Closing Recap

Monday, December 21, 2020

Equity Market Recap

·     Stocks finishes mixed, but well off the overnight lows as the Dow erased a 400-point loss to turn positive midday behind strength in Nike and banking stocks (GS, JPM). Despite reports of a fast-spreading strain of coronavirus emerging from England prompting fresh travel restrictions, hitting airlines, cruise lines, energy names overnight, it makes you wonder what it will take to send and keep markets lower. Dow futures fell as much as 600 points overnight, and the S&P opened lower by around 1.5%, but it was just another buying opportunity for investors, who have been rewarded time and time again buying on any pullback (with today no different). After all four major averages settled at closing highs late last week, today was seen initially as one of profit taking following the UK news that it is imposing fresh lockdowns to combat a new strain of Covid-19 that appears to be much more contagious than prior…but it was not to be.

·     There were several positive headlines and catalysts over the weekend initially overshadowed by the renewed virus fears, but the focus seemed to turn back to them late morning as Democratic and Republican leaders finally reached an agreement on a new coronavirus relief deal worth around $900 billion that includes a second round of stimulus checks and additional unemployment benefits (among other items). Financials jumped after last week’s Fed stress test headlines opened the door to buyback and dividends on a limited basis (JPM, GS, C). Retailers were lifted by better Nike results and guidance. Markets also acknowledge that with a second vaccine getting emergency approval use to fight the vaccine (MRNA Friday after PFE the week before), more individuals are expected to be inoculated, boosting hopes for a 2021 recovery.

·     Overseas, European shares tumbled after countries across the continent and beyond barred travelers from Britain to keep out an infectious variant of coronavirus that is spreading rapidly in England. The Stoxx Europe 600 slumped 2.3%. Adding to investors’ concerns about U.K. markets, negotiators missed a Sunday deadline for reaching a Brexit agreement, raising the prospect of a disruptive U.K. exit from the European Union at the end of the year.

·     Major averages did pare losses as the World Health Organization’s (WHO) Van Kerkhove downplayed the new strain news saying "good news" that the UK has reported variant of covid-19 virus does not affect efficacy of vaccines, saying results of study into antibody response will be known in the coming days, while the WHO’s Ryan said there is zero evidence that new variant increases severity of the disease.

·     There were also several M&A deal announced today heading into the final two weeks of the year including: AJRD to be acquired by LMT in defense space for $56 per share in deal valued at $5B, AGIO rises after saying it will sell its cancer business for $2B, RP to be acquired by Private-equity firm Thoma Bravo LP for $9.6 billion, which is paying $88.75 per share, HMSY to be acquired by Veritas Capital backed Gainwell for $37 per share in all cash-deal valued at around $3.4B. Also, the WSJ reported GPN and FIS held unsuccessful merger deal talks recently (all details below).

Commodities, Currencies and Treasury’s

·     Oil prices fell as WTI crude slips -$1.36 or 2.77% to settle at $47.74 per barrel, off earlier lows but still down on slowing demand fears amid the new virus strain reports. Gold prices slipped -$6.10 or 0.3% to settle at $1,882.80 an ounce after volatility overnight (high $1,912 and lows $1,859), falling initially after the buck managed a mini rebound before slipping throughout the day as stocks rebounded. The dollar opened higher (off more than 2-year lows last week) as investors fled to safe-haven assets, but as stocks recover, the dollar pulled back. Treasury yields end the day little changed, with the 10-year at 0.94%, recovering off earlier lows.

Sector News Breakdown

Consumer

·     Retailers; NKE with strong results across the board late Friday as Q2 EPS 78c beat est. 62c and Q2 revs $11.2B up 9% YoY vs. est. 10.55B as digital again was strong, growing 84% and also delivered on its inventory plans, ending the quarter in a healthy position, -2% YoY and raised year guidance; WMT upgraded to outperform from sector perform and raise tgt to $170 from $153 at RBC Capital; FOXF upgraded to Buy at Truist and up tgt to $130 as increasingly comfortable that FOXF can generate 10%+ organic growth over the next 3-5 years; BNED creates new partnership with licensed sports merchandise leaders Fanatics and Lids; GME rises as RC Ventures reports an increased stake of 12.9% stake from just under 10% prior.

·     Consumer Staples & Restaurants; casual dining and restaurant names slid initially on the reports of the possible new virus strain and its impact on potential closures and tighter restrictions, but the sector recovered off lows; consumer staples such as CLX in products and grocers KR and food related stocks TSN, GIS, CPB were also active

·     Leisure and Gaming; in leisure, cruise lines (CCL, RCL), hotels (MAR, HLT) and travel names pressured on reports of new virus strain in UK causing increased travel restrictions for the country; in leisure, LESL Q4 EPS and sales topping consensus on slightly better guidance; Compass Point downgrades ELY to Neutral from Buy on price, price target $24 from $23; FUBO extends week-long rally after Axios says the company is looking at forming exclusive sports content deals.

·     Services; RCII agrees to acquire online lease-to-own provider Acima Holdings in a cash-and-stock deal valued at $1.65B; total consideration consists of $1.27B in cash and ~10.8M Rent-A-Center common shares currently valued at $377M https://bit.ly/34xzpCt

Energy

·     Energy stock movers: Oil prices dropped the most in seven weeks before recovering, with investors fleeing the market as a mutation of Covid-19 discovered in the U.K. threatened more lockdowns across Europe. Brent futures slumped below $50 a barrel overnight down as much as 6% before cutting losses in half. Large cap energy saw big declines initially (XOM, CVX, COP) as well as E&P related names (OXY, APA, EOG, PXD)

·     Energy; WTI crude and Brent oil prices down on slowing demand fears given the travel restrictions and tighter curbs in the UK on virus fears; announced M&A deal in the E&P space as FANG to acquire QEP in $555M deal, as QEP holders to get 0.05 of FANG for each QEP share they own, implying a per share value of $2.29, a small discount to QEP’s Friday close (deal valued at $2.2B including $1.6B in QEP debt); RDSA shares tumble after announcing a write-down of oil and gas assets by $3.5B-$4.5B for Q4 which bring total cuts for 2020 to more than $22 billion

·     Utilities & Solar; Wind and solar projects are part of a broader package of tax incentives that will be attached to the government funding bill, according to a person familiar with the matter, Bloomberg reported. Deal extends for one year the production tax credit for wind and other renewables and an investment tax credit for solar energy projects for two years (shares of CSIQ, ENPH, FSLR, JKS, NOVA, RUN, SEDG, SPWR were active)

Financials

·     Bank movers: JPM, GS, WFC, BAC, C, MS among leaders as large cap banks and regionals (PNC, USB, HBAN, RF, ZION) seeing strength after last week’s Fed stress test headlines opened the door to buyback and dividends on a limited basis. The Fed said the largest U.S. banks have enough capital to withstand over $600 billion in losses from a short sharp economic slump, as well as a moderate longer-lasting downturn, and will be permitted to pay out dividends and buy back stock on a limited basis. JPM said its board authorizes a new common equity share repurchase program of $30 bln after the U.S. Federal Reserve relaxed restrictions and permitted banks to pay out dividends and buy back stock on a limited basis

·     Consumer Finance: payments systems sector active after the WSJ reported this weekend that FIS and GPN recently held unsuccessful talks for a merger deal that could have been valued at around $70B, citing people familiar with the matter. Article noted that negotiations broke down in the last few days, https://on.wsj.com/3h3SqSd

Healthcare

·     Pharma movers; FGEN falls after it and partner AZN said the FDA extended its review period for the marketing application for its experimental treatment Roxadustat for anemia in patients with chronic kidney disease by three months to March 20^th; EXEL announces cabozantinib significantly improved progression-free survival in cosmic-311 phase 3 pivotal trial in patients with previously treated radioiodine-refractory differentiated thyroid cancer; QURE slides after U.S. regulators have put a clinical hold on its hemophilia B gene therapy program after a preliminary diagnosis of a form of liver cancer in one patient taking part in a late-stage study; European Medicines Agency has recommended granting a conditional marketing authorization for the vaccine developed by PFE and BNTX to prevent coronavirus disease; EYEG shares jumped after buying privately owned biotech co, Panoptes Pharma, to strengthen its eye disease portfolio; AGIO surges after saying it will sell its cancer business for $2 bln to privately held Servier which includes $1.8 bln in upfront cash and $200 mln in a potential future milestone payment for its experimental brain cancer treatment, vorasidenib; gene editing stocks CRSP, EDIT, NTLA saw massive outperformance

·     Biotech movers; MRNA on Friday (as expected) the FDA issued an emergency authorization for a Covid-19 vaccine developed by the co, the second such vaccine to be cleared in the United States as inoculations should begin within days; EPZM downgraded to Hold from Buy at Jefferies saying while they like the appeal of an oral cancer drug with a balance of good efficacy and good safety, visibility on Tazverik uptake remains low and we believe it will take time to get momentum through 1H21 during the ongoing pandemic; ICPT cut to Hold at Jefferies as well as ongoing complete response letter from the FDA for OCA for NASH remains unclear and the specifics to be re-filed and timing of any re-filing is likely not near-term; CLVS Rubraca shows survival benefit in late-stage ovarian cancer study; NK rises after privately-held ImmunityBio and NantKwest have entered into an agreement to merge in a stock-for-stock transaction. https://bit.ly/34wUVXU

·     Healthcare services and providers; HMSY to be acquired by Veritas Capital backed Gainwell for $37 per share in all cash-deal valued at around $3.4B https://bit.ly/38sBGQu; in MedTech and Equipment; QDEL receives emergency use authorization for QuickVue SARS rapid antigen test for #covid19 diagnosis

Industrials & Materials

·     Transports; Airline sector (AAL, DAL, LUV, JBLU, UAL) was rattled in reaction to the new travel bans and flight cancellations in Europe aimed around a new more contagious strain of COVID-19 in the U.K. It is not yet known if the new strain makes people sicker or changes the way their immune system responds to the virus if they were already infected or vaccinated

·     Aerospace & Defense; AJRD +25%; has entered into a definitive agreement to be acquired by LMT for $56 per share in deal valued at $5B, representing a 33% premium to AJRD’s prior closing price of $42.04 https://on.mktw.net/3nDGrNF ; BA shares fall following a U.S. Senate report saying Boeing officials "inappropriately coached" test pilots during recertification efforts; the report, citing a whistleblower, raised questions about testing this year of a key safety system known as MCAS was contrary to proper protocol

Technology, Media & Telecom

·     Semiconductors; INTC and AMD shares slumped late Friday and carried over early today after Bloomberg first reported that MSFT is working on in-house chips for use in server computers that run on its cloud services. Microsoft is using Arm designs to produce a processor that will be used in its data centers and it is also exploring using another chip that would power some of its Surface line https://bloom.bg/2WvdtDy   

·     Cyber security sector; SWI downgraded by a few analysts as increasingly see the risk of customers turning off the software in wholesale fashion given the risk of compromised Orion software impacting critical internal network and IT infrastructure for large companies and federal govt agencies (but shares bouncing after falling every day last week); security technology stocks soared on Friday (FEYE, FTNT, PFPT, CRWD) amid cyber-attack disclosures; Wedbush raised price tgts on CHKP, CYBR, FTNT, OSPN, PANW, PFPT, QLYS, SAIL, TENB, TLS, VRNS, ZIXI, ZS in cyber security as believe there is a $200 billion dollar growth opportunity in cloud security "up for grabs" over the next five years

·     Software; MSFT upgraded to buy at Citigroup and raise tgt to $272 from $229 as see convergence of forces positive for MSFT in 2021 and beyond as COVID19 accelerates adoption of Azure within IT-driven projects and a more stagnant macro drives customers to squeeze more value out of productivity / collaboration deployments with O365; RP to be acquired by Private-equity firm Thoma Bravo LP for $9.6 billion, which is paying $88.75 per share, a 31% premium to RealPage’s closing price Friday of $67.83, officials at the firms said https://on.wsj.com/3rjFKLu

·     Media & Telecom movers; RNET to be acquired by VSAT in an all-stock transaction representing an EV of $222M, including RigNet’s net debt as of Sept. 30, 2020; RigNet stockholders to receive 0.1845 shares of ViaSat stock per RigNet share https://bit.ly/3mCD3kW ; CMCSA is well positioned for post-COVID world according to Barron’s this weekend saying stock could rally as investors come to realize that Comcast’s diverse portfolio-including broadband, film studios, streaming, and theme parks-is well suited to a post-COVID-19 world; GOGO said it expects to end 2020 with more business aviation air-to-ground subscribers than it had when year began