Closing Recap

Tuesday, July 21, 2020

Equity Market Recap

·     U.S. stocks rose on Tuesday, led by energy, financials and industrials, while Monday’s market leading technology stocks lagged Tuesday, along with healthcare and communication services. Stocks pared gains in the final hour after Mitch McConnell said there would be no relief bill by next week, contrary to other recent official comments. COVID-19 vaccine hopes, ongoing talk of further stimulus from the government and better-than-expected earnings thus far has helped markets offset the rising coronavirus cases and slowing reopenings of state economies. Energy stocks were the big drivers in the S&P 500 and Russell 2000 today with oil prices surging on rising global demand hopes, as DVN, OXY, FANG, and HAL were among the leaders in the S&P 500 (energy sector rose around 6%). Financials was the other market leader after positive reaction to a handful of regional bank earnings. After massive outperformance on Monday (rising over 2.5%), the Nasdaq Composite slipped, falling on the day amid profit taking in software, semis and big tech ahead of a busy week of earnings to come (MSFT, INTC, SWKS, TSLA) – though the Nasdaq did hit a fresh intraday record highs of 10,839 before sliding (after closed at all-time closing high yesterday). Airlines outperformed (UAL, AAL, DAL) as lawmakers, White House officials push toward new coronavirus aid legislation. Separately, major U.S. and European Union airlines have asked the EU and White House to consider a joint program to test passengers for COVID-19 as a way to allow people to travel once again between the U.S. and Europe. Stock futures got off to a good start, tracking Europe and Asia markets higher on news of a new recovery plan as the EU reached an economic recovery deal after four days of negotiations, agreeing to a EU750 billion ($860 billion) coronavirus rescue fund which will see EU390 billion offered in grants to individual countries, with the rest coming in the form of loans. Precious metal stocks spike further as silver prices hit 6-year highs and gold fresh 9-year highs on inflation, rate fears. The Dow outperformed amid strength in XOM, CVX in energy with oil rising, KO and IBM after earnings beats, while BA leads the gains. The euro hits 4 ½ month highs vs. the dollar. Market concern remains that only a handful of stocks in the S&P (AAPL, AMZN, MSFT, GOOGL, FB) make up the bulk of the market cap of the S&P and if any of them disappoint, it could spell trouble for averages. Trade news with China has also been relatively quiet over the last few weeks.

Commodities

·     Oil prices closed higher as WTI crude rose $1.15 or 2.82% to settle at $41.96 per barrel helped after European Union leaders agreed to a more than $2 trillion spending package is the latest stimulus program that investors feel could stoke inflation and help boost demand. COVID-19 cases have also been rising, but that hasn’t dented hopes for a global demand recovery. Prices also jumped ahead of weekly inventory data tonight (API) and tomorrow (EIA). The recent tumble in the U.S. dollar to near 2020 lows is also beneficial for commodity prices.

·     Precious metals outperform as gold prices rose $26.50 or 1.5% to settle at $1,843.90 an ounce (still best levels since 2011) while silver futures extend gains, rising to its best level in 6-years, adding $1.37 or 6.8% to settle at $21.55 an ounce (best since March 2014). Stifel said high inflation and broad weakness in the U.S. economy likely will to drive real rates further into negative territory, as they boosted gold and silver tgts. Note gold closing record of $1,891.90 was in August 2011.

Currencies & Treasuries

·     U.S. dollar remains weak vs. nearly all rival currencies; the euro touches fresh 52-week highs vs. the dollar (which stood at 1.1495), rising as high as 1.154 following the EU stimulus relief deal, while the dollar remains pressured vs. other currencies as the Fed remains accommodative on rates, expected to remain near lows for an extended period of time to help ensure economic growth. Treasury prices have remained stable the last few weeks, with the 10-year stuck in the 0.6%-0.7% trading level with no discernable move in either direction as markets remain complacent amid of improving economic data, rising coronavirus cases, and gov’t stimulus.

Sector News Breakdown

Consumer

·     Retailers; sector rebounded with department stores higher (M, KSS, JWN); TPR announces that CEO Jide Zeitlin has resigned from the company and board for personal reasons while issues a Q4 update; HIBB shares jumped after preannounces 70%+ F2Q same-store sales growth, 1H comp store sales are expected to increase approximately and digital comp sales are forecasted to increase approximately 200% in Q2; UAA was reiterated sell and $5 tgt at BTIG saying it appears to be making deep, across-the-board cuts to its business, cuts that our industry contacts suggest are now starting to hit bone; GES rises after CEO bought 100K shares at $10.17 according to filing

·     Consumer Staples; in beverage space, Dow component KO reported Q2 EPS beat of 42c (est. 40c) while unit case volume fell -16% vs. +3% YoY and organic revenue fell -26% vs. +6% YoY while operating margin decreased to 27.7% from 29.9%, citing pressure on revenue and the negative impact of currency translation; in tobacco, PM reports a beat for 2Q on the top and bottom line (EPS $1.29 and revs $6.65B) while guides FY adj EPS $4.92-5.07 vs. est. $4.92, says not facing significant business continuity issues with key suppliers; NDLS says ordering and pickup options have sales approaching pre-Covid levels; says Q2 digital sales are up 138% vs. Q1

·     Housing & Building Products; Homebuilders DHI, PHM downgraded to neutral from positive at Susquehanna on valuation saying the bar is much higher for the industry now as shares are pricing in a strong V-shaped recovery, while order comps get a lot tougher from here; Building products JELD, OC and TREX downgraded to hold from buy at Benchmark; at BTIG, homebuilders MTH and TMHC upgraded to buy from neutral and LGIH to neutral from sell, while downgraded TOL to sell from neutral and raise tgt prices on DHI from $63 to $78, GRBK from $14 to $16 and LEN from $75 to $88 saying they are more positive on the homebuilder space

·     Casino & Leisure movers; SunTrust raised tgt on gaming names, BYD ($24 from $20) PENN ($40 from $22) MGM ($18 from $19) IGT ($11 from $8) – Q2 marks the first quarter reflecting COVID-19 shutdowns and re-openings

Energy

·     Energy stocks paced stock market gains as oil prices surge amid EU stimulus plan and signs that coronavirus cases in some of the “hot-spots” are slowing, easing global demand fears; gains were across the E&P, equipment, services and integrated names with CVX, XOM among the top gainers in the Dow and OXY, MRO, FANG, DVN among top gainers in the S&P 500

·     E&P sector; Piper upgraded shares of DVN, FANG and PE to Overweight saying 2Q should mark the trough for E&P operations, as benchmark pricing, differentials and production deferrals have already rebounded sharply from April/May levels. Importantly, E&Ps are broadly sticking to reduced activity and muted longer-term growth paths; HAL tgt raised by several analysts after better earnings results yesterday and was upgraded to buy at Bank America; TELL spiked after Reuters reports Petronet LNG, India’s top gas importer, renewed its initial deal to consider investing $2.5B in the Driftwood liquefied natural gas project in Louisiana.

·     Utilities & Solar; DTE downgraded to sector weight at KeyBanc and firm upgraded SRE to overweight saying for utilities, they expect 2Q20 to shape up as a noisy reporting season, given the complexity of the moving parts affecting sector performance due to COVID-19 shutdowns; ES downgraded to Underperform on valuation after recent outperformance at Credit Suisse; FE shares fell after House speaker Householder and others were arrested in Ohio on $60mm bribery charges related to HB6, the $1 billion-plus ratepayer bailout of two Ohio nuclear power plants owned by FirstEnergy Solutions (now Energy Harbor) that he helped push through last year

Financials

·     Bank movers; UBS beat expectations, strong performance in the second quarter of 2020, amid its investments bank division and wealth management division; ZION Q2 EPS of 34c missed by 4c and revs of $680M missed the $692M estimate nut net interest income (NII) of $563M was above views; SBNY posts higher net interest income in Q2, mainly due to growth in average interest-earning assets and reports record rise in quarterly deposits and loans; SNV Q2 provision for credit losses rises to $141.7M due to economic stress due to the COVID-19 crisis compares with consensus of $152.1M, $158.7M in Q1 2020 and $12.12M in 2Q 2019, while NIM weak at 3.13% vs. 3.37% in 1Q20, 3.69% in 2Q19; FHB will replace EBS in the S&P SmallCap 600 Index, as EBS is moving up to the MidCap 400; CMA and TBK shares jumped on better earnings results

Healthcare

·     Pharma movers; ACAD tgt cut by several analysts as the combined MDD pivotal Phase 3 CLARITY-2 US and CLARITY-3 EU trials missed the primary endpoint of HAMD-17 at 5 weeks – ACAD now will no longer pursue adjunctive treatment of MDD with pimavanserin; ABBV said Rinvoq (Upadacitinib) (15 mg and 30 mg, once daily) monotherapy met both primary and all secondary endpoints in Measure Up 2, the second Phase 3 study in individuals with moderate to severe atopic dermatitis; MBRX said second round of independent in vitro lab testing has confirmed antiviral activity of its lead drug candidate, WP1122, against the new coronavirus; NVS shares slipped as reported Q2 miss and trimmed its year sales outlook)

·     Biotech movers; GILD said it will invest $300 million to acquire a 49.9% stake Tizona Therapeutics Inc., along with an exclusive option to buy the rest of the privately held cancer immunotherapies company for up to $1.25 billion; AIMT said the Europe ARTEMIS trial, the third of three Phase 3 trials within the Palforzia development program met all primary, secondary and safety endpoints; LXRX said all four Phase 3 sotagliflozin studies – SOTA-MONO, SOTA-SU, SOTA-GLIM and SOTA-INS – met primary objectives of lowering A1C in patients with type 2 diabetes

·     Medical equipment and devices; NUVA said it sees Q2 revenue $202M-$205M which is down -30% YoY but came in well above ests $151.58M saying reflects the impact of the widespread shutdown in elective surgical procedures in April, with surgical volumes increasing in May and even further in June; UBS raised tgts on several medical equipment names (TMO to $450, CTLT to $97) saying TMO and DHR are best ideas exposed to testing, along with small cap FLDM; BMRA shares fell late day as filed to sell stock

·     Healthcare services and providers; OMI shares spike as raises year view to $1.00-$1.20 from 50c-60c prior (est. 50c) saying it expects foreign currency will have a minimal impact on adjusted net income per share for the full year; AMN upgraded to buy at SunTrust with $62 tgt on (1) improving weekly travel nurse orders per private companies and our RN job posting data; (2) growing crisis orders for rapid response nurses in hotspots; WST upgraded from Neutral to Buy on strong growth prospects from COVID at Bank America

Industrials & Materials

·     Industrial & Machinery; LII downgraded to neutral from buy at Seaport Global as stock price is up 45% from our upgraded on April 3, 2020 (follows better earnings yesterday); ROK upgraded to buy at Citigroup saying July survey of 200 decision makers on how COVID-19 is impacting factory automation spend suggests that despite some near-term adoption headwinds, secular growth in automation appears to be "gathering steam" and automation spending could grow by double digits over the next 12 months; PCAR cut its capital expenditure forecast for the full year to $525M-$575M from prior $625M-$675M after Q2 sales beat $3.06B vs. est. $2.89B)

·     Metals & Materials; CCK reported year EPS guidance that topped views (helps other can makers BLL early); precious metal miners powering higher (NEM, AEM, GOLD, HL, RLGD) as silver prices touched best levels since 2016 and gold at 9-year highs – closing in on record highs. This morning, Stifel said high inflation and broad weakness in the U.S. economy likely will to drive real rates further into negative territory, as they boosted gold and silver tgts; steel stocks benefit early after STLD reported Q2 results above consensus and as U.S. Steel (X) raises steel sheet prices by at least $40 a ton

·     Aerospace & Defense; LMT posted a Q2 EPS beat of $5.79 vs. est. $5.72 as sales of $16.2B topped the est. $15.2B as qtr-end backlog $150.3B (guides FY20 EPS $23.75-24.05 vs est $24.17, sees FY20 net sales $63.5-65B vs est $63.45B); BA shares paced the Dow gains but slipped briefly midday after an FAA official said its 737 max ungrounding is not likely before October given remaining tasks/won’t speculate when 737 max work to be completed

Technology, Media & Telecom

·     Internet; EBAY sells classified ads unit in $9.2B cash and stock deal to Norway’s Adevinta (ADEVF), making the latter the largest online classifieds company globally; in semiconductors; SYNA announced its second acquisition in the last month, acquiring DisplayLink, an enterprise docking supplier, for ~$305M in cash saying the transaction is expected to be immediately accretive to non-GAAP GMs and EPS (upgraded to positive from neutral and raise tgt to $100 at Susquehanna on news); big week coming up with INTC, SWKS earnings; SNAP earnings tonight

·     Hardware & Component news; IBM reported Q2 beat and said software trends improved in June but did not provide full year guidance and said recovery could take longer/collectively, YOY bookings were down 20%, while Q-Q RHT’s growth decelerated; CDNS delivered a beat and raise for Q2 despite ongoing disruption due to COVID-19, while noting it was continuing to see customer demand, underpinned by strong design activity in verticals such as 5G, AI, Hyperscale and Auto; HEAR active after positive data points as LOGI reported a strong June Q with strength across the business, with Gaming sales up 35% and improved guidance; TEL was upgraded to buy at Jefferies as believe the auto recovery and inflecting industrial indicators suggest more auto and industrial exposed connector cos could close the performance gap to peers.

·     Optical sector; Needham positive on space, upgrading two names with AAOI raised to buy from hold as believe the company has several secular drivers on the horizon across Data Center, CATV and Telecom positioning AAOI to return to topline growth and profitability; CIEN also upgraded to buy at Needham with $65 tgt based on expectation of positive news flow around Ciena’s 800G product particularly at Verizon where we see deployments starting in CY2H20. Current guidance for 2HCY20 of just 2%-3% looks highly conservative