Closing Recap

Tuesday, November 17, 2020

Equity Market Recap

·     U.S. stocks continue to thrive, pushing to new record highs for some averages despite weakness in the early going on some mild profit taking (though markets pulled back in the final hour of trading). Economic growth bets surge, driving the ongoing rotation into cyclical stocks that have lagged in 2020, with a big day of gains for consumer discretionary/retail names, while energy, industrials and financials push higher, leading the Smallcap Russell 2000 to a fresh record. Stocks got a bump midday after reports that House speaker Pelosi spoke to McConnell on stimulus, while another positive vaccine headline helped as Reuters reported JNJ saying in an interview that data, including safety data, needed for a U.S. authorization of the company’s COVID-19 vaccine candidate is seen being available by the end of this year or early next year. Stocks were heavy overnight but once again investors took the opportunity to add to any market weakness (no matter how small) as expectations grow for the economic growth boom to accelerate with additional fiscal stimulus out of Washington expected at some point and the virus fears to subside (despite surging cases).

·     In stock news, TSLA rises after being announced it will join the S&P 500 index in the December 21st index rebalance, while pharmacies (CVS, WBA, RAD) and distributors (ABC, CAH, MCK) fall after AMZN launched Amazon Pharmacy as shoppers can pay using their health insurance. Prime members who don’t use their insurance are eligible for discounts on generic and brand-name drugs on Amazon’s site or at about 50,000 participating pharmacies. Economic data was plentiful on the day (see below), while Treasury yields dip, the dollar was steady along with gold and oil. Dow components WMT and HD both report better earnings (though stocks don’t react well) while TGT and LOW set to report tomorrow morning.

Economic Data

·     October Industrial Production rose +1.1% M/M to 103.2 vs. +1.0% consensus and -0.4% prior (revised) while Manufacturing Output +1.0% M/M vs. consensus of +0.9%; Capacity Utilization 72.8% vs. 72.2% consensus

·     October Retail Sales rose +0.3% M/M vs. +0.4% consensus and +1.6% prior (revised from 1.9%) while Retail Sales (ex: autos ) rise +0.2% M/M vs. +0.5% consensus and +1.2% prior (revised from +1.5%); Ex-gas and autos: +0.2% M/M vs. +0.6% expected and +1.2% prior (revised from +1.5%).

·     Import prices for October fell -0.1% M/M vs. +0.2% consensus and +0.2% prior (revised from +0.3%) driven by lower fuel prices, which more than offset higher nonfuel prices. U.S. import prices fell 1.0% for the year ended in October. Export prices +0.2% M/M vs. +0.3% consensus and +0.6% prior. U.S. export prices declined 1.6% for the year ended October

·     Business inventories rose 0.7% in September after gaining 0.3% in August and compared to estimate for an advance of 0.6% in September. Retail inventories surged 1.7% in September instead of 1.6% as estimated in an advance report published last month. That followed a 0.5% increase in August. Motor vehicle inventories accelerated 3.1%

·     Homebuilder confidence rises to a record in November as the NAHB Housing Market Index: 90 vs. 85 consensus and 85 prior and present single-family sales: 96 vs. 90 previous

Commodities

·     Oil prices end little changed, as WTI crude edged higher 9c to $41.43 per barrel as investors continue to cheer vaccine hopes and the optimism it will improve demand. Though the full impact of a vaccine on crude demand is still a way off, China’s oil processing rebounded in October to match a record, helping boost sentiment. Brent crude slips 7c to $43.75 per barrel while natural gas slips to near 5-week lows at $2.692 mln btu on milder weather forecasts. Gold prices fell for the first time in four session, slipping -$2.70 to settle at $1,885.10 an ounce, pulling back after failing to top the $1,900-an-ounce mark despite the dollar slipping.

Sector News Breakdown

Consumer

·     Retailers; WMT reported Q3 Adj EPS $1.34 on revs $134.7B, both topping estimates ($1.18, $131B), Comp Sales +6.4%, e-commerce +79% YoY (slowing from Q2 +97%), and membership income +10.4% on strong sign-up and renewal rates, but the company does not provide guidance; KSS posted a surprise quarterly profit as Q3 adj EPS 1c vs. est. loss (43c) on revs $3.97B vs. est. $3.87B, though Q3 comp sales fell (-13.3%) more than est. (-11.3%) decline as dept store traffic was impacted by the pandemic, and the company announced plans to reinstate dividend during 1H21; COST announced a $10/share one-time special dividend, payable December 11; GME investor Ryan Cohen pushes to conduct a strategic review of its business and reconsider its emphasis on physical store sales to invest in e-commerce and tech-driven digital experiences

·     Retail research; with a vaccine on the horizon and a forecast of a rotation into recovery names, Wells upgraded each of the following to OW: CPRI on a resurgence in luxury spending globally, VFC as a YTD laggard that has a strong track record and compelling portfolio of brands bolstered by the recent Supreme acquisition, UAA as a laggard in athletic apparel and after its first positive DTC comp in over 3 years in Q3, and BOOT as a stock who has been pressured and down YTD despite a resilient business that owns a strong market share that can grow as smaller competitors are impacted by the pandemic, but Wells downgraded URBN to Equal Weight as the stock price has already priced in a recovery after doubling off its 2020 lows and outperformed other retailers despite pre-Covid operational issues, giving better ways to play the recovery; Morgan Stanley initiated FTCH at OW with a $65 pt, REAL at EW with a $16 pt, and SFIX at UW with a $25 pt, preferring businesses with limited to no inventory risk, who operate in low price points or luxury, and in industries that are becoming more concentrated, overall liking marketplaces over retailers and luxury over mid-tier; Wedbush maintained their Outperform rating on FL and raised their price target to $44 from $37 ahead of Friday’s scheduled earnings report

·     Auto sector; TSLA will be added to the S&P 500 index effective prior to the open of trading December 21st to coincide with the December quarterly rebalance; in auto retail, Bank America downgraded ADNT and APTV to underperform from buy, cuts LEA to neutral from buy and cuts KAR to underperform from neutral – upgraded SAH to buy from underperform saying the speed of the automotive industry recovery over the past several months puts at risk ongoing sequential improvement into 2021, while sees it being too early to value stocks in the sector on 2022 ests; CRNC results for the quarter and forward guidance were well ahead of the Street on the top line as well as EBITDA (downgraded at RBC); KNDI says EVs eligible for $2,500 rebate in Texas

·     Housing & Building Products; HD reported a beat on the top and bottom line on better comp sales which rose 24.6% topping consensus of 14%, but shares pressured after saying it will spend about $1 billion more on employees’ compensation and as gross margins of 34.2% in Q3 came in 30 basis points below consensus according to one analyst; in homebuilders, JPMorgan upgraded KBH, downgraded LGIH and said its top large-cap picks remain PHM, NVR saying while they believe several factors have driven the group’s recent weakness, demand trends have remained fairly robust through October, while 3Q results were solid and mostly above our ests

·     Consumer Staples; MNST upgraded from sell to neutral and raise tgt to $85 from $62 at UBS on constructive outlook for the US market saying it will continue to benefit from curtailed spend on event/sponsorship-based marketing in the near to medium term; KDP announced that JAB majority-owned subsidiary Maple Holdings and MDLZ will sell an aggregate of 60M shares through a secondary offering at $28.45; in tobacco, Imperial Brands forecasts low to mid-single digit growth in organic adjusted operating profit for 2021 to match consensus expectations

·     Leisure and Gaming; GAN reported mixed Q3 results but continues to grow revenue at near triple digits (+86% y/y organically) as US online gambling trends continue to accelerate and GAN rapidly adds new customers; gaming sector initiated at Loop with DKNG buy and $100 tgt, VICI buy and $30 tgt, GLPI init buy and $50 tgt, PENN hold and $60 tgt, MGP hold and $31 tgt

Energy

·     Energy stock movers; sector takes a breather after a tremendous run with oil spiking on hopes an economic recovery amid improved vaccine news will help boost demand expectations; DVN was upgraded to Buy with a $14.50 pt from Neutral with a $11.75 pt at Goldman Sachs, and Morgan Stanley also upgraded the stock to OW from EW and raised the PT to $15 from $13 on valuation as the stock’s YTD performance is roughly in-line with peers despite executing a well-structured merger with WPX that boosts its peer-leading FCF profile while adding meaningful scale and asset diversification; Morgan Stanley downgraded CXO to EW from OW as COP’s announced acquisition of CXO included a 15% premium which captured most of the upside of the prior OW rating and their new $56 price target (lowered from $64) is the exchange ratio of 1.46 COP shares, though they expect the combined company to provide further upside (rate COP OW with a $48 PT, 26% upside; RBC upgraded BP and CVX to Sector Perform from Underperform to Sector Perform; TRP says it signed an agreement that allows Natural Law Energy to invest as much as $1B of equity in the Keystone XL pipeline project

Financials

·     Bank movers; banks have had a tremendous run over the last week or so given the bounce in rates and hopes for a rebound in the economic recovery given improved vaccine news – today was no different as banks recovered off earlier losses to end stronger; SCHW and RJF were both upgraded to buy at Citigroup saying while the Group has rallied moderately post COVID-19 vaccination news, they believe the Sector could be poised for meaningful break-out as investors "bring forward" normalized EPS

·     Consumer Finance; MOGO signed definitive agreement to acquire Carta Solutions Holding in an all-stock transaction through a plan of arrangement; 100% of Carta’s outstanding shares in exchange for the issuance of 10M shares equivalent to $24.2M; as the contactless transactions have jumped to nearly 80% across Europe, MA is extending the Google Pay service to cardholders across parts of Europe; TREE 2.96M share Spot Secondary priced at $295.00; PYPL partners with Even to improve the financial health of its workforce

Healthcare

·     Pharma movers; Warren Buffett’s Berkshire Hathaway adds onto its pharmaceutical holdings with fresh positions in ABBV of 21.2M shares, MRK 22.4M shares, BMY ~30M shares and PFE 3.71M shares, during Q3, according to Berkshire’s 13F filing; BMY said the FDA has informed the company that its review of the Biologics License Application (BLA) for lisocabtagene maraleucel (liso-cel) for the treatment of adults with relapsed or refractory large B-cell lymphoma after at least two prior therapies will not be completed by the Prescription Drug User Fee Act (PDUFA) action date of November 16, 2020; LXRX said two Phase 3 studies achieved their primary endpoints by showing statistically significant reductions in cardiovascular deaths, hospitalizations for heart failure and urgent heart failure visits in patients treated with sotagliflozin as compared with placebo; RDHL said the FDA signed off on its Phase 2/3 study evaluating RHB-107 (upamostat) in patients with symptomatic COVID-19 who do not require hospitalization.

·     Biotech movers; BCLI falls after saying data from late-stage study shows its treatment for amyotrophic lateral sclerosis (ALS) did not meet its main goal as was not statistical significance in primary efficacy endpoint; ALKS received a Complete Response Letter from the FDA regarding its New Drug Application for the treatment of adults with schizophrenia and adults with bipolar I disorder; INO downgrade from Neutral to Sell with $8 tgt at Roth Capital after PFE and MRNA’s COVID-19 vaccines looking strong at their first interim efficacy analyses and given INO’s almost 50% share price increase since our recent upgrade to Neutral, we are downgrading

·     Healthcare services and providers; sector smashed today on the AMZN pharmacy news, led by declines in CVS and WBA as well as distributors ABC, CAH, MCK as Amazon will allow customers in the U.S. to order prescription medications for home delivery, including free delivery for Amazon Prime members (cutting foot traffic to pharmacy retailers); GDRX was another name getting hurt this morning on AMZN push into pharmacy; SDC Q3 EPS loss (11c) on revs $168.5M vs. est. loss (14c) and $146.23M as Q3 unique aligner shipments of 93,301 and said average aligner gross sales price of $1,794 for Q3, compared to $1,788 YoY; TVTY raised to Overweight from Neutral at Cantor; ACHC upgraded to buy from neutral and raise tgt to $54 from $37 at UBS

·     MedTech and Equipment; BSX shares fall after initiates global recall of all unused inventory of its LOTUS Edge Aortic Valve System and discontinues the product due to complexities associated with the product delivery system – sees pre-tax charge of about $225M-$300M; CODX shares slide as Q3 earnings that missed analysts’ expectations as revenue of $21.8M missed the $32.8M estimate and also said both its Logix Smart ABC test and its Logix Smart SARS-CoV-2 multiplex test have obtained regulatory authorization to be sold as in-vitro diagnostics in markets that accept CE markings; XRAY downgraded at Barclay’s to Underweight as believe the stock is now a little bit ahead of itself in relation to pricing in near-term volume recovery; IRTC falls after being downgraded at Oppenheimer as the stock is near their tgt, currently trades at ~19x FY21E P/S, and simply can’t keep up on this rat race of crazy multiples

Industrials & Materials

·     Transports; another day another record high for the Dow transports, as the index rises further behind a rebound in airline stocks (AAL, DAL, UAL) and extended follow through strength in truckers and rails (UNP, CSX, NSC) as the economic recovery trade pushes stocks upward; FDX and UPS also pushed higher heading into the holiday season

·     Aerospace & Defense; BA little profit taking after surging the last few days, boosting the Dow Jones to record highs; TXT was upgraded from Neutral to Positive with $55 tgt at Susquehanna as see positive momentum occurring across all four of TXT’s businesses, with its largest segment, Textron Aviation, set for a notable return to profitability in 4Q; RTX missile system intercepts and destroys intercontinental ballistic missile (ICBM) target outside Earth’s atmosphere calling it an "unprecedented homeland defense test"; MAXR upgraded to buy from hold and increasing our price target to $36 at Canaccord as believe the recent pull-back due to delay risks around the Space Infrastructure segment create an opportunity to own a vertically integrated space company with strong positions in both commercial and gov’t markets at an attractive valuation

Technology, Media & Telecom

·     Internet; Chinese Internet names active after the WSJ reported Chinese companies with shares traded in America would be required to use auditors overseen by U.S. regulators or face being kicked off exchanges under a plan being drafted by regulators https://on.wsj.com/35BL4B5 ; BIDU reported a solid beat and raise and announced the acquisition of JOYY’s live streaming to diversify revenue stream; IQ reported a mixed quarter and weaker guide with membership for the Q weaker and in line ARPU; SPT downgrade to EW from OW at Morgan Stanley but up tgt to $51 saying the story has plenty of room to run with a $25B TAM

·     Software and Semiconductors; TSM fell after Samsung said it is investing $116B into next-gen 3nm chips to reach mass production by 2022 – TSMC also has a goal of ramping 3nm production two years from now; video game names active (ATVI, EA, TTWO) after NPD says total U.S. game industry spending continues to break records; PANW was upgraded to Buy at Bank America a day after better earnings and guidance along with several pt raises; MSFT said it developed a chip-to-cloud security technology to boost the security advancements of future Windows PCs.