Closing Recap

Monday, July 20, 2020

Equity Market Recap

·     U.S. stocks jumped on Monday, led by gains in technology shares following a week of profit taking that saw the Nasdaq Composite fall from record highs, but rose over 270-points today, topping the 10,770 level amid broad tech strength (software, semi’s, Internet, stay-at-home beneficiaries and equipment all surged). The move comes ahead of a busy week of earnings in the space with key earnings results from MSFT, INTC, TXN, SWKS, and TSLA among those expected. Markets were buoyed early as concerns about a jump in COVID-19 cases this weekend was overshadowed by positive COVID-19 vaccine trial data from BNTX/PFE and AZN, along with hopes for more stimulus from the government to help the economy as benefits expire this week. Defensive sectors took a hit today, with a pullback after gains late last week for Utilities, and REITs as money rotated back into work-from-home and tech stocks (ZM, PTON, W, DOCU). Fear in stocks slides as the CBOE Volatility index trades under the $25 level, down over 4%, its lowest levels in over a month as vaccine news on the virus boosts market sentiment. Stocks saw continued buying momentum throughout the trading session as virus case totals (at least for today), came in lower than recent averages for several hot spots including CA, FL, AZ. Gold prices pushed back near 9-year highs while oil prices reverse earlier losses to close higher.

·     Pharma companies BNTX and PFE announced positive data on their experimental coronavirus vaccine that showed it was safe and induced an immune response in patients. AZN also provided positive bullet points on its study with Oxford, though shares slipped following the spike last week heading into the expected data. The economic reopening sectors (airlines, casinos, restaurants, cruise lines) lagged broader markets .

·     The extra $600 unemployment benefits are expected to expire by the end of this week, which could be a near-term headwind for market sentiment. Government officials have been talking about additional stimulus measures with the two sides (shockingly) nowhere on the same page, but Treasury Secretary Mnuchin said to extend those added benefits on top of regular unemployment benefits was unlikely.

Commodities

·     Oil prices reversed higher, as WTI crude gained 22c, or 0.54% to settle at $40.81 per barrel (well off earlier lows of $39.83), getting a boost as stocks bounced broadly with the exception in defensive sectors, as investors were back in “risk-on” mode. Natural gas prices slipped 4.5% to settle at 3-week lows of $1.641 mln btus. Gold prices advanced as August futures rose $7.40 or 0.4% to settle at $1,817.40 an ounce, while silver futures added 43c, or 2.2%, to settle at $20.192 an ounce, the highest most-active contract finish since August 2016.

Currencies & Treasuries

·     The euro climbed to four month high against the U.S. dollar amid hopes the EU would agree on a recovery fund for economies in the region hit by the COVID-19 pandemic. The fund proposal was announced to be around 750B euros, of which 390 billion euros could be offered as grants. EU leaders said they were cautiously optimistic that agreement on a massive stimulus plan for their coronavirus-blighted economies was within reach. Safe haven names struggled as the buck, yen and Swiss franc havens struggled against the euro as fears about the extended EU summit faded. The euro traded to highs of 1.14675 (its highest level since its 1.1495 March 9 pandemic peak). Treasury prices remain higher as yields, especially on the short-end of the curve, remain not far off all-time lows, as 2-yr around 0.15%, the 5-year 0.28% and 10-year around 0.60%.

Sector News Breakdown

Consumer

·     Retailers; DLTR said Michael Witynski, Enterprise President of Dollar Tree, has been promoted to President and CEO as Gary Philbin is retiring; DG, DLTR also mention positively in Barron’s saying dollar stores are resilient while many other retailers are struggling and could there be further upside in these stocks; in auto retail, AAP tgt raised to $166 from $156 at Bank America and reiterate buys on ORLY and GPC and Neutral on AZO following BAC credit card data last week and ahead of earnings; URBN was downgraded to sell at Loop Capital; retailers in general (KSS, GPS, TPR) slipped a nice rally in value for much of the prior week; PETS slides on EPS miss

·     Consumer Staples & Restaurants; KO with earnings results expected tomorrow morning in the beverage sector (after good results from PEP last week); tobacco sector also in focus tomorrow with results from PM expected in the morning; CMG new record highs up 2.5% ahead of earnings Wednesday – tgt to $1,125, from $783 ahead of Q2 EPS at RBC today and tgt raised to $1,336 at SunTrust as continued to see upside to CMG’s shares heading into 2Q20 results (also received a positive mention in Barron’s this weekend)

·     Housing & Building Products; Wedbush said with improving prospects, they are raising estimates and price targets for HD, LOW and TSCO – with a higher exposure to outdoor-related products, DIY and repair- and maintenance-type sales (two-thirds of total sales), as well as better internal margin opportunities to further accelerate earnings growth, we prefer LOW over HD and TSCO

·     Leisure related sector; ELY rises after Bloomberg reports that Topgolf International could go public through the black check company route with Churchill (ELY owns stake); cruise lines dipped on the day with US reopening names slipping on the day (CCL, NCLH, RCL); NKLA shares fell after the company has filed to offer up to 23.9M shares, while the filing also relates to sales from shareholders of up to 53.39M shares of common stock and up to 890,000 warrants

Energy

·     Energy stocks were active following M&A activity in the sector CVX confirmed an all-stock deal to buy oil and gas producer NBL for about $5 billion or $10.38 per share/including Noble’s debt, the deal would be valued at about $13 billion https://on.mktw.net/2WANhIa (the WSJ reported the deal overnight first); Raymond James upgraded shares of APA, CXO, PE, PXD, MNRL, MTDR & LPI though said this should not be taken to mean this will be anything but an ugly quarter for the E&P space; MTDR was upgraded to buy at Stifel with raised $12 tgt based on their updated oil price forecast and risk adjustments to our NAV/share estimate of $14.40

·     Oil services; HAL shares rally early after Q2 operating income $236M vs. est. $32.9M with EPS of 5c helped by aggressive cost cutting, even as revenues fell 46% Y/Y to $3.2B/swung to a GAAP net loss of $1.68B, from net income of $75M which included $2.1B in impairment charges in response to lower oil prices and the resulting collapse in drilling by North American customers – also said sees higher operating income in 3q vs. 2q

·     Refiners; Jefferies upgraded shares of HEP, PSX, PSXP, VLO to Buy saying demand for gasoline has steadily rebounded, and meaningfully accelerated in recent weeks as states have reopened, vacationers have taken to the highways, and travelers have displayed a preference for driving vs. flying

Financials

·     Bank movers; bank earnings expected tomorrow from CBSH, CIT, CMA, CTG, FULT, SBNY, SNV, SYF in the financial sector; MS CEO James Gorman disclosed he sold 150,000 shares of his company in an SEC filing on Friday; GS price target was also upped to $220 from $200 at UBS , and Barron’s stated that the company’s blowout quarter last week was not a fluke; Barron’s also laid out a case to buy WFC, the worst-performing bank YTD (-53%), noting that it is cheaper than its peers in terms of book value and the company’s problems can be fixed, including cutting expenses; FHN upgraded to Outperform at Evercore ISI; BLK had its price target raised by Citi, Argus, BMO, and UBS after its quarterly earnings results on Friday; in insurance; William Blair upgraded CB to Market Perform from Underperform and TRV to Outperform from Underperform

·     Payments; PYPL announced a partnership with Paxos to let users buy and sell cryptocurrencies, and Goldman Sachs raised its price target from $170 to $205 and reiterated its Conviction Buy; MA also announced its expansion into cryptocurrencies with its Accelerate program; RBC says its top ideas for this quarter include FIS, GPN, FISV, SSNC, MA, V

·     REIT stocks were broadly lower; Mizuho lowered tgts on several names (ARE, BDN, BXP, HPPand KRC) as Office REIT stocks have been under pressure since the COVID-19 pandemic revealed that working from home is a viable option for many employees without any material loss of productivity. Said they expect pressure on occupancy and rents over the next few years across the traditional office market due to the WFH movement, but most especially in CBD markets like NYC, San Francisco and Boston; SLG was downgraded at Deutsche Bank; BKD among biggest decliners in senior living REITS (big exposure to AZ, TX, FL)

Healthcare

·     Pharma movers; BTAI rises after reporting that data from two Phase 3 trials of BXCL501 for the acute treatment of agitation in patients with schizophrenia and bipolar disorder met primary and secondary endpoints; PFE and BNTX report early positive data from their German phase 1/2 Covid-19 vaccine study, including first T Cell response data which further demonstrated the ability of BNT162b1 to elicit high SARS-CoV-2 neutralizing titers (shares of MRNA fell on the better competing COVID-19 data along with a valuation downgrade at JPM); AZN/Oxford COVID-19 vaccine candidate shows robust action in early-stage study

·     Biotech movers; GILD was upgraded to neutral from underperform and increasing tgt to $75 (from $64), as they are layering in the remdesivir commercial opportunity following clarity on pricing/ access; BGNE signed an agreement with ASMB securing exclusive development and commercialization rights in Greater China, paying ASMB $40M upfront, up to ~$500M in milestones and tiered royalties on net sales; GRFS will acquire the Montreal-based plasma fractionation facility and two purification facilities from South Korean-based GC Pharma, along with 11 U.S.-based plasma collection centers for a total amount of $460M

·     Medical equipment and devices; DGX received the first FDA authorization under Emergency Use Authorization (EUA) to conduct specimen pool testing for the detection of COVID-19 in up to four samples; ALGN was downgraded to underperform at Bank America noting the stock has had a particularly strong run in recent months, recouping all the losses from the March Coronavirus sell-off (+130% from trough on 3/23) and currently trading up +15% for year; ISRG rises to 52-week highs as Stifel upped tgt to $715 saying recent survey results prompt higher projections

·     Healthcare services and providers; CAH was upgraded to buy with $63 tgt at Guggenheim noting shares have significantly underperformed its distribution peers by an average of 13% and they believe the underperformance relative to its peer group has largely been a function of the company’s Medical business and its exposure to the ongoing pandemic.

Industrials & Materials

·     Aerospace & Defense; DGLY receives 500 units order for its non-contact temperature-screening instrument ThermoVu from Trust Think Products, a domestic distributor of Digital Ally; MAXR has renewed four contracts and expanded a fifth contract in Q2 combined worth more than $120M; LMT was awarded a $15B contract by the U.S. Air Force to develop, integrate, retrofit and produce variants of its C-130J transport aircraft, and also wins a $935M contract from the U.S. Navy for support equipment; SPCE shares up some of last week’s gains (rose on mgmt change)

·     Chemicals; CE to sell 45% stake in polyplastics JV for $1.58B and said is increasing buyback authorization by $500M; PPG was upgraded to buy at SunTrust saying expect the discount to peer SHW will narrow in the next few quarters as investors start to focus on its prospects for margin expansion, demand recovery in several markets and balance sheet optionality

·     Industrial & Machinery; KeyBanc boosted its profit estimates on generator maker GNRC for this year and next, saying recent storm activity supports forecasts calling for a highly active hurricane season; LII posts headline earnings beat and revs beat of $941M while boosts year EPS view to $7.90-$8.70 vs. prior guidance $7.50-$8.50 (Street $8.19) and topline growth (10%)-(15%) y/y vs prior guidance (11%)-(17%) vs FC(12.1%)

·     Transports; the number of people flying in the U.S. last week (July 13-19) fell 4.4% compared to the previous week (July 6th – 12th) according to TSA data, the first weekly decline in passengers since early April (AAL, JBLU, DAL, UAL); KSU tgt to $183 from $175 at Raymond James as believe KSU possesses a unique growth story anchored by its Mexican franchise that provides above-average long-term growth opportunities among U.S. railroads; YRCW shares dropped after a congressional panel said they didn’t meet test to be designated as essential to national security/the co received $700 million coronavirus relief loan

Technology, Media & Telecom

·     Internet; AMZN rises after analysts up tgts $Goldman to $3,800 and MKM to $3,350) recovers after pullback last week on profit taking after recent record highs; online retailers outperform brick-and-mortar names (CVNA, FVRR, ETSY, OSTK, MELI, W, CHWY) in face of slower state reopenings; stay at home tech names outperformed again today (AMZN, SPOT etc.)

·     Semiconductors; Philly semi index (SOX) leading tech higher ahead of some key earnings this week in the space (INTC, TXN, SWKS) though still off last week record highs still of 2,121 on 7/13, as tech outperforms

·     Software movers; sector outperformed in tech space with big gains early from TWLO, TEAM, AYX, CRM, NOW; DBX upgraded to buy at Jefferies given that it trades at an attractive discount, it is a WFH beneficiary with impressive top-of-funnel metrics, and it has shown it can deliver on margin goals; CTXS was upgraded to overweight at Barclay’s while Goldman Sachs said it continues to expect another strong quarter as conversations have pointed to continued demand, albeit the pace of reactionary spending following mid-March shelter in place orders seems to have moderated; stay at home names WORK, DOCU, ZM among leaders as well

·     Hardware & Component news; INFN rises after Needham says VZ testing its 800G for an upgrade of its long-haul backbone and deployments could start as soon as the second half of this year; potentials Chinese retaliation concerns remain against Europe’s NOK, ERIC if the EU moves to ban Huawei, which was mentioned last week