Mid-Morning Look: January 8, 2019

Terrie AmengualDaily Market Report

Mid-Morning Look

Tuesday, January 8, 2019

U.S. equities open higher, looking to make it a 3rd straight day of solid gains for U.S. markets (NASDAQ on track for 8th day of gains out of last nine) with major averages inspired by hope of further progress in two-day talks between the U.S. and China, amid reports talks look to be extended for a third day. Dow Jones reported U.S., China negotiators narrowed differences on trade, but two sides still not ready to conclude a trade deal, which took some of the steam out of the early market rally. The dollar and Treasury yields increased, and crude neared $50 a barrel on expectations of a tighter market with OPEC’s output cuts. Tech stocks held up well despite negative news out of phone maker Samsung, which said it expects Q4 operating profit will decline 29%, well below analysts’ estimates (follows the lower revenue outlook from Apple last Thursday). Transports outperform, rising as much as 2.5%, led by gains in railroad UNP after analysts applaud recent management hire. Government shutdown into day-18, as President Donald Trump will make his case to Americans Tuesday night in a national address (9:00 AM EST) that a wall is needed to resolve a “crisis” at the U.S.-Mexico border, trying to make good on a campaign promise.

Treasuries, Currencies and Commodities

· In currency markets, the dollar rebounds after yesterday’s pullback, rising vs. the euro and pound, but overall higher vs. most currencies on hopes of a trade deal with China to materialize. Commodity prices mixed as gold prices pullback to around $1,285 an ounce, off 6-month highs as the dollar bounces, while oil prices add to gains, moving higher for a 7th session. Treasury market slip as stocks gain again with the 10-year yield now back above 2.70%.

Sector Movers Today

· Chemicals; BMO Capital upgraded NTR to outperform saying in a dynamic in which all core fertilizer names are atypically trading at similar multiples, NTR seems relatively safer with its diversified portfolio, stable Canadian investor base, lower commodity price sensitivity; CE was downgraded as believe the weaker macro backdrop, falling commodity price environment, and concerns around China may make it hard for the stock to outperform the broader group; Bank America/Merrill double upgrade WLK to Buy, upgrade AXTA to Buy, and downgrade APD to Underperform saying preference is to gain increased cyclical exposure to stocks that have had large pullbacks and where the second derivative of industry profitability is positive.

· Restaurants; CMG tgt raised to $525 at KeyBanc and our comp/EPS estimates based on our analysis of Key First Look Data, which implies a sequential improvement in indexed spending since 3Q; BLMN upgraded to overweight from neutral at JPMorgan saying the stock has remained below $20/share and trades at a discount to casual dining peers; EAT and CAKE both upgraded to outperform at Raymond James which they now view as contrarian long ideas (very high short interest and few buy ratings on the Street)

· Medical equipment and devices; TCMD rises after prelim Q4 revs $45.5M-$46M topped the $40.5M estimate and said is confident about 20% plus revenue growth in 2019; ILMN falls after prelim guidance outlook, seeing year revs $3.76B-$3.8B vs. est. $3.81B; BSX issues in-line prelim Q4 sales view of $2.65B; DHR said Q4 2018 core revenue growth should be above guidance while non-GAAP EPS should be at or near the high end of guidance; DVAwas upgraded to neutral at UBS saying that the risk/reward is more balanced after the stock’s recent pullback

· Aerospace & Defense; HXL was upgraded to outperform at BMO with a solid outlook for top-line growth, a number of cost issues behind it, and an inexpensive valuation for this long-term growth story; TXT was removed from Jefferies franchise picks list; GD was downgraded to hold at Jefferies citing a lack of earnings momentum despite a host of marquee assets (cut tgt to $164)

· Bank movers; banks JPM, USB and STI all downgraded to hold at Jefferies saying their new ’20 numbers for all of them are below consensus as they remove rate hikes; Morgan Stanley reduced price targets for big banks including JPM, C, SIVB, and COF and cutting estimates citing lower market-based revenue; slower net interest margin growth, with just one rate hike likely in 2019; risks to luxury consumer spending and a drop in M&A. In trust banks, Jefferies downgraded NTRS to hold with their ’20 EPS estimate now 7% below consensus

· Consumer finance and lending; GPN upgraded to buy at Goldman Sachs as GPN has “transformed its business with software technology in recent years,” and may sustain ~18% EPS growth, even as stock has declined 25% from 2018 peak; Bank of America is still bullish on payments companies as the sector may manage to sidestep the issues recently triggering financial market volatility, including questions about Federal Reserve policy, tariffs and the Chinese economy – firm downgrade MA to neutral while PYPL is top payments pick, with “secular tailwinds, margin expansion and balance sheet deployment potential while also positive on V/WP

      Stock GAINERS

· MAT +5%; after announcement of Barbie movie franchise

· MNST +5%; upgraded to buy at SunTrust as think concerns about its partnership with KO and growth potential in China are overblown, raise tgt to $65 from $50

· MRNA +1%; said it has 21 mRNA development candidates in its pipeline with 11 programs now in clinical development.

· NUE +3%; strength in steel sector after Credit Suisse downgraded US Steel (X) to neutral from outperform, while upgraded STLD and NUE to outperform saying the near-term outlook for the US steel industry actually looks constructive

· TCMD +22%; after prelim Q4 revs $45.5M-$46M topped the $40.5M estimate and said is confident about 20% plus revenue growth in 2019

· TSLA +2% as ORCL founder Larry Ellison has emerged as the second-biggest individual investor in Tesla Inc. with a holding worth $1 billion in the electric carmaker

· TTWO +3%; positive mention at RW Baird saying seeing sustained strength in sales and engagement for its Red Dead Redemption 2 video game, which lifted its estimates

· UNP +7%; upgraded by several analysts (RBC, Cowen, Seaport) following the hiring of 40-year veteran at Canadian National Mr. Jim Vena as COO (had since retired)

Stock LAGGARDS

· FTR -3%; Wells Fargo downgraded the RLEC subsector to Underweight from Market Weight and downgraded shares of both CNSL and FTR (tgt cut to $1.75 from $5)

· HELE -10%; following mixed 2019 guidance and lower margins

· ILMN -6%; after prelim guidance outlook, seeing year revs $3.76B-$3.8B vs. est. $3.81B

· MAXR -33%; downgraded by at least 4 brokers as one of its imaging satellites failed Monday

· PCG -11%; lost its investment-grade credit rating and remains under review by S&P Global Ratings for a further downgrade

· ROKU -6%; as Citron Research said in tweet “We initially went long $ROKU at $35. However, have to recognize when the story has changed…expect big retracement…stock is uninvestable now

· SIMO -4%; expects revenues to be within the lower half of their original guided range of $120.5-$127.5M and GMs to also be in the lower half of their original guidance of 50-52%.

Market commentary provided by Hammerstone Markets, a division The Hammerstone Group, a firm separate from and not affiliated with Regal Securities L.P. Regal Securities L.P. has not participated in the creation of the content, and does not explicitly or implicitly endorse the content.

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