkt Perform at William Blair
- Toast (TOST) upgraded to Outperform from Neutral at Mizuho; tgt raised to $33
- V.F. Corp (VFC) upgraded to Buy from Neutral at Citigroup; tgt raised to $20
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Downgrades:
- 10x Genomics (TXG) downgraded to Neutral from Overweight at JP Morgan; tgt lowered to $20
- Inari (NARI) downgraded to Hold from Buy at Needham
- Melco Resorts & Entertainment (MLCO) downgraded to Neutral from Overweight at JP Morgan; tgt lowered to $7
- Molson Coors Brewing (TAP) downgraded to Underweight from Equal Weight at Barclays; tgt lowered to $47
- Morgan Stanley Direct Lending (MSDL) downgraded to Neutral from Buy at UBS; tgt $23.50
- Palo Alto Networks (PANW) downgraded to Neutral from Buy at Redburn Atlantic; tgt lowered to $325
- PayPal (PYPL) downgraded to Mkt Perform from Outperform at William Blair
- Pinnacle Finl (PFNP) downgraded to Neutral from Overweight at Piper Sandler; tgt raised to $98
- Teradyne (TER) downgraded to Market Perform from Outperform at Northland Capital
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Others:
- Impinj (PI) initiated with an Overweight at Cantor Fitzgerald; tgt $205
- PagerDuty (PD) initiated with a Neutral at Goldman; tgt $24
- Thor Industries (THO) initiated with a Hold at The Benchmark Company
- TKO Group Holdings (TKO) initiated with a Buy at Redburn Atlantic; tgt $129
- Winnebago (WGO) initiated with a Buy at The Benchmark Company; tgt $75
Research Calls I
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Upgrades:
- Allstate (ALL) upgraded to Outperform from Market Perform at BMO Capital Markets; tgt raised to $191
- e.l.f. Beauty (ELF) upgraded to Outperform from Neutral at Robert W. Baird; tgt raised to $230
- Fortinet (FTNT) upgraded to Buy from Hold at TD Cowen; tgt $75
- Gap (GPS) upgraded to Overweight from Equal-Weight at Morgan Stanley; tgt raised to $29
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Downgrades:
- CrowdStrike (CRWD) downgraded to Sell from Neutral at Redburn Atlantic; tgt lowered to $275
- Doximity (DOCS) downgraded to Underweight from Equal Weight at Wells Fargo; tgt lowered to $19
- Elevance Health (ELV) downgraded to Neutral from Buy at BofA Securities; tgt lowered to $530
- First Horizon (FHN) downgraded to Outperform from Strong Buy at Raymond James; tgt $18
- Five Below (FIVE) downgraded to Hold from Buy at Deutsche Bank; tgt lowered to $79
- Foot Locker (FL) downgraded to Underweight from Equal-Weight at Morgan Stanley; tgt lowered to $18
- Hub Group (HUBG) downgraded to Hold from Buy at TD Cowen; tgt lowered to $43
- Leslie's (LESL) downgraded to Sell from Hold at Stifel; tgt lowered to $2.50
- Torrid (CURV) downgraded to Underweight from Equal-Weight at Morgan Stanley; tgt $5
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Others:
- AstraZeneca (AZN) initiated with a Buy at BOCOM Int'l
- Bristol-Myers (BMY) initiated with a Sell at BOCOM Int'l
- Frontier Communications Parent (FYBR) initiated with a Buy at UBS; tgt $33
- Grocery Outlet (GO) initiated with an Overweight at Wells Fargo; tgt $28
- LCI Industries (LCII) initiated with a Buy at The Benchmark Company; tgt $130
Gapping up
In reaction to earnings/guidance:
In reaction to earnings/guidance:
- VIRT +5.5%, BKU +3.9%, INFY +3.8%, DFS +3.3%, SLG +3.1%, BHLB +2.4%, FR +2%, LBRT +1.6%, UAL +1.5%, AA +1.2%, TSM +1.2%, TXT +1.2%, REXR +1%
Other news:
- CHUY +46.9% (DRI to acquire CHUY for $37.50/sh)
- ZIMV +14% (Osstem Implant Company in discussions to acquire ZimVie)
- OPK +4.9% (enters into $250 mln purchase agreement with HealthCare Royalty)
- RARE +4.4% (completes an end-of-Phase 2 meeting with the FDA supporting its Phase 3 plans for GTX-102)
- WOOF +4.3% (names new CEO)
- PWR +4.3% (Completed the acquisition of Cupertino Electric; estimated full-year 2025 adj EBITDA and adjusted diluted EPS contributions of approximately $175MM - $195MM and $0.40 - $0.50, respectively)
- DCO +2.4% (confirms receipt of unsolicited revised non-binding indication of interest from Albion River)
- FMX +2% (to divest its refrigeration and foodservice equipment ops)
- IBRX +2% (enters settlement agreement)
- MLKN +1.5% (amended stock repurchase program authorizing an additional $200 million to fund share repurchases)
- AG +1.4% (Q2 production)
Gapping down
In reaction to earnings/guidance:
LESL -20.1%, DPZ -11.7%, WNS -5.1%, NOK -4.6%, FOR -3.6%, MMC -2.5%, KMI -2.3% (also expects a 2% bump in 2024 dividends), OZK -2.2% (also approves $200 mln repurchase plan), NVS -2.2%, KEY -2%, BX -2%, FNB -1.8%, DHI -1.7%, ALK -1.5%
Other news:
AGEN -38.7% (announces end-of-phase-2 meeting outcomes and topline interim phase 2 data for BOT/BAL in MSS colorectal cancer)
BYND -13.1% (has engaged with bondholders for restructuring talks, according to WSJ)
SWIM -2.3% (in sympathy with weak LESL guidance)
GEHC -2.2% (to acquire clinical artificial intelligence business from Intelligent Ultrasound)
PFG -2.1% (reports June AUM)
VALN -2% (VALN and PFE complete primary vaccination series of Lyme disease vaccine candidate VLA15)
AUNA -1.8% (launches first oncology insurance in Mexico)
RF -1.4% (increases dividend)
VIGL -1.2% (update following a Type C Meeting with the U.S. FDA to its clinical development strategy for its IGNITE clinical trial)
Where will private equity aim its $9tn money hose?
‘Use it or lose it’
Private capital firms are sitting on an ungodly amount of capital, after mammoth fundraising in 2020–21 and little investment in subsequent years.
Late last year, Preqin estimated the amount of “dry powder” at over $4tn, almost a third of the entire private capital industry’s total assets under management. As Alphaville wrote in May, the industry has now raised more money from investors than it has returned for six straight years, for a gap of ca $1.6tn.
Morgan Stanley analysts reckon the pile of proverbial dry powder has now grown to about $4.5tn — which, with leverage, means they are sitting on about $9tn of buying power — and that this will need to be actually invested soon:
Time to deploy (dry powder relative to annual deployment) has extended to ~3 years, the highest since 2013 and above the levels we’ve seen over the last 5 years at ~2.4 years to deploy. Given large fundraises in 2020-21, and limited deployment over the last 2-years, we now see an aging cash pile of private equity dry powder that in some cases may begin to no longer generate economics unless deployed, hence driving an urge to transact.
This was a bit of a theme on some second-quarter conference calls in the industry as well, with Partners Group CEO David Layton noting that “you use it or lose it within a certain period of time”.
But where? Most of the money is in private equity funds, and despite the prayers of investment bankers activity remains muted. By dollar value, PE-backed M&A was up 32 per cent year-on-year in the first half of 2024, but relative to history and the industry’s growing size it remains weak.
And by number of deals activity is continuing to contract. If you discount the first half 2020 — because, well, obvs — we saw the fewest number of deals in the past six months of 2023 and first six months of 2024 since 2017.
Unfortunately, Morgan Stanley doesn’t really have anything actionable to say about where this money is going to get sprayed, only observing that private credit opportunities, refinancing of existing deals, opportunistic “dislocations” and sexy themes like green energy and AI will get attention.
Here are the bank’s “key deployment themes”:
1. Expand across the private credit spectrum. Alts mgrs continue to step into the lender friendly backdrop with attractive risk/rewards. Opportunities span beyond sponsor-backed lending, CLOs and into asset-backed finance, varying forms of bank partnerships and more. We continue to see opportunities emerging with banks from asset portfolio sales, regulatory capital trades, and forward flow arrangements.2. Bring liquidity and flexible capital solutions. We see alts mgrs remaining nimble to bring a range of liquidity solutions (i.e. LP/GP-led secondaries, continuation vehicles, hybrid capital) to market given limited distributions and realizations. Refinancing demand is also high, with mgrs providing structured solutions to refinance and provide a bridge to when rates decline.3. Step into selective pockets of dislocation. Alts mgrs are selectively stepping in areas of dislocation that presents compelling valuation, particularly across a challenged real estate asset class. Some point to near-bottoming real estate values which present opportunities to buy into themes like warehouses, student housing, residential rental, logistics, European real estate, etc. Global Foundation4. Lean into high conviction LT themes and markets undergoing structural change. Secular themes (i.e., energy transition, data centers, logistics, AI, digital infrastructure) with resilient growth profiles and long-term tailwinds are in focus. As markets are undergoing structural change, such as in Japan that’s exiting decades of deflation, seeing greater risk appetite and greater shareholder activism. This is incentivizing corporates to re-evaluate their strategic options and portfolio of businesses and may catalyze divestitures of non core businesses as well as take-privates of public companies
In other words: ¯\_ (ツ)_/¯
But pretty much everyone agrees that the current situation — where private capital funds keep trying to raise new funds but are not deploying their existing capital, realising many of their investments or handing returns back to investors — can’t go on for much longer.
Morgan Stanley’s own CEO Ted Pick talked about this in the bank’s earnings call on Tuesday, noting that:
. . . there’s just been so much activity that has been suppressed by any kind of measure percentage of asset, stock, percentage of market cap. And the stickiness that we’re seeing in the sponsor community, too, needs to unglue. There is an enormous, as you know, multitrillion-dollar stockpile between the two sides of — sitting on inventory that needs to be released and then dry powder that’s been raised.
Given the scale of money that might be deployed when things eventually ‘unglue’, the only people happier than investment bankers might be financial journalists who adore a dumb deal.
Meta explores stake in Ray-Ban maker EssilorLuxottica
Facebook owner considers multibillion investment in European eyewear group to expand smart glasses partnership
Facebook owner Meta has explored a multibillion-euro investment in eyewear group EssilorLuxottica, as the social media platform intensifies its push to develop smart glasses.
The Silicon Valley company has considered taking a small stake in the €87bn Franco-Italian group, according to multiple people with knowledge of its thinking.
The move comes as Meta has been holding talks with EssilorLuxottica to deepen their existing collaboration following the successful launch of a revamped version of their “Ray Ban-Meta” smart glasses last year, some of the people said.
Meta’s chief Mark Zuckerberg has spent billions of dollars in recent years to enter the wearable technology market, such as by creating virtual reality headsets. Meanwhile, Paris-listed EssilorLuxottica has also pushed for deals that can attract a new generation of shoppers.
There is no guarantee that any investment will take place, said the people close to the talks. Meta has been working with Morgan Stanley on the matter, according to one of the people.
Meta, EssilorLuxottica and Morgan Stanley declined to comment.
The first Ray-Ban Meta glasses were launched in 2021, but the newest generation launched in October last year sold more in a few months than the previous ones did in two years, EssilorLuxottica’s chief executive Francesco Milleri said at an event earlier this week.
The latest version of the glasses allows users to livestream what they see directly on to Facebook and Instagram. In the US, the glasses are integrated with Meta’s artificial intelligence assistant, giving owners the ability to ask the glasses for more information about what is in front of them.
This week, EssilorLuxottica agreed to buy US streetwear label Supreme for $1.5bn. People close to the deal said the eyewear group aimed to launch a new version of Supreme smart sunglasses in partnership with Meta, to better target young consumers.
Meta and rival Apple are vying to build unintrusive augmented reality glasses that could one day replace the smartphone as the next-generation computing device, but the technology is nascent and consumers have been reluctant to wear cumbersome devices on their face.
Zuckerberg said on an April earnings call that the company’s outlook for smart glasses had “improved quite a bit” and that it was one of the “bigger areas” that the company was investing into in its AR and virtual reality department, Reality Labs.
Previously, he had said glasses would need “full holographic displays to be a large market”, but that the success of the Meta Ray-Bans had proven otherwise.
“If we want everyone to be able to use wearable AI, I think eyewear is a bit different from phones or watches in that people are going to want very different designs,” he added. “So I think our approach of partnering with leading eyewear brands will help us serve more of the market.”
EssilorLuxottica, which was created seven years ago through a complex €50bn merger of late Italian billionaire Leonardo Del Vecchio’s eyewear group Luxottica and French lens manufacturer Essilor, has steadily grown larger to become the world’s largest eyewear manufacturer.
Over the past few years, acquisitions of technology and engineering companies have been at the core of its strategy. In 2022 the group acquired Israeli hearing technology start-up Nuance Hearing to develop glasses fitted with its acoustic beamforming technology.
This week, EssilorLuxottica also took an 80 per cent stake in Heidelberg Engineering, a German company specialising in eye surgery technologies, as part of its push into medtech.
Ex-Segantii block trader says SEC not planning action against him
Robert Gagliardi says US agency, which probed Morgan Stanley, ‘confirmed’ it did not recommend measures against him
The former Segantii Capital Management employee whose trading formed part of the US probe into Morgan Stanley that the Wall Street bank settled this year for $249mn has said the Securities and Exchange Commission is not planning to take action against him.
Block trading specialist Robert Gagliardi made the statement in court filings for a breach of contract lawsuit he is bringing against his subsequent employer, hedge fund Evolution Capital Management, which he says owes him a $7.5mn bonus.
Evolution said in filings last month that it believed Gagliardi was the unnamed investor referenced by the SEC and US Department of Justice in January in extracts it cited from documents about their probes into Morgan Stanley’s block trading business.
It said paying a bonus to an employee who had previously engaged in such “disreputable conduct” could bring it into disrepute itself.
Gagliardi said in his latest court filing, dated July 12, that he would “proceed on the assumed basis that those extracts refer to him”, but that Evolution’s inclusion of them in its court filings was “abusive” and part of a “smear campaign”, and that no regulator had ever accused him of wrongdoing.
Alongside Morgan Stanley’s settlement with the SEC, the former head of its US equity syndicate desk Pawan Passi admitted to misconduct for leaking confidential information to investors. The authorities did not name or announce any actions against recipients of the information.
The extracts Evolution selected included one from a DoJ document in which an unnamed investor, which the hedge fund said it believed was Gagliardi, referred to Passi as his “daddy” who had “put [him] in the f*cking game” on block trades. Another extract from the document described an investor betting against Canada Goose after talking to a Morgan Stanley banker who asked, “how is your store of cold weather jackets?”, and “chuckled”.
Other extracts taken from an SEC document described occasions on which a hedge fund investor, which Evolution also said it believed was Gagliardi, bet against clinical services company Medpace and house leasing group Invitation Homes, after talking to Passi ahead of block trades. Block trades are sales of large amounts of a company’s stock, which can depress its share price.
Gagliardi worked at Segantii at the time of the Canada Goose, Medpace and Invitation Homes trades, and at Evolution at the time of the “daddy” comment. Segantii declined to comment.
He said none of the authorities’ documents “makes any allegation of wrongdoing against” the investor or alleges “disreputable conduct” or that the person in question “knowingly used confidential information to obtain any unfair market advantage”.
He said the SEC had “confirmed expressly” in a letter dated March 4 that “on the basis of the matters to date it does not recommend that any action be taken” against him. An SEC spokesperson declined to comment.
The DoJ’s document said the “daddy” comment was an example of how “hedge fund investors who received confidential information . . . about upcoming blocks recognised that this information allowed them to profit in ways they otherwise would not have”.
A spokesperson for Gagliardi said Evolution’s claims were “a desperate attempt to rewrite history after the event, relying on so-called ‘impressions’ to exploit the court process to damage his reputation”, and that he “categorically denies any insinuations of wrongdoing” and “looks forward to responding and robustly defending his position”.
Segantii is now shutting down after Hong Kong’s Securities and Futures Commission in May announced a separate case against it, its founder Simon Sadler and former trader Daniel La Rocca, alleging criminal insider dealing. That case does not involve Gagliardi and relates to trading that took place before he joined the firm. Segantii has said it plans to defend itself “vigorously”. Sadler declined to comment. A representative for La Rocca did not immediately respond to a request for comment.
Gagliardi said in his latest filings that “the Evolution group” also hired La Rocca in 2022, alleging that the firm knew he “was under a regulatory investigation for insider dealing” at the time. La Rocca worked at Evo Capital Management Asia Limited from June to October 2022, in between stints at Segantii, according to the SFC. An Evolution spokesperson said it had no knowledge of the investigation when it hired him.
Gagliardi also said in the filings that Evolution was returning clients’ funds and planned to “cease trading as a hedge fund” after Morgan Stanley dropped it as a client of its prime brokerage business — the often lucrative corner of investment banks that provides services to hedge funds. Morgan Stanley declined to comment.
Instead, Evolution would become a family office for its founder Michael Lerch, Gagliardi said.
Gagliardi’s filings cited an internal email from September 2021 that said Evolution’s US entity traders “cannot trade US PRODUCTS (US swap ok).”
That email said: “If any prime brokers find out that US traders (under Evolution Capital Management LLC) executed US products and their compliance raise the issue, we will most likely be required to terminate prime brokerage agreement . . . PLEASE PLEASE PLEASE BE CAREFUL.”
A person with knowledge of Evolution’s operations said the email was “taken completely out of context — it is in relation to maintaining routing connectivity”, for example, “that offshore employees route orders through the proper entity”.
Gagliardi said Evolution — which is countersuing him for the $7mn it paid him while he worked there — had decided by 2022 not to pay his bonus, and “events 18 months after that date do not justify such non-payment.”