Mid-Morning Look

Monday, April 20, 2020

U.S. equities with early declines, led by a plunge of more than 40% in front-month WTI crude (20-year lows below $11 per barrel), while investors also brace for over 140 S&P companies expected to report earnings this week (subject to change given many companies have been pushing out results) and as cases of coronavirus have been easing, but U.S. testing capacity remains insufficient to allow a safe restart of the economy. Traders and investors with much on their plates these days, dealing with the global economic shutdown to slow the spread of COVID-19 pandemic, and now a further collapse of May oil futures which expire tomorrow (June futures are trading in the mid-$20 range), as well as earnings season kicking off this week. The plunge in crude today comes as the price spread between the front-month and future-month delivery for oil has risen well above the spot market, situation known as contango, which can encourage traders to store oil. Biotech names a bright spot, helping pare Nasdaq Composite losses, as the IBB ETF trading to 52-week highs above the $125 level. The Dow Jones Industrial Average falls, weighed down by BA and DIS (analyst downgrades) as well as energy with XOM, CVX falling amid the plunge in oil prices. Stocks are coming off strong gains last week after the President laid out plans for the reopening of the U.S. economy, with the ultimate decisions made by State Governors, though will receive help at the Federal level in any way needed. Markets remain at odds on the extent of the economic damage stemming from the coronavirus pandemic and how quickly businesses will recover. A sharp rebound in the Dow and the S&P 500 in recent weeks has left some investors anxious about whether the rally is sustainable when so much remains unknown. Reported cases of the coronavirus have exceeded 2.4 million globally. However new infections in some countries and U.S. states appear to be easing, and governments are weighing when and how to reopen. Markets are also hanging on to hopes of more help for small businesses as Democratic leaders and Treasury Secretary Steven Mnuchin said they were close to striking a deal to replenish a roughly $350 billion small-business program.

Sector Movers Today

·     Aerospace & Defense; in research, Citigroup said they are throwing in the towel far too late for BA as they downgrade shares noting the company has unique challenges beyond a dimmer aero picture. Looking through COVID, SPR offers more compelling risk/reward on a recovery trade, although it’s still risky & hard to time since air travel is still under significant pressure; Goldman Sachs upgraded SAIC to a buy and downgraded BAH to neutral saying organic revenue growth is accelerating at SAIC and decelerating at BAH, SAIC trades at a near record discount to Government IT & Services and the S&P500 while BAH is near a record premium; in news, Der Spiegel reported Germany will order 45 fighter jets from BA to replace aging craft as will order 30 F/A-18 Super Hornets and 15 EA-18G Growlers to replace aging Tornado jets

·     Industrial & Machinery; several analyst comments in the industrial sector as Goldman Sachs upgraded shares of ALSN, OSK to buy, while downgraded shares of MTW, TEX to neutral in the machinery sector noting outperformance of ALSN/OSK vs. TEX/MTW by 20% YTD, but given the depth of the production downturn, they believe cyclical compounders are well positioned to generate cash flow at the trough and lead the recovery. Citigroup upgraded PCAR to buy (also positive on CMI) while downgraded ALSN as think truckload-related stocks can continue to work as investors gravitate towards the groups that will be earliest to recover post the exogenous virus shock. As the truckload market begins to swing from relative capacity surplus towards equilibrium, and spot rates improve, we expect multiples to expand ahead of expected earnings

·     Healthcare services and providers; HCSG was upgraded at Baird to Outperform citing improving funding picture for its customers, much better set earnings expectations, record-low absolute and relative valuation, and now a better environment to hire personnel; in the CRO sector, Baird downgraded shares of ICLR and MEDP estimates saying the market may be unrealistically discounting COVID-19 impacts in some names as they lower sector exposure (says would expect greater upside in names currently most discounted SYNH, PRAH, PPD)

·     Casino sector; WYNN CEO called for the Las Vegas Strip to reopen in mid- to late May, as long as a number of health precautions are taken; Bernstein said channel checks indicate that Macau’s gross gaming revenue (GGR) for April 14-19 period plunged around 97% year-over-year, to an average daily (ADR) rate of just 25 million patacas, or around $3.1 million; Nomura lowered tgts in the sector and downgraded LVS to neutral from buy

·     Restaurants; SHAK announced $150M equity raise, $140M from underwritten offering led by JP Morgan, and the balance through ATM (“at-the-market”) offering to strengthen its balance sheet; CAKE secured a $200M investment from private equity firm Roark Capital saying the deal enhances the company’s liquidity position to navigate the near-term COVID-19 landscape and bring back affected staff to work as soon as practicable; the leading restaurant lobby on Monday asked Congress for $240 billion in federal aid, saying the industry has suffered more than any other and needs a dedicated fund to stave off disaster

Stock GAINERS

·     CAKE +4%; secured a $200M investment from private equity firm Roark Capital saying the deal enhances the company’s liquidity position to navigate the near-term COVID-19 landscape

·     DD +3%; after the company sees better-than-expected Q1 results on coronavirus-led demand; guided Q1 EPS 82c-84c vs. est. 68c/also upgraded to overweight at JPMorgan

·     EXEL +23%; after it and partner BMY reported topline results for their Phase 3 CheckMate -9ER trial evaluating Opdivo in combination with CABOMETYX in previously untreated advanced renal cell carcinoma (RCC). The trials met its primary (PFS) and secondary endpoints (OS)

·     FLIR +5%; on Reuters report that AMZN has started to use thermal cameras at its warehouses to speed up screening for feverish workers who could be infected with the coronavirus

·     JNPR +1%; upgraded at JPMorgan to overweight on the best risk/reward amongst the traditional networking names given the resilience of (admittedly low) top-line expectations

·     MTB, TFC +2%; bounces after better earnings this morning

·     NFLX +2%; gains again in stay at home beneficiaries along with gains in AKAM, ROKU

Stock LAGGARDS

·     DIS -3%; downgraded by two analysts (UBS and Credit Suisse) noting the COVID-19 outbreak is impacting every one of Disney’s segments, with Parks being hit the hardest

·     HAL -2%; reported in-line quarterly EPS and revenue (revs $5.04B vs. $5.74B a year ago) but it will reduce overhead and other costs by $1B, cut capital spending 56% to $800M and improve working capital

·     LEN -5%; homebuilders feeling the pain still from job losses and fears of inventory staying on the market with stay at home restrictions in place with shares of LEN, TOL, KBH, MTH among movers)

·     OXY -7%; leading energy names lower in broad pullback for the sector given the plunge in April futures contract (expires tomorrow), down 40%

·     UAL -5%; said it expects to get $5B from the U.S. though payroll support plan and expects to borrow $4.5B from U.S. and get $5b in aid/said it has $6.3B of cash and equivalents as of April 16