Closing Recap

Wednesday, March 04, 2020

Equity Market Recap

·     U.S. stocks were back in rally mode on Wednesday, rising to their best levels of the day in the final hour as the Dow Jones Industrial Average rose over 1,100 points to the 27,000 level, the S&P topped the 3,100 level (up 4% moving back above its 200-day MA earlier of 3,050) and the tech heavy Nasdaq Composite surging over 3% (touching the 9,000 level late) as investors put money back to work in beaten up stock markets. Gains were paced by a healthy rebound in healthcare related stocks (UNH, ANTM, CI) after results from Super Tuesday Democratic elections pointed to a win for Joe Biden, beating out Bernie Sanders who is seen as disruptive to the healthcare industry (Sanders not seen as positive for the market overall – so Biden leading also helping broader stocks). At the same time, Treasury prices were little changed as the ten-year yield inched back above the 1% level but still as historically low levels as the coronavirus impact on the economy remains a concern. Stocks failed to rally Tuesday after the Fed’s 50-bps cut wasn’t followed by other Group of Seven nations with rate cuts or fiscal stimulus in the face of the virus’s growing threat to the global economy – but it was “risk-on” today for markets. The sectors that are directly impacted from reduced travel, and leisure such as cruise lines, airlines, restaurants, hotels and movie theatres have been hit the most thus far.

·     Former Vice President Joe Biden picked up wins across the South and dealt a blow to Senator Elizabeth Warren after winning her home state of Mass. while Senator Bernie Sanders picked up California, the state with the most delegates. Overall, Biden scored a commanding nine-state victory in the Super Tuesday Democratic primary winning Alabama, Arkansas, Massachusetts, Minnesota, North Carolina, Oklahoma, Tennessee, Texas, and Virginia while Senator Bernie Sanders (I-VT) wins California, Colorado, Utah, and Vermont on Super Tuesday

·     In coronavirus news: as of last night, the coronavirus that was first detected in December in Wuhan, a city in China’s Hubei Province has since sickened 92,817 people and caused at least 3,159 deaths and troubled markets. Ongoing outbreaks of COVID-19 continue to worsen in Iran, which has 2,336 cases and 77 deaths; Italy, which has 2,502 cases and 79 deaths (updated to 3,089 cases this afternoon and said country to close schools until March 15^th); and South Korea, which has 5,186 cases and 28 deaths according to latest figures late yesterday. The World Bank pledged $12 billion to support poor countries’ epidemic control efforts.

Economic Data

·     Private payroll firm ADP said that U.S. firms added 183K jobs in February, topping the est. 170K while January was revised by -82K to 209K from 291K as reported last month.

·     Markit US Services PMI Feb-Final 49.4, in-line with est. and prior flash reading and Markit Composite PMI reported at 49.6 (same as flash reading as well)

·     ISM non-manufacturing data (services) reported at 57.3, topping the 54.8 estimate and up from 55.8 in the prior month; New orders rose to 63.1 vs 56.2 in prior month (best index since June 2018), while employment rose to 55.6 vs 53.1 prior; prices paid fell to 50.8 vs 55.5 MoM

Commodities

·     Oil prices couldn’t hold onto earlier gains as WTI crude slipped -40c or 0.8% to settle at $46.78 per barrel (off highs of $48.41), reversing course ahead of tomorrow’s OPEC official two-day meeting where the market wants a 1 million barrel a day cut to help prices due to slumping demand on the coronavirus impact, which Saudi Arabia have suggested doing, but Russia at this point is not agreeing to. Gold prices edged lower by $1.40 to settle at $1,643 an ounce in quiet trade just a day after surging over 3% for its biggest one day jump since June of last year; the dollar rebounded after its recent weekly slide and stocks rebounded, partially dulling the appeal of precious metals.

Currencies & Treasuries

·     After a day of extreme volatility for Treasury prices on Tuesday that saw more than 20 bps declines for 2’s, 10’s and 30’s, prices ended the day little changed, but still at very depressed yields as the 10-year holds bounces above 1.03% late day (off lows 0.92%). Despite a surge in U.S. stocks, investors continued to pour money into bonds as fears of the coronavirus impact on the economy remains a threat, and with the Fed cutting rates by 50 bps yesterday, it also pushes out the prospect of rate hikes by the Fed anytime soon. The U.S. dollar meanwhile posted a modest rebound after the dollar index fell more than 250 bps from 3-year highs last week.

Sector News Breakdown

Consumer

·     Retailers; JWN shares slumped after Q4 earnings missed ests ($1.23 vs. est. $1.47) and forecasts FY adj EPS $3.25-3.50 below est. $3.49 on net sales +1.5-2.5%, prompting a downgrade at Barclay’s to underweight citing a rising shift to online shopping; ROST shares slip on weaker Q1 guidance as sees Q1 EPS $1.16-1.21 below est. $1.24 after a Q4 EPS and comp sales beat; URBN another weak component in retail as Q4 EPS of 50c missed by 13c on weaker gross margins (28.5% vs. 33% YoY and estimate 30.4%); In firearm monthly data (AOBC, RGR, SPWH), NICS background checks rose to 2,802,467 in Feb ’20 from 2,702,702 in January and up from 2,053,886 YoY; toy retailer MAT upgraded at KeyBanc to overweight, more confident in the LT trajectory of the business, underpinned by a transition back onto offense as the turnaround matures; in discount stores, DLTR mixed Q4 as EPS beat/sales miss with lower Q1 guidance but year outlook was above estimates; ANF a bright spot after Q4 top/bottom line beat

·     Consumer Staples; CPB rises on improved 2020 EPS outlook after reports organic net sales growth of 1% in Q2, driven by gains in Snacks boosted its adjusted EPS: $2.55 to $2.60 from previous guidance of $2.50 to $2.55 and guides FY net sales: $9.975B-$10.1B; BF cut its underlying net sales forecast for the full year as now sees sales +3%, down from prior view of up 5%-7% and lowers year EPS $1.75 to $1.80, saw $1.75 to $1.85 (after Q4 sales miss); beverage stocks KO and PEP both outperformed

·     Restaurants; CMG was upgraded to overweight and tgt raised to $1,000 at Wells Fargo saying Chipotlane stores, which will account for over 50% of new stores in 2020, are set to accelerate the company’s move back toward all-time high store-level sales, margins and returns; SBUX estimates cut by 6% at Oppenheimer amid impact from virus but said it would take advantage of stock’s 12% pullback as expect any near-term earnings reset to be tolerable and temporary

·     Housing & Building Products; HD was upgraded to buy at Nomura/Instinet with $251 tgt as the recent market volatility, along with movements in rates, makes for a more rewarding entry point and firm sees several fundamental factors moving in the right direction for Home Depot; BLD and IBP upgraded to buy at SunTrust as virus fears have pushed Treasuries to all-time lows and should enhance the homebuilding cycle; TOL was added to best ideas list at Wedbush after pullback in shares; positive news for homebuilders as MBA mortgage applications index rose 15.1% in week ended Feb. 28 after rising 1.5% in prior week while refi’s increased 26% to highest level since May 2013, after falling 0.8% in prior week as mortgage rates tumbled)

Energy

·     Energy stocks reversed earlier gains, falling ahead of this week’s OPEC meeting in Vienna where hopes are high for Saudi Arabia, other OPEC members to be in talks with Russia to join in cutting crude production by ~1 million barrels per day to offset a hit to prices from coronavirus outbreak. Though note that Russia has opposed the plan according to reports today; MLP stocks fall as the Alerian MLP index drops to 172 level (off lows of 162 on 2/28 – and its lowest levels since 2008)

·     In stock news, oil service names remain weak following drop in oil and analysts cautious (HAL, SLB downgraded at UBS yesterday); CVE was downgraded to neutral from overweight at JPMorgan and lowered estimates and price targets for North American integrated oils coverage group to reflect a reduction in strip pricing in 2020-22E since our last update in January

·      Utilities & Solar; JKS shares erased earlier gains after being mentioned negative in a short-seller report from Bonitas Research that alleges the company "exists for the sole purpose of developing PRC assets with JKS’ cash that were disposed to Chairman Li at a significant discount to market." Utility stocks gained as Treasury yields and rate environment remain low, increasing demand for more defensive and dividend paying sectors

Financials

·     Bank movers; with Treasury yields holding at all-time record lows (10-year below 1% and the 30-year below 1.6%) the lending margins for banks has disappeared, which has pushed many names to 52-week lows (ZION, CFG, CMA, MTB among them); MS was upgraded to buy from neutral at Citigroup saying they believe the recent 15% pullback in the bank stocks is warranted given our view that the business models for many banks are likely to be impaired from prolonged low rates…but MS is down a similar amount to other regionals, yet believe the impact to longer term returns is slightly less than 100bp vs 200bp or more at other banks; also at Citigroup, RJF was downgraded to sell and LPLA to neutral after a rapid rates reset that has compressed earnings power and revitalized existential risks for the firms, due to expectations for far lower-for-longer interest rates; says retail brokers dealers aren’t built for deflationary dynamics

·     Consumer finance and lending; in mortgage finance, AGNC was upgraded to outperform at Wedbush as expects a tailwind from the Federal Reserve’s rate cut; WEX said it now expects first quarter 2020 revenue to be approximately 2%-3% lower than the previous revenue guidance given on February 13, 2020

Healthcare

·     Pharma movers; managed care names surging (UNH, CI, CNC, HUM, CVS, ANTM) following the Super Tuesday Democratic election results as Biden’s victory over Sanders seen as big win for industry (Sanders has pledge to provide universal healthcare for all Americans which could potentially lead to an extensive overhaul to the existing health insurance system); Takeda said overnight it is working on a coronavirus drug, joining GILD and ABBV as the latest drugmaker to work on developing a coronavirus vaccine; ZGNX 8.52M share secondary priced at $23.50 per share; in cannabis sector, CRON upgraded to buy at MKM Partners, taking advantage of broad market concerns and weakness related to 10K filing uncertainty

·     Biotech movers; VIR and ALNY to expand collaboration for the development and commercialization of RNAi therapeutics to treat coronavirus/companies to develop up to six novel RNAi to treat infectious diseases/new program expands the companies’ 2017 licensing agreement for development of chronic hepatitis B virus (HBV) infection treatment; INO rises as Stifel said the company’s development of a MERS-targeting vaccine, a COVID-19-related virus, provides leverageable experience for its COVID-19 drug candidate; EOLS shares fell after Seoul-based Medy-Tox Inc. and partner AGN said ITC staff submitted an opinion backing Medy-Tox regarding the use of a botulinum toxin over rival Evolus and partner

·     Healthcare services and providers; OMI shares decline after Q4 revs miss ($2.19B vs. est. $2.48B) and guides FY20 EPS 50c-60c below est. 76c; HIIQ reported 4Qresults, which were essentially in line with its pre-release in mid-January while 2020 guidance was below consensus; EHTH 1.8M share secondary priced at $115

Industrials & Materials

·     Industrial & Machinery; heavy duty trucks active (CMI, PCAR, NAV) after ACT estimates February Class 8 orders were 14,100 units which was below the Wells Fargo 17,500 midpoint of channel check based 16,000-19,000 estimate range/also NAV posted a wider than expected Q4 EPS loss on better revs and its board said it is also carefully reviewing an unsolicited proposal from its alliance partner TRATON regarding a potential transaction to acquire the company; GE said it sees a hit of up to $300mm to first-quarter operating profit from the Coronavirus; the impact is incorporated in its full-year 2020 outlook, but isn’t taken into account beyond the first quarter

·     Waste services; UBS upgraded shares of ECOL, RSG and WM to buy from neutral as see the Municipal Solid Waste (MSW) space as attractive to ride out the near-term market volatility/says WCN is their top idea and expect FCF/sh growth of 13.7% 2020-24 driven by balance sheet funded M&A with opportunity to participate in WM/ADSW merger disposals a potential catalyst

·     Transports; SAIA released QTD LTL operating data that implies a steeper than expected deceleration in LTL tonnage trends (in February LTL tonnage per workday was +0.4% yoy while January trends were +7.7% yoy, averaging below Deutsche Bank 1Q20 estimate of +5.0%); airlines were once again laggards in transports on virus impact fears to revenue (AAL, UAL); UBER shares jumped after its comments on profitability at Morgan Stanley conference; LYFT shares up after positive comments by JPM calling shares extremely compelling given pullback on virus fears; UAL said today it would reduce flights, freeze hiring on coronavirus. trim international flying by 20% for April and overall cut U.S. flying by 10% for April

·     Metals & Materials; Bank America with a few company upgraded in metals space as AA upgraded to neutral from underperform with $15 tgt in aluminum, PAAS upgraded to neutral from underperform with $25 tgt in silver miners and EGO upgraded to buy from neutral

Technology, Media & Telecom

·     Semiconductors; Philly semi index (SOX) rises near 4% topping the 1,770 level (its 100-day MA resistance higher at 1,780) as markets acknowledge the growing list of semi companies cutting guidance due to corona impact; AMBA shares rise as reported in-line F4 results and provided F1Q21 revenue guidance above estimates driven by strong demand in Home Security Cameras while continues to see solid traction with its CV SoCs and expects CV revenue will contribute ~10% of total FY21 revenue; SWKS the latest chip maker to cut forecast on coronavirus impact as lowers rev outlook to $760M-$770M from $800M-$820M view prior (follows other recent warnings from AAPL, MCHP, QRVO, NXPI, PLXS); LRCX held its Analyst Day saying while near-term markets continue to be volatile with macro and logistics challenges and demand disruptions, long-term LRCX sees 2023 WFE capex reaching ~$60B-$70B, up from ~$55B for 2020

·     Software movers; ZEN had its Q1 revenue forecast cut at JMP Securities by $2.5M to $238M and EPS by a cent to $0.08 citing ZEN’s cancellation of its user conference and management comments that the move will create some additional expenses in 2020; VEEV results came in better than expected with billings, revenue, and margins all above the Street expectations as billings were ~$26M above consensus ($528M vs. $502M), driven largely by strong bookings; OKTA was downgraded at Needham as see limited upside to the company’s shares near term; BNFT a top gainer on the day following well received earnings

·     Media & Telecom movers; AT&T (T) said it will retire $4B of its common stock beginning in Q2 through a new accelerated share repurchase agreement with Morgan Stanley/move follows a similar $4B transaction in which the company is retiring shares in the current quarter; CHTR offers senior unsecured notes due 2030; CDLX downgraded at Craig Hallum to hold and cut tgt to $70 from $100 after softer Q1 revenue guidance ($43.5M-$46.5M misses the $52.7M estimate)

·     Hardware & Component news; HPE shares declined after Q4 revenue missed estimates $6.95B vs. est. $7.21B and cut its FY free cash flow $1.6 billion to $1.8 billion, down from prior view $1.9 billion to $2.1 billion; ANET was upgraded to neutral at JPMorgan primarily on the combination of already lowered expectations for 2020, backdrop of improving cloud industry spend, and an earnings multiple at a significant discount to recent average multiple