Monday, January 7, 2019
Equity Market Recap
· U.S. stocks enjoyed gains to start the week, but finished off their best levels as investors await details form the ongoing China, U.S. trade talks as well as news that President Trump said he’ll deliver a prime time televised address on Tuesday (9:00 PM EST) before he travels to the U.S.-Mexico border later in the week as he battles Democrats over his proposed border wall. The wall remains a key sticking point to the current partial government shutdown that is well into week three currently, delaying several important economic data reports and impacting various gov’t departments (IRS for tax season). President Trump wants $5B budgeted for the wall while Democrats refuse to add a dime. Stocks have generally been higher to start the year (outside of last Thursdays sharp market pullback on AAPL’s lowered sales guidance), with the S&P 500 up for a 4th time in the last five sessions. SmallCaps off to a solid start as the Russell 2000 index is up over 4% in the first four sessions of 2019. Other key market factors include next week’s Brexit vote (Jan 15th) and upcoming earnings season (as estimates have come down). The non-manufacturing ISM survey proved to be a little disappointing, dropping to 57.6 from the prior month’s 60.7 though new orders rose earlier today.
· Stocks were very active, helped by a round of M&A news amid another large deal in the biotech sector as LLY buys LOXO in $8B deal (follows the BMY $70B deal for CELG last week that shook up the sector). Biotech stocks jumped in sympathy following the M&A deal while other healthcare related names were active today following financial guidance ahead of the JPMorgan Healthcare conference the next few days. Tech in focus this week with the Consumer Electronics Show (CES) all week. Oil prices rose again lifting energy stocks while the dollar fell.
· Treasury prices slipped after early gains, as yields edged higher into the afternoon as markets evaluated the likelihood of further Federal Reserve rate hikes this year and as the U.S. and China resumed trade talks. Bond yields and stocks pushed higher despite less bullish data on the economy, showing that the growth of U.S. services industries slowed to a five-month low in December.
· ISM Non-Manufacturing for December falls to 57.6 from 60.7 last month and below the 58.5 estimate as data in the U.S. (outside of jobs) coming in weaker than expected the last few weeks; Business activity fell to 59.9 vs 65.2 prior month while new orders rose to 62.7 vs 62.5 and employment fell to 56.3 vs 58.4; the services employment index declined for third straight month from historical high reached in Sept.; Prices paid fell to 57.6 vs 64.3. Factory Orders and Durable Goods orders data postponed due to gov’t shutdown
· Oil prices extend their recent bounce off 18-month lows more than a week ago, rising by 56c or 1.17% to $48.52 per barrel, but finished off the intraday best of $49.79 amid reports of support from OPEC production cuts and steadying equities markets. Note oil futures have gained about 9% from its recent winning streak. Oil got a boost from the weaker dollar as well.
· Gold prices end higher given the decline in the dollar, rising $4.10 to settle at $1,289.90 an ounce moving back near its recent six-month peak hit in the last session. Palladium hit an all-time high as the market suffers from a sustained deficit due to high demand and a supply shortage. The buck slipped on Friday following dovish comments from Fed Chairman Jerome Powell.
· The U.S. dollar was broadly lower, with the dollar index (DXY) down over -0.5% late afternoon to its lowest levels since mid-November on weaker manufacturing data. The Euro rose to afternoon highs, up more than 0.7% at 1.1477 vs. the US dollar (on its 100-day MA). The Canadian Loonie rose to a 1-month high vs. the dollar as oil prices climbed for a 6th day in response to Dow Jones report that Saudi’s to trim exports in effort to lift crude prices. The British pound put in a mixed performance, up vs. the U.S. dollar and slipping versus the euro, following a report that U.K. lawmakers will vote next week on PM Theresa May’s controversial Brexit plan. The safe-haven Japanese yen was lower across the board vs. rival currencies.
Sector News Breakdown
· Apparel retailers; JPMorgan downgraded URBN to neutral due to concerns on comparable sales growth and said channel checks show the Anthropologie and Free People brands are tracking below expectations; UBS upgraded PVH and RL to buy as sees better than 2%” industry sales growth for specialty retailers in 2019, helped by job and income gains; BOOT was upgraded to buy at Pivotal Research; AEO was added to best ideas list at Wedbush; DDS upgraded at JPM
· Hardline/Discount; KeyBanc said Hardlines investors need to be increasingly selective as dollar/discounters provide the best blend of defensiveness from the cycle and upside potential from tax rebates and lower gas prices: DLTR, OLLI, BIG, and newly-upgraded DG are favorites; DLTR rises after Starboard Value LP announced its nominations for the retailer’s board/Starboard has taken a 1.7% stake, valued at about $370M, WSJ reports ; BIG was downgraded at Morgan Stanley saying progress has yet to show more meaningfully in the numbers and a further earnings reset may be needed for 2019; FIVE upgraded at Morgan Stanley as view the company as a best-in-class retailer with a differentiated, defensible concept operating in our preferred discount retail subsector
· Consumer Staples; in tobacco, Cowen downgraded MO to a Market Perform rating from Outperform as points to accelerating declines in the U.S. cigarette market;ULTA added to JPMorgan Equity Analyst Focus List as a growth strategy; STZ was upgraded to neutral from negative at Susquehanna as stock is down ~40% since early Oct to $166.62, underperforming the market and peer group, and now trades below our last published PT of $174
· Restaurants; Stifel raised its raise on BJRI and EAT to Buy from Hold and lowered rating of WEN to Hold from Buy as acknowledge the concerns about investing in restaurants late in the cycle, which has caused many investors to sell casual dining stocks and/or shift to more defensive models, like MCD and YUM, but also believe the recent valuation pullbacks in certain stocks have created reasonable entry-points for stocks with catalysts (top picks include DPZ and DRI)
· Housing & Building Products; in housing, KeyBanc upgraded LEN, PHM, MAS, and ROCK on positive macro sentiment after being cautious in FY18 on rate hikes – saying the inverse is now true near term. KeyBanc remain most negative on Home Furnishings from a competitive and cyclical perspective as stay underweight on BBBY, cautious on WSM, and downgrade KIRK and RH today; back to builders, LGIH was upgraded to outperform at Wells Fargo; SunTrust cuts 2019 estimates for names primarily selling to new residential and renovation markets, shifting view from growth to a mid-single-digit decline in new construction and flat remodel spend (lower targets on AFI, CBPX, LL, JELD, and FBHS)
· Auto sector; AAP was upgraded to Overweight at Barclays with $205 tgt (up from $170) as now feel confident that a stable base for operations has been established;ALV was downgraded to Market Perform at BMO on concern that the company’s FY20 revenue and margin targets will have to come down
· Energy stocks buoyed by strong risk appetite today and as oil prices climb for a 6th straight session; HES and XOM said that drilling has begun on the Haimara-1 exploration well offshore Guyana, the first of two planned exploration wells in January; RRC said it sees 2018 capital spending $20M below $941M budgeted
· E&P sector; in sand frac space, HCLP spends quarterly distribution due to market conditions; QEP rises after Elliott makes proposal to buy company for $8.75 per share in deal valued at just over $2B ; in research, BMO Capital upgraded CLR, FANG, and PDCE to outperform from market perform, while OAS, CRZO and RRC were downgraded to market perform while saying CXO offers best risk/reward after sell-off, and is BMO’s preferred growth E&P; RBC Capital upgradedEOG to outperform, but downgrade EQT and DK ratings
· Utilities & Solar; PCG shares fall as reports surfaced late Friday that the California utility is exploring bankruptcy to cope with massive liabilities from fatal wildfires blamed on its equipment related to fatal wildfires in 2018 and 2017; Guggenheim downgrading several names on valuation: NJR to Sell, AEP, OGE, SR and CWEN to neutral while upgraded NI, CNP to buy (CNP new Best Idea…in place of NRG); SEDG notable decliner on the day in strong solar space, falling over 5% after agrees to acquire a 51% stake in Italian electric vehicle power train manufacturer SMRE for $77M in cash and shares.
· Bank movers; financial earnings will soon be in focus, with quarterly earnings kicking off for the big banks next week, with JPM out on January 15th; overall sector has been lagging as Treasury yields have pulled back from multi-year highs over the last month as the Fed rate hike outlook has slowed; Raymond James downgraded 13 banks ASB, TRMK, UMBF, UCBI, TOWN, LTXB, HAFC, FRC, FMBI, FHN, IBTX, HWC, BFST and upgraded two banks AMNB and CSFL, saying with rates no longer providing such a benefit to asset yields, and deposit betas continuing to rise, they expect downward revisions to NIMs to be abundant. In addition to NIM pressure, they anticipate loan growth to decelerate and loan loss provisions to accelerate going forward
· Brokers & Exchanges; NDAQ and ICE fall after the WSJ reported Morgan Stanley, Fidelity and Citadel Securities are among backers of the “Members Exchange,” a new low-cost stock exchange to challenge Nasdaq and the New York Stock Exchange; CBOE was upgraded to buy at Sandler O’Neill saying valuation is at its cheapest since 2013 currently trading at 19.7x the consensus NTM EPS estimate
· Pharma movers; LOXO soars as LLY pays 68% premium to Friday’s closing price, buying LOXO for $235 per share in cash in a deal valued at about $8B ; shares of cancer drug makers BPMC, DCPH, CLVS, EPZM, ARRY among names moving in sympathy of deal; AXSM shares spike in response to its announcement of positive results from a Phase 2 clinical trial, ASCEND, evaluating Fast Track-tagged AXS-05 in patients with major depressive disorder;LJPC shares drop as Q4 sales of $4.2M missed the $7.6M view and expects FY19 sales in the range of $24M-$28M, widely below analysts’ expectations of $78.60M
· Biotech movers; ; SAGE shares spike over 40% following its announcement of successful results from a Phase 3 clinical trial, ROBIN, evaluating SAGE-217 in women with postpartum depression (PPD). After two weeks of treatment, patients receiving SAGE-217 experienced a statistically significant 17.8-point improvement in depression score as measured by a scale called HAMD-17 compared to 13.6 points for placebo; in research, EPZM was upgraded to outperform at Leerink; AMRNprojected 2019 net revenue of about $350M vs. the estimate of $417.8M; reports preliminary FY18 revenue $224M-$228M vs. est. $221.35M; ICPT active following its update on it NASH and primary biliary cholangitis (PBC) programs; SRPT slipped on revenue guidance
· Medical equipment and devices; DXCM preliminary Q4 revenue of more than $331M exceeds the highest Street estimate of $301.2M; CUTR shares fell after CEO resignation and FY revenue forecast cut; EXAS rises after guiding FY18 revs between $454M and $455M vs. est. $438M/said completed Cologuard test volume during 2018 was ~934,000 tests, a 64% from 2017; MYGN shares fell after negative Southern Investigative Reporting Foundation (SIRF) mention; MDT shares slipped after guiding FY20 to be a low-trend EPS growth year
· Healthcare services and providers; DPLO slides after announcing that two executives are leaving amid warnings that 2018 revenue will be at the lower end of its $5.5B-$5.7B range and 2019 revenue may fall short of consensus (est. $5.56B); AXGN falls as 4Q prelim revs of at least $23.4M missed the average analyst estimate of $24.2M; SEM slides as its 2019 EPS forecast fell short of the average analyst estimate.
· Most of the guidance today coming ahead of presentations at the J.P. Morgan Healthcare Conference in San Francisco this week
Industrials & Materials
· Industrial & Machinery; AGCO was upgraded at RBC Capital citing the 10% pullback in the stock price since the summer to a valuation of 12-times his expected forward earnings; PCAR, WBC and Volvo downgraded to sell at Vertical Research on peak concerns; NAV mentioned positively in Barron’s saying the company has come through layoffs, cost cuts and the sale of peripheral businesses much leaner — and could become an acquisition target
· Metals & Materials; NUE announces plans spend $1.35B to build a state of the art plate mill in the Midwest, taking advantage of federal tax cuts and higher steel prices for domestic producers due to tariffs on steel imports; CMC missed its FY1Q sales ests and expects to see lower shipments in FY2Q, due to seasonality.
· Packaging; Citigroup upgraded SLGN to buy, while downgraded WRK and OI to Neutral noting 2018 was a dismal year for Paper & Packaging, which sharply underperformed (- 24% vs. S&P -6%) on late cycle fears, surging cost inflation & trade/macro concerns. With multiple sources of uncertainty in 2019 (potentially slower global growth, flattening yield curve, continued trade tensions, they reducing est. (’19 est. go -5% lower for Paper, -1% for Packagers) and targets
Technology, Media & Telecom
· Internet; GOOGL was upgraded to buy at Pivotal as don’t see much downside for Google from regulatory risks such as a Europe-led break-up of the company; SNAPdowngraded at Pivotal to hold while maintained sell rating on FB and initiated AMZN with a buy and $1,920 tgt; SPOT was downgraded at Guggenheim and cut tgt to $120 from $190 saying given high expectations, greater investor concern toward long-term valuation stories and near-term concerns as described within, they see SPOT shares as close to fairly valued; Piper said analysis of NFLX search trends points to a strong Q4 (potential upside) for domestic subs, with int’l likely in-line
· Semiconductors; MU was upgraded to outperform at BMO Capital and raised tgt to $50 from $32 saying while fundamentals will likely get worse before they get better, the stock had bottomed out; SWKS was downgraded to perform at Oppenheimer, while Morgan Stanley lowered tgts for AVGO, SWKS, QRVO to reflect AAPLrev miss and expectations for continued weakness in 2019; semi’s overall rallied nicely; NVDA
· Software movers; CRM was named a top ides list name for Wedbush following 13% pullback in the quarter, while Pivotal Research upgraded to a buy; Pivotal upgraded ADBE to buy as well as CRM ahead of Q4 earnings; FIVN upgraded to overweight at Morgan Stanley as believes contact centers should see an uptick in investment in the coming couple of years; software space as a whole outperformed for a second session (TWLO
· Media & Telecom movers; MSGN was downgraded to neutral at Guggenheim to reflect their expectation for slower growth in 2019 and higher investor valuation benchmarks; ad agencies active after Pivotal upgraded both IPG and Publicis (PUBGY) to buy with $25 and €61 price targets ahead of 4Q18 earnings as fundamental views are generally unchanged but relatively low stock trading levels vs. those YE2019 targets cause firm to upgrade (also raised WPP, NLSN and OMC tgts); RCI was downgraded to hold at Canaccord on expected wireless momentum cooling
· Hardware & Component news; ROKU Q4 streaming hours up 68% to 7.3 bln hours vs. FactSet consensus 6.6 bln; MAXR shares fall after saying its WorldView-4 satellite experienced a failure in its control moment gyros, preventing the satellite from collecting imagery due to the loss of an axis of stability; ANET upgraded to overweight at Morgan Stanley saying concerns about hyperscale growth through 2020 likely drove recent pullback/now offers attractive entry point
· Services; LXFT shares surged after DXC said it would buy the software development company for about $2 billion to expand its digital offerings to the financial and automotive sectors/LXFT holders will get $59 per share in cash and 86% premium to Friday