Closing Recap

Tuesday, May 18, 2021

Equity Market Recap

·     Stocks end lower, erasing earlier gains as a decline in energy and industrial stocks weighed on major averages, while the tech heavy Nasdaq slipped mid-afternoon to turn negative (trying to avoid a 5^th straight week of declines). The S&P 500 slipped despite large cap retailers Walmart and Home Depot posting better-than-expected earnings (ahead of TGT and LOW tomorrow) alongside a sharp decline in telecom stocks (T, VZ, TMUS) and weak housing starts data. Crypto currencies found themselves in a further decline with Bitcoin hitting its lowest levels ($42K) since late February, alongside drops in Ethereum, Litecoin, Ripple and others. Wall Street remains volatile, with fears of an overheating economy raising concerns the Fed would need to rein in its monetary support following a spike in volatility last week after strong inflation readings. The U.S. dollar touched its lowest level since late February, while Treasury yields were little changed.

·     Sector movers; WMT rises on its beat-and-raise quarter, though CEO comments regarding pent-up shopping demand fails to lift other grocers/retailers; Macy’s falls despite raising guidance after its EPS misses; HD also reports a strong quarter, but the stock slips slightly lower, pulling LOW ahead of their earnings tomorrow morning; several Asian ADRs with earnings (SE, BIDU, NTES, IQ); EV stocks CHPT, BLNK, TSLA, FSR, RIDE outperformed ahead of Biden touting his plan to ramp up EV production at his tour of an $F plant; MGM bounces after JPM upgraded the stock following its pullback and momentum in Vegas and iCasino/sports, and LYV also finds itself among the S&P leaders as reopen names move higher; in software, SNOW jumps on its Rosenblatt upgrade and PANW rises on a Raymond James upgrade; defensive utilities and REITs were among the top performing sectors.

Economic Data:

·     April Housing Starts fell -9.5% to 1.569M, below estimate of 1.702M (and vs. March +19.8%) – likely pulled down by soaring prices for lumber and other materials; Single-family starts -13.4% to 1.087M unit rate and multifamily +0.8% to 482,000-unit rate; April housing permits rose +0.3% to 1.76M vs. est. 1.77M vs. March +1.7%

Commodities

·     Oil prices finish lower as WTI crude slips -$0.78 or 1.18% to settle at $65.49 per barrel, erasing earlier gains. Oil stocks were initially higher, touching best level of the year before reversing lower following a BBC news report that progress was made in the U.S.-Iran nuclear talks, with an announcement on a deal expected tomorrow. The Russian envoy in Vienna says significant progress has been made in efforts toward an agreement to revive the 2015 nuclear deal, according to the report. Brent oil rose to hit $70 a barrel for the first time since March, as expectations of demand recovery following reopenings of the European and U.S. economies offset concern over spreading coronavirus cases in Asia. Gold prices eked out a small 40c gain to settle at $1,868 an ounce, settling at 4-month highs, getting a boost behind a weaker U.S. dollar.

Currencies & Treasuries

·     The U.S. dollar tumbled again, with the dollar index (DXY) hitting lows of 89.68 before paring losses as the buck fell to one-week lows against the Japanese yen of 108.83 after the weak U.S. housing starts data, down from 109.07 ahead of the open. The Canadian dollar moves to 6-year highs vs. the U.S. dollar, before paring gains as oil prices reversed lower.

·     U.S. Treasury yields trade in a narrow range again (10-yr low 1.63% to highs 1.655%), slipping initially on weaker housing starts data, but getting a boost on strong consumer demand as seen in Walmart and Home Depot earnings results. Market participants await the release on Wednesday of the minutes from the Federal Open Market Committee’s meeting in April.

Sector News Breakdown

Consumer

·     Retailers; Dow component WMT tops views as Q1 adj EPS $1.69 beats est. $1.21 on better revs and raises Q2 and year outlook (sees 2022 earnings to increase in high single digits, versus its prior forecast of a slight decline) – Q1 comp sales ex-gas +6.2% vs. est. 2.03%; and Walmart-only U.S. stores comp sales ex-gas +6% vs. est. about 2%; Macy’s (M) Q1 adj EPS 39c missed but raises full-year EPS and sales guidance, as qtrly comparable sales were up 62.5% on an owned basis and up 63.9% on an owned plus licensed basis versus 2020; GPS upgraded to Neutral from Underperform at Credit Suisse citing lack of near-term negative catalysts; Piper reit OW and $140 tgt on OSTK as believe the company could see upside near-term from a significant ramp in crypto trading, and upside medium/long-term should non-fungible tokens get labeled as securities by the SEC; COST tgt raised to $425 from $400 ahead of earnings at Oppenheimer though believe bottom-line Street figures could prove aggressive nearer term

·     Auto sector; electric vehicles (NKLA, NIO, XPEV, LI) got a boost (yesterday as well) as President Joe Biden will make the case for his $174 billion electric vehicle plan today, calling for government grants for new battery production facilities during a visit to a Ford Motor (F) electric vehicle plant in Michigan; FSR posted a mixed quarter and sounded confident that its Ocean SUV launch is on track for Q4 of 2022 while signs an agreement with UK-based Onto, an electric car subscription service, for delivery of up to 700 vehicles in 2023; The family office run by "Big Short" investor Michael Burry disclosed a short position against TSLA worth more than $500MM

·     Housing & Building Products; HD with quarterly beat as Q1 EPS $3.86 vs. est. $3.08; Q1 revs $37.5B vs. est. $34.96B; Q1 comp store sales rose 31% vs. est. 21.1% and comp sales in the U.S. increased 29.9% vs. est. 23.5%, 1q average ticket up 10.3%, 1q customer transactions rose 19.3%; paint companies (SHW, PPG) positive mention at Citigroup saying their survey trends bode well for SHW, the sole supplier of paints at Lowe’s and to a lesser extent for PPG through HD

·     Consumer Staples & Restaurants: PFGC to acquire CORE in a cash-and-stock deal valued at $2.5 billion where CORE holder will receive $23.875 per share in cash and 0.44 PFGC shares for each Core-Mark share owned. https://on.mktw.net/3wg55Ys ; SMPL downgrade from Overweight to Equal weight with $33 tgt at Morgan Stanley following solid outperformance in the past 6 months; PLAY active after Truist said competitive analysis confirms view that competitive intrusion continues pose risk to PLAY’s comp sales long-term as pre-COVID, PLAY comps were negative in 9 of 10 quarters, due primarily, in our view, to competitor store openings

·     Casinos, Gaming, Lodging & Leisure sector; MGM was upgraded Overweight at JPMorgan saying the 11% pullback in the past month provides an opportunity to buy, as momentum in domestic casinos, particularly Las Vegas, continues to build every week; SWIM Multiple initiations with OP/Buys from Baird, Barclays ($37 tgt), KeyBanc ($38), Truist ($37), GS at Neutral ($26), MS at Equal-Weight ($33); POOL was initiated with Buy and $535 tgt at Goldman Sachs in pool industry; LRN edged higher after a report that PSO is said to be preparing a bid for the online education company, citing Street Insider https://bit.ly/3osCkVP

Energy

·     Energy stock movers; CHK files $1.5B mixed securities shelf; CRK files $1B mixed securities shelf; DQ Q1 revs $256.1M vs. est. $297.97M, polysilicon production volume was 20,185 mt vs. 21,008 mt in 4Q20 and polysilicon sales volume was 21,471 mt vs 23,186 mt in 4Q20; Credit Suisse reinstated coverage on MPC at Outperform with a $74 price target after the company closed its Speedway sale to 7-Eleven last week and announced it will use the proceeds to buyback stock and lower its long-term debt, in addition to the stock providing insulation against RIN price escalation and a way to play the California reopen trade; Barclays raised their target on LNG to $104 and still sees favorable risk/reward despite its +40% YTD

·     Utilities & Solar; RBC maintained their Outperform ratings and $31 target on AES after meeting with mgmt and because they believe the company’s corporate partnerships to provide around-the-clock clean energy will drive backlog and attract a new demand flow, and they also said they are skeptical about Elliott’s proposal to separate DUK into three separate companies as they say the separation would increase the risk profile and overhead costs without a guarantee of increased operational efficiencies; Piper said that the return profile on PLUG is now more balanced after facing pressure over the past few months, though they remain Neutral as they wait to see more tangible progress on green hydrogen plants with margin stabilization and improvement; Mizuho upgraded LNT to Buy and upped their target to $61 after increasing their EPS growth rate estimate due to the company’s planned solar generation investments and cost savings opportunity from coal plant closures

Financials

·     Bank movers; weaker Treasury yields weigh on banks early, but group has had a tremendous run as the BKX up 37% YTD versus 11% for the S&P and 3% for the QQQs – Oppenheimer favorite stocks remain C, GS and JEF while saying loan volumes have stabilized, but have yet to start growing, and credit quality remains outstanding; market sensitive asset managers, insurance and fintech struggled of late; for non-Life Insurance Wells Fargo said continue to be most bullish on commercial lines and top ideas CB, ACGL, WRB and HIG in that order

·     Consumer Finance; ADS said it expects return on equity in mid-to-high 20s, according to its Investor Day presentation in an SEC filing- ADS’s card services unit’s ROE was 27% in Q1 2021, up from 16% in Q4 2020; monthly credit card NCO’s and delinquency data came in better yesterday for major players as COF net charge offs dropped to 2.4% from 2.41% prior month, JPM to 1.97% from 2.03%, AXP to 1% from 1.1%, SYF to 3.7% from 3.8%and DFS to 3.4% from 3.8% – each also showed improving delinquency levels as COF to 1.92% from 2.24% prior, AXP to 0.8% from 0.9%, JPM to 0.78% from 0.89%, SYF to 2.4% from 2.8% and DFS to 1.69% from 1.85%

·     REITs; coming into today’s trading, the S&P Real Estate was up roughly 15% YTD – with IRM up over 47%, SPG +43%, KIM +40%, REG +39% and CBRE +38% YTD – while worst names flat to up slightly in index (ARE -2%, EQIX flat and SBAC +25) – as sector remains a bright spot; mall stocks in general got a further boost on the reopen trade and better outlook from Macy’s today

Healthcare

·     Pharma movers; AGEN rises after BMY entered into a definitive agreement for the global exclusive license to Agenus’ proprietary bispecific antibody program, AGEN1777, that blocks TIGIT and a second undisclosed target (AGEN to get $200M upfront payment and up to $1.36B in development, regulatory and commercial milestones in addition to tiered double-digit royalties on net product sales); PRGO announces agreement to sell its Mexico and Brazil-based over-the-counter businesses to Advent International; for ABBV, three chairs of U.S. House of Reps committees are calling for FTC inquiry into AbbVie Inc.’s actions with its drug Humira, saying that a multi-year congressional investigation has raised questions about its pricing

·     Biotech movers; BNTX said it has named Jens Holstein as chief financial officer, replacing Dr. Poetting, who will focus on his role as chief operating officer; NKTR announces its first publication of preclinical data highlighting anti-tumor properties of il-15 agonist, NKTR-255; SRPT jumped as announced positive data from its SRP-9001 DMD study; Goldman initiates seven biotech names with buys on ARNA, RVMD as sees attractive entry points and is well above consensus projections and sell ratings on EXEL (neutral on NBIX, NKTR, MCRB)

·     Healthcare Services; CVS named former Aetna Chief Financial Officer Shawn Guertin as its new finance chief, in the latest hiring of a former executive from the health insurer since Karen Lynch was named chief executive; MAX upgraded to Buy from Neutral with $45 tgt at Citigroup as think the ~46% sell-off since mid-March is overdone, compounded by (1) confusion around revenue recognition, (2) limited liquidity and (3) lack of investor attention

Industrials & Materials

·     Industrials & Transports; industrials among top drags in major averages today with DOW, CAT, HON the top decliners in the Dow; in transports, UBER, LYFT active after Bloomberg reported new legislation creating collective bargaining rights for gig-economy workers is poised to be introduced in New York State in the coming weeks, according to the president of the Transport Workers Union; Dow transports overall quiet after an amazing record run, having its 14-week win streak for Dow Transports snapped last week, but index remains just 400 points of record higher (16,170), led by gains in airlines (AAL, JBLU, UAL), rails (UNP, CSX, NSC), package delivery (UPS, FDX) as bets on U.S. economic recovery continues to push the industry.

Technology, Media & Telecom

·     Internet; BIDU posted a Q1 earnings/rev beat driven by non-marketing sales growth, as revs rose 25% on the year to RMB28.14 billion on adj EPS RMB12.38 topping views; IQ reported 1Q results well ahead of expectations driven by a subs increase and stronger ARPU (membership services revs of RMB 4.3bn vs. est. RMB 4.18bn as memberships increased for the first time in 3 quarters); NTES 1Q results largely in-line with expectations with slight weakness in mobile gaming but strength in Cloud Music; DAO with mixed quarter in 1Q as they beat on Revs but missed on enrollments and OpEx; GOOGL said it is introducing new, simplified process that helps SHOP’s merchants make their products discoverable across Google in few clicks

·     Semiconductors; more positive analyst comments on HDD stocks as WDC tgt raised to $90 and STX to $88 at Mizuho (follows + comments from Morgan Stanley last week) citing the new Chia cryptocurrency driving HDD prices higher and stronger retail demand expected in June; Barclay’s reinstated ratings on Optical with best days of 3D sensing behind as have OW on LITE ($85 tgt) and COHR (EW, $250) and downgrade IIVI to EW from OW as believe the group will struggle to work as a whole until Telco tenders this summer

·     Software movers; TWLO agreed to acquire Business SMS Platform Zipwhip for ~$850M in an equal mix of cash and stock as co sees deal adding modestly to gross margin and revs; PANW upgraded to Outperform with $400 tgt at Raymond James noting it has underperformed significantly YTD (PANW -5%), as previously noted concern that next gen ARR guidance did not appear conservative; SE falls as Q1 revs topped estimates with 147% YoY growth to $1.8B but fell short on adjusted EBITDA while the cost of revenue increased 120% to $1.1B largely driven by digital entertainment investments – Q1 adj EBITDA was $88.1M, below the $172.9M consensus; SNOW upgraded from Neutral to Buy with $285 tgt at Rosenblatt ahead of earnings as expect Snowflake to meet and possibly exceed our 93% y-o-y Product Revenue growth estimate

·     IT Components & Services; GDS is considers acquiring GLP’s data center business for up to $10B according to Bloomberg reports; ADTN downgrade from Buy to Neutral with $20 tgt at Goldman Sachs as believe the stock is now pricing in the growth opportunity from broadband access market momentum; DM Q1 revenue and adjusted EBITDA beat while mgmt reiterates 2021 revenue guidance, lowers EBITDA guidance

·     Media movers; ATUS downgraded to underperform from neutral at Bank America as believe other opportunities in our coverage universe are more attractive following its strongest year of broadband net adds; TME posts solid 1Q subscriber adds and triple digit advertising growth offset by higher R&D, lower ARPU and higher OpEx due to TMEA creating in line profit (online music subscription revenue grew nearly 40% y/y mainly driven by net adds of 4.9M in paying subscribers – total paid subs of 60.9M vs. the Street’s 60.7M); AMZN is weeks into negotiations on a deal to acquire MGM Studios for about $9B, according to reports https://bit.ly/33SbL36 ; AT shares fell after saying it will cut its dividend payout ratio to the low 40% range from around 60% in the previous quarter, because of its $43B deal media asset deal with DISCA