Closing Recap

Monday, October 19, 2020

Equity Market Recap

·     Stocks and Treasuries declined sharply on Monday as hopes that a stimulus deal could materialize after weeks of failure once again failed to live up to the hype despite much talk about it this weekend from both sides out of Washington. The Nasdaq Composite fell for the 5^th straight day, its longest losing streak since August of 2019. It was also thirty-three years to the day that marked the 1987 "Black Monday" crash, when the Dow Jones Industrial Average lost over 22% in one day – not quite as disastrous today, but a notable decline given markets opened higher and follows three weeks of gains with less than three weeks to the Presidential election. Prior to the election investors will get a heavy dose of quarterly earnings, with about 80 names due out this week alone. The dollar dropped, while gold edged higher and oil was little changed with no major economic data today (small housing data point came in positive). Virus spikes continue in Europe along with renewed tightening in restrictions, increasing worries over the recovery. UK new Covid cases +18,804 v s +16,982 prior day, Italy +9,338 new Covid cases vs 11,705 on Sunday, France says number of confirmed cases up by 13,243 over 24 hours, versus +29,837 on Sunday. In sector news, airlines rose after the TSA said daily travelers topped the 1 million mark since March on Sunday, along with strength in package delivery UPS and FDX into the holiday season early. semiconductors outperform early before paring gains while large cap biotech was under pressure majority of the day (REGN, GILD, BIIB); materials and industrials led behind better China GDP data while REITs lagged; consumer names bounced led by luxury names. Every rally was met with additional selling pressure throughout the day, with stocks ending near their lows.

Commodities

·     Oil prices erased gains late day, with WTI crude dipping a nickel to $40.83 per barrel, erasing earlier highs of $41.22 per barrel with the broader pullback in stocks. Prices had been up earlier after the Saudis reiterated their OPEC vigilance, but news that production at Libya’s Sharara oilfield rises to around 150,000 barrels per day, from 100,000 last week raised supply fears. December gold rises $5.30 or 0.3% to settle at $1,911.70 an ounce, getting a boost as the dollar and stocks slide. Overall commodity prices were mixed with nickel higher as well as natural gas.

Currencies & Treasuries

·     The U.S. dollar declined against most currencies despite a pullback in stocks (dollar index DXY fell over -0.4%), falling against the euro, British Pound and Canadian dollar, giving back some of its 0.7% rise from last week when a global surge in coronavirus cases and an impasse over the stimulus package stoked caution. The British pound with renewed strength, back near the $1.30 level, shrugging off a ratings downgrade for the U.K. from Moody’s rating agency and the euro approached the 1.18 level. Treasury yields fell from earlier highs (10-yr down to 0.75% from highs 0.78%), as Treasury prices rebounded with stocks sliding throughout the session as a stimulus deal once again failed to materialize despite a lot of talk over the weekend. 

Sector News Breakdown

Consumer

·     Retailers; LB price target was raised to $50 from $42 at JPM who remains OW on the stock; VFC was downgraded to Underweight at Bofa who sees the company losing market share to NKE after reporting Q2 revenue fell 11%; Wells Fargo raised their targets on NKE, ADDYY; GPS tgt raised to $24 from $21 at RBC as see Thursday’s investor event as an important milestone for the new GPS management team to outline opportunities for value creation with growth drivers Old Navy and Athleta, productivity stabilization at Gap brand and Banana Republic aided by specialty store closures, and cost reduction efforts while balancing the mix shift to online

·     Auto sector; in auto retail, ORLY upgraded to outperform at Raymond James saying they historically have been hesitant to recommend owning the stock due to valuation concerns but the current valuation is actually attractive for a long-term; CROX trades to 13-year highs as UBS raises tgt to $48; NKLA active after JPM earlier said they are still likely to enter a strategic partnership by Dec 3 with GM as a deal could be adjusted to remove or condense NKLA’s electric truck project, the Badger initiative, which is unfavorable for GM and can possibly lead it to seek more equity

·     Restaurants; PLAY announces proposed private offering of $500 million of senior secured notes due 2025 by its subsidiary; target prices raised at Wedbush – BJRI (to $39 from $34), CAKE (to $31 from $26), DNKN (to $86 from $67), SBUX (to $88 from $81), and TXRH (to $82 from $71) as like TXRH most saying based on checks, expect upside to both Q3 and Q4-to-date SSS growth estimates and also like CMG and DIN as expect the top line at both to exceed expectations

·     Housing and Building Products; the NAHB says U.S. housing market index at record high in October, surpassing record high reached in September as the index 85 (consensus 83) versus 83 in September as index of current single-family home sales 90 versus 88 in september; RH shares dipped after Jefferies initiated with an underperform rating and $320 tgt

Energy

·     E&P sector active after CXO confirmed prior reports last week as COP to buy the E&P company in a deal valued at roughly $10B, paying $49.30 per share as CXO holders will receive 1.46 shares of ConocoPhillips for each share held https://on.mktw.net/34dro69; CRK was upgraded to overweight at Piper saying Natural gas continues to represent a tale of near-term headwinds due to elevated storage and medium-term tailwinds stemming from re-definition of forward supply; E&P space didn’t move too much on the CXO deal with shares moving last week on speculation

·     Oil services; SLB results sunk service stocks last Friday while today HAL reported a Q3 EPS beat while revs fell short of consensus $2.98B vs. est. $3.09B) and said the pace of activity declines in the international markets is slowing, while the North America industry structure continues to improve, and activity is stabilizing

·     Utilities & Solar; NI was upgraded to Buy at Bank America saying it presents a unique way to position for the wide discount in gas LDCs and reiterate confidence in their well above Street EPS on ’24 and see clear upside as an LDC sale could remove equity overhang; in solar, JKS signs a supply deal with juwi Hellas Renewable Energy Sources S.A. where it will supply 204 megawatt of Swan bifacial modules for juwi’s Kozani project in the north of Greece

Financials

·     Bank movers; group generally outperformed last week in rotation into cyclicals; ONB reported Q3 EPS 46c on sales $208.8M, besting 33c, $201.9M ests; SFNC reported Q3 EPS 63c on revs $225.5M vs estimated 42c, $208.6M; Stephens resumed coverage on ABCB at OW, $32 pt;

·     Insurance; AEL agreed to a strategic partnership with BAM, which will reinsure as much as $10B of American Equity’s fixed index annuity liabilities and make a 19.9% equity investment in the company at $37 per share – AEL rejects ATH and MassMutual’s takeover proposal made public earlier this month, saying it undervalues the company https://bit.ly/2HbIdWg ; HNI reports a Q3 EPS and revenue beat

·     Asset managers; AB and APAM both downgraded to Market Perform from Outperform, while BEN upgraded to Outperform from Market Perform all at Keefe Bruyette; MMI says it has entered into a definitive agreement to acquire Mission Capital in a transaction expected to close in Q4 (price and other terms remain undisclosed); Assets under management at the world’s 500 largest asset managers topped $100T for the first time last year, totaling $104.4T, according to research from Willis Towers Watson’s – up 14.8% from 2018 (BLK, STT, IVZ)

·     REITs; RESI shares surge after a deal to be sold to a group led by Pretium and Ares Management (ARES) in all-cash purchase values Front Yard at $2.4B expected to close in Q1 of 2021, with holders expected to get $13.50 per share https://bit.ly/2HfhQyv ; Evercore upgraded KIM to In-Line from Underperform and downgraded KRC to In-Line from Outperform and cut VNO to underperform from in-line; STWD announced a $300M price offering of notes due 2023; HST downgraded at Blair to Neutral from Outperform

Healthcare

·     Pharma movers; PFE said it could be ready to apply for emergency-use authorization of its COVID-19 vaccine by late November; KMDA signs a supply deal with Israeli Ministry of Health for its investigational plasma-derived hyperimmune immunoglobulin (IgG) treatment for COVID-19 patients in Israel; BMY and EXEL will get a priority review on applications with the FDA for combining Bristol’s Opdivo and Exelixis’s Cabometyx drugs to treat kidney cancer; BMY separately was upgraded to buy at Guggenheim with $70 tgt; AERI downgraded to underperform at Bank America and cut tgt to $9 from $14 saying post COVID-19 pathway looks daunting"; adds risk/reward still unfavorable for AERI; BSTC to be acquired by ENDP for $88.50 per share, in deal valued at about $540M (net of approximately $120M in cash acquired) https://bit.ly/37m2wLu

·     Biotech movers; NTLA receives authorization to initiate phase 1 clinical trial of ntla-2001 for transthyretin amyloidosis and says on track to dose first patient by year-end with a systemically delivered CRSPR/cas9-based therapy; AGIO withdrew its European Marketing Authorization Application for Tibsovo to treat certain adult patients with acute myeloid leukemia; shares of large-cap biotech in general weak most of the day (REGN, GILD, BIIB)

·     Healthcare services and providers; OSUR said it received emergency use authorization from the U.S. FDA for a saliva collection and stabilization device in Covid-19 testing; TVTY sells Nutrisystem for $575 million, less than half what it paid to buy it last year; MD was downgraded to sell and tgt cut to $12 at Deutsche Bank saying they are constructive on its ongoing strategic transformation and the simplification of its business model, but believe elements out of its control will pressure the company’s low-mid SD organic growth targets and constrain its ability to generate operating leverage for targeted margin expansion; mask and protective products names such as APT and LAKE outperformed on the day

·     MedTech and Equipment; FLDM said it will provide millions of noninvasive, saliva-based tests for the coronavirus to qualifying U.S. colleges and universities at a cost as low as $5 per test – FLDM’s test has received emergency use authorization from the FDA

Industrials & Materials

·     Industrial & Machinery; Barclay’s upgraded LECO to an overweight saying it has a best-in-class return profile and diverse exposure to a global manufacturing recovery into 2021, upgraded AGCO to EW, and downgrade URI to Underweight, all which reflect their end-market hierarchy two quarters from a machinery trough; LII issues improved revenue guidance for the year, guiding to a decline of -5% to -9%, better than the prior view of -10% to -15% and said Residential revenue rose 13% and set a new record for any quarter at $722M (good read for HVAC names TT, CARR); SNA downgraded to Underperform from Neutral at Longbow citing concerns around lack of Tools segment organic growth and deteriorating credit collections; OSK upgraded to buy at Bank America with a $97 target calling it the higher quality and more defensive of the two major aerial suppliers to the equipment rental industry; CTVA upgraded to buy at Bank America expects technology and cost reductions to accelerate earnings growth

·     Waste sector; Jefferies upgraded RSG to Buy on the back of higher landfill pricing, better operating leverage and proprietary mapping analysis that shows that RSG is best positioned to benefit from population growth centers while also raised CLH to Hold from Underperform as shares have underperformed significantly YTD on falling expectations

·     Transports; Airlines stocks (UAL, DAL, AAL, ALK, JBLU) gained after a study completed by BA, UAL, and the DoD showed that the risk of Covid-19 exposure on an airline is “virtually nonexistent” if passengers remain masked; additionally, the TSA reported more than 1 million passengers yesterday, the first time topping the benchmark since March 16; AAL is preparing to operate a daily 737 MAX flight between Miami and New York from Dec. 29 to Jan. 4, with flights available for booking from Oct. 24; KSU was upgraded to outperform at BMO Capital as believe that KSU’s network sits on significant volume growth opportunities and faces fewer growth hurdles than most U.S. rail networks; truckers look to rebound after dragging transports lower Friday on weak JBHT results

·     Metals & Materials; FCX tgt raised to $21 at UBS citing a 12% increase in China property completions next year, a +2% lift in China’s power grid spending funded and a global, ex China demand recovery from a low COVID-related base; AEM downgraded to Equal Weight art Barclay’s while hiked gold targets by an average of 8% and base metal targets by 4% – say given view that copper and gold prices could face downside in 2021, they remain picky on valuation (have the most upside to target on NEM and GOLD; SON is implementing a $50/ton price increase for all grades of uncoated recycled paperboard (URB) in the United States and Canada, effective with shipments beginning November 16, 2020; TSE issues upbeat Q3 guidance saying many end markets experienced strong demand recovery in Q3 after weak demand during Q2

Technology, Media & Telecom

·     Semiconductors; MCHP upgraded to Overweight at Morgan Stanley and increasing our PT to $131 saying the stock has significantly underperformed close peer TXN, the SOX and S&P 500 over the last 3-years largely attributable to less multiple expansion compared to the group; SGH entered into an agreement with CREE to purchase the Cree LED Products business unit for up to $300M, including fixed upfront and deferred payments and contingent consideration; INTC shares rose after the WSJ reported it is nearing a deal to sell a memory-chip unit to South Korea’s SK Hynix Inc. for roughly $10 billion https://on.wsj.com/2FNzKbe (MU, WDC shares spiked)

·     Internet movers; EBAY mentioned positively in Barron’s this weekend noting shares have been overlooked during the current online retail boom but the company, under pressure from activist investors, is going back to the basics; NFLX earnings around the corner, expected tomorrow along with social media company SNAP

·     Media & Telecom movers; ATUS presented a revised offer to acquire Cogeco (CGECF) and Cogeco Communications (CGEAF), now up to C$11.1B (about $8.4B), topping its previous C$10.3B offer https://bit.ly/3492BQs ; in the media space, CCO downgraded to Underweight from Neutral at JPMorgan saying while the stock has already underperformed YTD and are late on this ratings change, they don’t expect recent trends to substantially improve – firm also downgraded AMCX to underweight as we see worsening fundamentals ahead for the company due to the lack of a competitive DTC strategy

·     Hardware & Component news; FN upgraded to outperform at Northland based on the 15% pullback in the shares since our 8/18 downgrade likely driven by Huawei and CIEN concerns, along with indications of strength in high end ROADMs, 400/600G Telecom and 100G Datacom modules; FLEX adds to last Friday gains after RBC and JPM said the market is underappreciating FLEX’s 100% ownership interest of NEXTracker, the world’s largest solar tracking company; IBM with expected earnings after the close tonight; cinema stocks AMC, CNK bounced after NY Governor Cuomo said over the weekend that movie theaters can open with 25% capacity starting this Friday