Closing Recap

Monday, April 27, 2020

Equity Market Recap

·     U.S. stocks opened higher and continued to churn upward as more states prepare to lift restrictions imposed on businesses amid the coronavirus pandemic, boosting market sentiment and lifting several sectors. Stocks rose broadly (except energy – though did rally off lows), led by gains in industries that have been most effected by the global coronavirus economic shutdown including casinos, theme parks, retailers, hotels among others. Hopes that the recent state by state reopening’s, which included partials for Georgia, Oklahoma, Tennessee and South Carolina last week, will lead to a bounce back for an economy that has been decimated by the coronavirus related forced closures. Some of the re-openings include hair salons, gyms, and bowling alleys while the list expands to sit-down restaurants, movie theaters shortly. The Texas governor said the stay-at-home order will expire April 30^th while Ohio said today May 1^st will allow openings for dentists and vets and allow non-essential healthcare surgeries. The reopening of hard-hit New York State could begin in mid-May, according to Governor Andrew Cuomo. Italy’s Prime Minister Giuseppe Conte said in an interview its lockdown will be eased from May 4.

·     Markets also await quarterly earnings reports from heavy-weight tech companies this week including Alphabet (4/28), Amazon (4/30), Apple (4/30), Facebook (4/29), Microsoft (4/29) and Tesla (4/29), while there are over 140 S&P companies expected to report this week (Dow components PFE, MRK, CAT, MM tomorrow morning). In a CNBC Interview, Double Capital CEO Jeffrey Gundlach said that markets recovered obviously because of the Fed and that the sentiment shifts should have investors concerned as he says a retest of stock market lows is “very plausible.” Gold fell on Monday as U.S. Treasury yields rose and plans by many countries to ease coronavirus-induced lockdowns whetted investor appetite for riskier assets, but unprecedented stimulus measures from governments provided underlying support. The updates from hardest hit areas a benefit for markets today as NY Governor Cuomo said daily deaths related due to COVID-19 fell to 337 in latest figures, down from the 367 yesterday which had been the lowest in a month. Italy reports 1,739 new coronavirus cases vs 2,324 Sunday (positive developments).

·     European markets were higher as the German DAX index surged 3%, while the European STOXX 600 closed up 1.8% after a modest fall last week ahead of central bank meetings this week. Last night, the Bank of Japan pledged to buy unlimited amount of bonds to keep borrowing costs low amid havoc caused by the coronavirus pandemic. The U.S. Federal Reserve’s decision is due on Wednesday while on Thursday, the European Central Bank is likely to signal more bond buying. The number of companies that have lowered their guidance as a result of the pandemic as of April 22 represents a 40% increase since March 31. At least 14 companies have raised their guidance as of April 22, up from three as of March 31. At least 185 S&P companies, or 37% of the companies in the index, have issued coronavirus-related guidance since Jan. 15. That is a 52% increase since March 31 – Dow Jones

Commodities

·     Oil prices fall with WTI crude sliding -$4.16 or over 25% to settle at $12.78 per barrel (high $16.98 and lows $11.88) as over supply concerns continue to hit the sector hard (prompted a bankruptcy filing from oil drill DO today). Last Tuesday (4/21), the U.S. oil contract for delivery in June tumbled 43% to $11.57 a barrel, its lowest close in 21 years. Its record low is $10.42 in data going back to 1983. WTI crude is down over 78% YTD with no signs of demand picking up despite world producers cutting production this month. The decline today followed a 32.3% plunge last week. Gold prices fell -$11.80 or 0.7% to settle at $1,723.80 an ounce, pulling back as stocks rallied and investors rotated out of defensive safe-haven assets, but could see support later this week from possibility of more monetary easing from central banks.

Currencies & Treasuries

·     Given the action in stock markets over the last few weeks, Treasury and currency market moves have been modest in comparison, with the 10-year yield rising to 0.66%, up 6 bps and at its best levels since April 17^th while the U.S. dollar was mostly lower on the day vs. rival currencies, falling against the euro, Pound, Aussie and Canadian dollar but posted a modest gain vs. the yen.

Sector News Breakdown

Consumer

·     Autos; GM suspends its dividend and share buybacks and extended $3.6 billion under its three-year revolving credit agreement to April 2022; NSANY to slash Japan production by 70% in May, 43% in June according to Reuters report; HOG mentioned cautiously in Barron’s saying the stock could be headed for a serious decline this coming week, with the motorcycle maker expected to report earnings on Tuesday; in research, Credit Suisse upgraded LEA and MGA to Outperform given strong balance sheets, FCF generation, and defensive product positions and downgraded AXL to Neutral as elevated leverage may remain an overhang; ALV upgraded to outperform at RBC Capital citing its strong liquidity profile and cost control in 1Q; HTZ was downgraded to underweight at Barclay’s saying the risk/return skews to the downside/can never rule out a rescue package, but don’t see the equity at $4/share fully reflecting the risks to shareholders; TSLA jumps over 10% after reports the company is calling some workers back to its California vehicle-assembly plant next week (reports earnings later this week)

·     Retailers; VSTO said Q4 EPS expected to exceed guidance with sales in-line within guidance range and free cash flow to exceed guidance; GME activist firm Hesta Capital Partners pushes for changes as believes GameStop’s recent board refreshment is insufficient; ADDYY Q1 EPS and sales miss estimates and says 2Q results will see declines greater than 1Q (which implies below consensus) and operating results are expected to be negative; many retails saw strong gains/squeezes with broader markets (DDS, BBBY, M)

·     Consumer Staples; BYND downgraded to sell from neutral and cut tgt to $73 from $90 at UBS noting shares are up 142% off its March low and is the best performing stock in our coverage YTD despite having the greatest channel risk exposure to foodservice (51% of mix); in tobacco, IMBBY rises as withdraws from the premium cigar business to focus on vaping, with a $1.33B sale of hand-rolled makes including Cohiba and Montecrist; COTY was downgraded at Davidson to neutral on valuation noting the stock is +68% from its March 18th low of $3.74 per share, when the dividend yield was 13%

·     Restaurants; PZZA was downgraded at MKM Partners noting the company has had success through its solid execution, which has resulted in outsized share price performance and now believe they are priced into the shares; PBPB returned their $10M PPP loan and said they would look for other sources of financing; EAT was downgraded to mixed from positive by OTR Global

·     Casino & Leisure movers; MCRI was upgraded to Buy from Hold at Stifel saying although the COVID-19 outbreak has led to the temporary closure of MCRI’s resort operations, they believe the current dislocation in MCRI’s share price/valuation ignores the company’s superior leverage profile, strong end markets and outright real estate ownership; Nomura said regional casino operators, BYD and PENN should be able to restart operations gradually in May, with EBITDAR recovering to ~50% of 2019 peak in 2021 and to ~80% in 2022 and see upside to $22 in BYD in the next 12-18 months and to $19 for PENN (casinos in general jump – LVS, WYNN, MGM); cruise lines (RCL, CCL, NCLH) and hotels (HLT, MAR) also rise on re-open hopes

Energy

·     Energy stocks did not participate with today’s rally given the plunge in oil prices, with WTI crude falling as much as 25% to below $13 per barrel as swelling global crude stockpiles made it more difficult for leading producers to balance the market by curbing output. Futures fell, snapping a four-day gain. U.S. drilling is sliding and Saudi Arabia has started reducing output ahead of the start date for OPEC+ supply cuts

·     Stock news; in oil drillers, DO filed for Chapter 11 bankruptcy after having skipped an interest payment on senior debt (note Loews ($L) is the majority owner of the company at 53%) – also, Diamond Offshore had disclosed that HES was its biggest customer in 2019, accounting for 28.9% of its annual revenue, while OXY was its second biggest customer at 20.6%; RRC reports Q1 production totaled 2.29B cfe/day, and continues to expect full-year production to average 2.3B cfe/day, including an expected exit rate of 2.3B cfe/day and affirms production view

·     MLPs; HEP was upgraded to outperform at Raymond James after distribution cut and shift to more conservative model; Wells Fargo upgraded EQM, ETRN, WMB upgraded to overweight and CNXM to equal-weight with shift for gas levered names to a more positive tilt. With WTI prices weak and associated gas from oil plays set to decline, natural gas supply/demand dynamics have improved supporting our E&P team’s $2.75/Mcf gas price forecast for 2021. Higher gas prices reduce midstream counterparty credit risk and could potentially lead to a resumption of Northeast gas volume growth; DCP was downgraded to sell at UBS saying another distribution cut from the natural gas processor is possible and the stock is over-valued

Financials

·     Bank and broker movers; AMTD was downgraded to neutral at Citigroup and is no longer on Positive catalyst Watch after the stock rose more than 15% since late March, resulting in a less compelling upside and "thinning M&A arbitrage spread" against acquirer SCHW; DB said it expects to report Q1 revenue of €6.4B, topping consensus estimate of €5.7B and anticipates expects reporting group profit before tax of €206M and net income of €66M

·     Insurance; Citigroup upgraded MET to Neutral and EQH to Buy as well as downgrading LNC to Neutral as top picks remain AMP, VOYA and RGA but overall remain cautious on the life sector, prioritizing companies with strong excess capital and business mixes with lower interest rate exposure/lower EPS estimates for most companies, driven by lower equity markets/interest rates, unfavorable FX movements, lower alternative returns, modestly higher claims and lower or no buybacks for the rest of 2020; Credit Suisse lowers estimates for insurers today

·     Consumer finance and lending; V and MA tgts raised at Wedbush citing strong growth in card-not-present (CNP) and eCommerce volumes (For V, $200; MA,$300)

Healthcare

·     Pharma movers; AXSM announces positive results from a Phase 2/3 clinical trial, ADVANCE-1, evaluating lead drug AXS-05 for the treatment of Alzheimer’s disease (AD) agitation/study met the primary endpoint of a statistically significant average reduction in a scale called CMAI total score at week 5 compared to placebo; AVDL rises after saying its Cataplexy drug FT218, its treatment for excessive daytime sleepiness and cataplexy in patients with narcolepsy, a type of sleep disorder, meets main goals in late-stage study; Dow components PFE, MRK earnings tomorrow in the large cap healthcare sector

·     Biotech movers; REGN, SNY said preliminary data from a Phase 2/3 clinical trial evaluating IL-6 receptor inhibitor Kevzara (sarilumab) in hospitalized severely and critically ill COVID-19 patients showed no notable clinical benefit in the combined groups; CLVS was downgraded to underperform with a $5 tgt at Leerink; cannabis stocks jump (TLRY, CRON, CGC, APHA)

·     Medical equipment and devices; Stifel raised estimates for 1Q for the core tools companies (TMO, DHR, MTD ) that have yet to provide either preliminary or full results saying based on the growth rates announced thus far from those companies, firms initial cut to numbers was presumably too heavy-handed when it came to the impact of China’s Q1 battle with Covid; ABMD was downgraded to market perform at Leerink

·     Healthcare services and providers; lab companies DGX, LH were both upgraded to buy from hold at Citigroup as consider the potential for a new lab testing paradigm coupled with improving l-t fundamental/industry dynamics for the large national labs that likely drives multiple expansion, in our opinion; Dow Jones reported the Supreme Court rules government owes insurers billions in payments under affordable care act program/Court rules government can’t avoid paying insurers under ‘risk corridors’ program (UNH, CI, ANTM)

Industrials & Materials

·     Materials, Industrial & Machinery; CAT and URI both downgraded at Morgan Stanley as they see growing headwinds from a multi-year downturn in Non-Resi Construction, combined with historically weak oil prices and declining mining commodity prices; FCX was upgraded by two analysts (Eight Capital to buy and Scotiabank to outperform) after the company last week slashed spending budget for the year and adopted other measures to mitigate impacts of COVID-19; CAT and MMM among Dow components reporting earnings tomorrow morning

·     Aerospace & Defense; BA walks away from its proposed $4.2 billion combination with ERJ’s commercial-jet business, ending more than two years of talks, as the plane makers brace for a far smaller market for aircraft after the coronavirus pandemic; EADSY CEO told employees that the company is "bleeding cash" and warned that its survival was at stake unless it took immediate cost cutting action

·     Transports; in tanker sector, NAT shares jump after CEO spoke Friday in an interview yesterday with Mad Money’s Jim Cramer saying "we are making a lot of money at this time, improving our balance sheet tremendously, and I have never seen such a strong market"; overall, Transports rise but still way off 50-day MA resistance at 8,423 as airlines remains pressured

·     E&C sector; Citigroup upgraded KBR to Buy and downgraded FLR to Neutral, while saying their favorites are now PWR, J, KBR, and ACM in that order as E&C earnings season will also likely be unlike anything we have seen, with little investor regard for pre-COVID results and most of the focus on end market resiliency/balance sheet/self-help; FLR was also downgraded at UBS to neutral from buy and cut tgt to $11 from $29 saying oil price weakness, the ongoing impact from COVID-19, potential for more charges on two specific projects, and a now challenging outlook for state and local budgets, may lead to "continued complex quarters”

Technology, Media & Telecom

·     Internet; EBAY upgraded to Neutral at Mizuho as expect the appointment of the new CEO should accelerate its portfolio review (raise tgt to 442) and firm upgraded TWTR to Neutral as the COVID-19 impact is mostly reflected in the stock price in our view/maintain Buy on BABA and PT of $255 as our checks indicate upside to March quarter; AMZN tgt was raised to $2,700 at Oppenheimer and maintaining Outperform rating, as are materially raising their FY20 revenue outlook (+6%), with EBIT margins mostly unchanged (-15bps)and see upside to revenue

·     Semiconductors; Oppenheimer reduced estimates for the semiconductor group (second time in two months) as data suggests greater COVID demand drag than originally expected; the sector failed to fall despite reports of AAPL delaying mass production of next iPhone

·     Hardware & Software movers; CHKP reported Q1 EPS $1.42 on revs $486M vs. est. $1.38 and $480.3M as profit tops estimates on higher demand for remote network access; AAPL lagged broader markets after reports it delays mass production of 2020 flagship iPhones and that the phones, some with 5G connectivity, will vary in price and come in three sizes; AUDC shares jumped following better Q1 results

·     Services; EGOV said it sees for 2020, to come in near low end of previously issued guidance for total revenues, adjusted ebitda and EPS and previous guidance for capital expenditures and capitalized software development costs for 2020 remains unchanged