Closing Recap

Thursday, December 17, 2020

Equity Market Recap

·     The trend for global stock markets remain sharply higher, with the S&P 500, Dow and Russell 2000 all joining the Nasdaq Composite in record territory as lawmakers keep telling investors they are closing in on a deal to extend stimulus relief measures to businesses and individuals that could support the economy. Congressional leaders noted a roughly $900 billion coronavirus relief deal yesterday that includes another round of direct payments to households as well as additional assistance to small businesses (though the figure is lower than what was bantered about last month). With vaccine distribution under way to treat Covid patients and hospitalizations hitting record highs, the stimulus is the next catalyst markets are looking for. Rising coronavirus cases appear to have hit consumer sentiment this week, weighing on retail sales, and there are new business restrictions in some states – though housing data came in better this morning. Jobless claims data added to evidence that the economy has hit a speed bump as first time claims for unemployment benefits rose by 23,000 to 885,000 in the week ended Dec. 12, the second week above estimates.

·     The hot asset class of late is Bitcoin, with prices nearly touching $24,000 overnight after topping the $20K level for the first time the day prior as momentum continues to build after several bullish Wall Street calls. Cryptocurrency exchange Coinbase has confidentially filed to take itself public. The company founded in 2012 submitted a draft registration statement, or S-1 with the SEC, to go public. Coinbase has been at the vanguard of those offering retail investors in the U.S. a venue to buy and sell bitcoin and other nascent digital assets https://on.wsj.com/3p6FAW9

Economic Data

·     Weekly Jobless Claims rise +23K to 885K vs. 806K consensus while prior week revised to 862K prior from 853K; the 4-week moving average rose to 812,500 dec 12 week from 778,250 prior week (previous 776,000); continued claims fell to 5.508 mln in latest week vs. est. 5.598 mln (prior week revised to 5.781 mln from 5.757 mln)

·     Housing starts rose 1.2% to a seasonally adjusted annual rate of 1.547M units last month, the Commerce Department said, closer to its pace of 1.567M units in February and above the estimate of 1.530 million units in November. Homebuilding surged 12.8% on a YoY basis

·     Building Permits for November jumped 6.2% to a rate of 1.639 million units in November vs 1.553M expected and 1.544M (revised from 1.545M). Single-family homebuilding rose 0.4% to a seasonally adjusted annual rate of 1.186 million units, the highest level since April 2007.

·     Philadelphia Fed business conditions index for December at 11.1 (consensus 20.0) vs 26.3 in November as new orders index 2.3 in December vs 37.9 in November

Commodities

·     Oil prices extended gains, as WTI crude rises 54c or 1.1% to settle at $48.36 per barrel to its highest settlement in almost 10 months after broader markets rallied and American crude stockpiles declined more than expected yesterday. Crude inventories dropped by 3.14 million barrels last week the EIA said yesterday, more than the median estimate. Hopes for another COVID-19 U.S. relief package and the rollout of vaccines looked to improve the economic outlook, and demand for oil.

·     Gold prices moved back near six-week highs, as February gold rises $31.30 or 1.7% to settle at $1,890.40 an ounce, helped by a fresh U.S. dollar slide, and stimulus progress. Silver also with a big run of late as precious metals buoyed after the Federal Reserve strengthened its commitment to supporting the economic recovery and U.S. lawmakers made progress on a stimulus package. An additional stimulus relief package is weighing on the dollar due to more money being pumped into the supply as lawmakers sought to hammer out a $900 billion COVID-19 aid bill.

Currencies & Treasuries

·     Treasury yields climbed, as the 10-year rose to 0.945% from 0.92% late yesterday and the 30-yr neared the 1.7% level amid signs of new progress on economic relief efforts in Congress. Yields reversed an early morning decline after lawmakers signaled they were close to agreement on a roughly $900 billion stimulus package (which they have said for several days now). Meanwhile the FOMC said yesterday it is committed to aiding the economy by keeping borrowing costs low, setting short-term interest rates near zero and buying billions of dollars of bonds. The U.S. dollar was pummeled as the dollar index (DXY) falls over -0.5% to 89.75 level, with euro at more than 2-year highs above 1.2252 as the buck broadly lower.

Sector News Breakdown

Consumer

·     Retailers; NKE gaining a lot of attention with its unorthodox announcement that earnings for the quarter will be released after the close on Friday (analysts positive into results); SWBI board authorized a $50M share repurchase plan; CPRI very bullish comments at Well Fargo saying margin visibility is growing, and Michael Kors outlook is for a smaller, more profitable brand; in office furniture, MLHR falls as Q2 EPS and sales beat but noted weaker sales in its business selling furniture made for offices and other institutional settings in the U.S. and Canada

·     Auto sector; Morgan Stanley lifted GM price target to $57 from $53 on potential monetization of its autonomous “Super Cruise” technology, targeting 7 models next year and 12 by 2023; CVNA was initiated at OW with a $300 PT and VRM at Sector Weight without a PT at KeyBanc, believing that digital used auto retail has some of the strongest long-term secular tailwinds in our coverage; FSR signed a definitive platform and definitive manufacturing agreement with Magna, which finalizes their framework agreement from October; European car registrations declined 12% in November to 897,692 units, followed by 7.8% decline in October

·     Housing & Building Products; homebuilder LEN rises early after earnings beat (by 20%) on homebuilding margins and financial services and sets FY21 guidance at 62,000-64,000 deliveries and gross margin of 23.75-24.0% (up from delivery of 52,925 homes, margin of 20.6% in FY 2020); housing stocks in general getting a boost today from the LEN results as well as stronger Housing starts data boosting shares of KBH, TOL, BZH, DHI

·     Consumer Staples: in food space, GIS with a Q2 beat as adj EPS $1.06 vs. est. 97c and sales $4.7B vs. est. $4.65B and expects current COVID-19-related eat-at-home trends to continue for the rest of fiscal 2021, with organic sales growth in Q3 similar to Q2; SAFM turned a profit for the latest quarter, as it said demand for chicken products at grocery stores remained strong this year as Q4 sales rose 3.7% to $940M from $906.5M and est. $902M; KO said it is cutting 2,200 jobs globally, including 1,200 in the U.S., as the coronavirus pandemic accelerates restructuring efforts

·     Restaurants: Wells Fargo with industry note as they upgraded BJRI, DRI, QSR, YUM to Overweight from Equal Weight while downgraded CBRL, PLAY, RRGB to underweight and reiterate overweight on CAKE, CMG, DENN, JACK, MCD, SBUX, WING saying coming out of a year unlike any other in modern history for the restaurant industry, they expect chains to benefit from pent-up demand and a consumer who is flush with cash to spend

·     Leisure and Gaming; in gaming, Truist said preferred way to play the sports betting/iGaming opportunity remains Buy-rated CZR, PENN and BALY as total sports betting GGR was up +70% M/M same-store during October and up +62% Y/Y on a full month of NFL and NCAA football, MLB playoffs, and the NBA Finals. Meanwhile, iGaming GGR was up a strong +209% Y/Y and +6% sequentially (is neutral on DKNG); DOOR mentioned cautiously by Citron which weighed on shares

Energy

·     Energy stock movers: oil prices remain higher, back at fresh 9-month highs on rising demand hopes given the bullish economic outlook due to the vaccine rollout; BE issues downside guidance for FY21, forecasts revenues of $950M-$1.0B vs. a consensus of $1.01B; expects adjusted gross margin of ~25% and adj operating margin of ~3% in MLP sector, Credit Suisse upgraded NBLX, WES, and WMB to Outperform from Neutral and downgraded HEP, HESM, KMI, MMP, and RTLR to Neutral from Outperform on valuation following strong performance, and lifted target prices by an average of about 20% to reflect lower discount rates;

·     E&P sector; MTDR was upgraded to Outperform with a $16 target from Market Perform at BMO; RBC also raised their price targets on Outperform-rated FANG (to $67 from $50), VLO ($67 from $53), PSX ($75 from $66), MPC ($51 from $40), HFC ($34 from $33), VNOM ($17 from $16), BSM ($9 from $8), WES ($15 from $12), APA ($19 from $13), COP ($55 from $50), EOG ($70 from $63), PXD ($155 from $130), MTDR ($17 from $13), EQT ($20 from $19) and Sector Perform-rated PBF ($8 from $6), PARR ($13 from $8), DK ($17 from $13), CXO ($80 from $65), DVN ($20 from $14), MRO ($10 from $8), CDEV ($3.50 from $1.50), SWN ($4.50 from $4)

·     Coal sector: BMO downgraded METC and HCC to Market Perform from Outperform due to valuation implications from reduced forward-looking met coal price forecasts, expected capex push-outs resulting in reduced production growth, and the recent rally as shares are up ~17% and ~30% respectively from early November;

·     Utilities; Dominion (D) was upgraded to Outperform on valuation at Credit Suisse who sees the current pricing offering 14% total return potential over the next 12 months and a more compelling entry point after the company took several positive strategic steps in 2020 to significantly reduce the company’s operating and financial risk; PNM reaffirmed its FY20 EPS guidance of $2.23-2.31 and expects FY21 EPS to be in the range of $2.27-2.37 (est. $2.34); In Natural Gas utilities, Stifel initiated NWN at Buy with a $61 tgt, OGS at Buy with a $87 tgt, and SJI at Hold with a $25 tgt as the current energy landscape with a vaccine on the horizon provides investors with the optionality of a more stable investment opportunity longer-term

Financials

·     Bank movers; Wells Fargo raises ests and tgt on large cap banks saying bank outperformance since "Pfizer Monday" (Nov. 9) should continue given the 3 "C’s" – Capital markets, Credit, and Costs as reiterate OW ratings and increasing PTs on GS by 20% to $310 (top pick into 4Q20 results) and note recent deal success (Snowflake, DoorDash, mergers, etc.); and on BAC, JPM, and C by avg. 10%; Stephens upgraded CMA to overweight from equal-weight with $62 tgt noting it’s the worst-performing Super Regional Bank year-to-date (down ~26% vs. ~11% at the KRE), while downgraded HBAN as expect it to be more of a peer performer in 1H21; in insurance; UNM enters a reinsurance agreement for a substantial portion of its Closed Individual Disability Insurance Block business, backed by ~$7.1B in reserves, with a subsidiary of Global Atlantic.

Healthcare

·     Pharma movers; MGNX rises after the FDA approved its drug Margenza in combination with chemotherapy for the treatment of an advanced type of breast cancer in patients who failed two or more prior therapies; NVS to acquire privately held Cadent Therapeutics for a total potential consideration of $770M gaining full rights to Cadent’s neuroscience portfolio; PHAT 2.25M share Secondary priced at $42.00; VIRI 3M share IPO priced at $10.00; ZYNE falls as FDA recommends co to redo late-stage trial of its experimental cannabinoid gel, Zygel, in neurological disorder Fragile X syndrome patients; RVNC said topline efficacy and safety results were positive from its Phase 2 study of DaxibotulinumtoxinA for Injection for upper facial lines

·     Biotech movers; NVAX rises as the European Union concludes preliminary talks with NVAX to secure up to 200 mln doses of its COVID-19 vaccine candidate; HZNP slips after announcing short-term TEPEZZA supply disruption due to government-mandated COVID-19 vaccine production related to Warp Speed/orders have dramatically restricted capacity available to produce TEPEZZA at CTLT, their product contract manufacturer; AMGN submitted an NDA to the US FDA for sotorasib for the treatment of KRAS G12C-mutated locally advanced or metastatic non-small cell lung cancer

·     Healthcare services and providers; pharmacy retailer RAD spikes after 3Q adj EPS $0.08 beat the ($0.05) loss on higher sales $6.12B (est. $5.84B) and lifts targets for revenue, profit and same-store sales in 2021 following solid Q3 results; OMI upgraded to Buy from Neutral at UBS and raise tgt to $37 from $27 after several checks with large acute care operators suggest OMI’s growing PPE manufacturing capabilities could drive revenues and margins higher; XSPA rises after announces partnership with UAL for covid-19 testing with XpresCheck testing facilities

·     Life Sciences, MedTech and Equipment; ILMN upgraded to buy at BTIG with $410 tgt as believe the end market conditions for next-generation sequencing will continue to improve throughout next year and as the value of the GRAIL acquisition becomes clearer; overall, BTIG says 2020 represents the best life science tools and diagnostics sector performance they said they’ve seen in recent history if not ever with top picks LMNX, FLDM and TMO; MTD and WAT both upgraded to Buy from Neutral at Cleveland Research

Industrials & Materials

·     Industrial & Machinery; the economic recovery trade continues as machinery, multi-industry, equipment names extend gains; Citigroup downgraded URI downgraded to neutral while upped price tgts on TEX, OSK in Access & Rental equipment as no longer see adequate risk-adjusted upside to warrant a Buy (in URI) vs XLI Firm said access growth is still under-appreciated, and we see greater scope for positive earnings revisions; Transports stay healthy on economic recovery trade as well in a big year (major index not far-off recent record highs)

·     Metals movers: in steel, STLD guides Q4 EPS 80c-84c vs. est. 80c as expects Q4 earnings from steel operations will be meaningfully higher than Q3 results, driven by flat roll metal spread expansion and steady total steel shipments, while NUE guides Q4 EPS $1.15-$1.20 vs. est. $1.06 as expected Q4 earnings include a net benefit totaling $39.7 mln, or $0.13 per diluted share, related to state tax credits; aluminum prices jump as Bloomberg reports that European officials told the U.S. government that Russian billionaire Oleg Deripaska continues to exert control over Rusal, one of the world’s top producers, in what the officials said was a breach of U.S. sanctions (shares of AA, CENX active on headlines); in materials and Chemicals, OLN upgraded to overweight at KeyBanc with $31 tgt as believe recent epoxy and EDC strength is significant enough to more than offset the challenging caustic soda outlook

Technology, Media & Telecom

·     Internet: Bank America called GOOGL his favorite large cap name in 2021 and says TWTR is top mid cap for 2021; in online travel, SABR upgraded to Overweight at Morgan Stanley and raise PT to $14 from 7 saying Sabre has responded strategically to Covid challenges through cutting costs, leveraging its Google partnership, and ensuring liquidity (2^nd analyst upgrade in as many days); MELI downgraded to neutral at BTIG noting shares are up 192% year-to-date despite a considerable currency headwind; SNAP partners with software solutions provider Unity Software Inc (U) to let game developers on Unity’s platform use "Snap Kit" that will help them expand reach through Snapchat

·     Semiconductors: KeyBanc raised MCHP tgt to $165, NXPI to $190 as highlight a broad accelerating recovery with September and October shipments inflecting and a sharp decline in aggregate supply chain inventories, below targeted levels; overall sector just off its record highs earlier in week around 2,825 for the Philly semi-index (SOX) as group remains strong amid rising demand and tighter inventories; STX falls as Goldman reiterated sell after speaking with Toshiba to discuss their HDD business outlook and strategy

·     Software movers; sector generally higher with broader tech, while Morgan Stanley with several rating changes: MDB upgrade to OW from EW & Raise PT to $439 from $295, DOMO upgrade to OW from EW & Raise PT to $70 from $41, RNG upgrade to OW from EW & Raise PT to $420 from $300, FIVN upgrade to OW from EW & Raise PT to $190 from $150 as expect digital transformation / cloud investments to remain a higher priority item moving forward; WK upgraded to EW from UW and raise tgt to $82 from $52

·     Media & Telecom movers; busy day of analyst research as Morgan Stanley downgraded AT saying balance of catalysts seems to be shifting towards the downside; WMG upgraded at Morgan with $40 tgt as see it the best way to play the secular growth in streaming music as WMG; SBGI was upgraded to Equal Weight and up tgt to $31 from $24 at Wells Fargo as impressed w ability to extract value from Diamond through BALY deal; in media, ATUS downgraded at Barclay’s saying at present levels, ATUS valuation at ~9. 2x 2021E EBITDA and ~14x 2021E unlevered FCF is the highest since its IPO back in 2017; ATUS tgt raised to $40 and CMCSA to $50 at UBS as expect cable broadband sub growth to remain solid in 4Q, albeit moderate from a pandemic-fueled 2Q/3Q; FUBO spikes after mentioned at Motley Fool pick

·     Hardware & Component news; ROKU rises after saying starting today, company’s users will be able to download HBO MAX (AT&T) from Roku channel store & subscribe directly on Roku device to access all of HBO Max; ACN rises after Q1 adj EPS $2.17 and revs $11.8B topped consensus and raised its FY revs view to up 4%-6%, from prior 2%-5%; JBL traded at 20-year highs as posts Q1 rev of $7.83B beating the $7.03B estimate and guides Q2 revs $6.2B-$6.8B vs. est. $6.24Bon better year outlook as well