Mid-Morning Look

Tuesday, August 04, 2020

U.S. equities rebound off earlier lows, as the Nasdaq Composite looks to make it a 5^th straight day of gains, setting another record all-time intraday high in the process as the march high continues with absolutely no fear shown by markets and investors. Treasury markets telling a different story as the 10-year yield falls to lows of the day, down 3 bps to 0.523% and the 2-yr edges down to 0.107%, while gold prices continue to hover at record highs around the $2,000 level. The weaker dollar, the Fed maintaining the easy money/accommodative monetary policy (what they say will be for at least another year) and Washington with expectations of more free money in the form of stimulus to help ailing Americans who have lost jobs during this pandemic continues to fuel the positive market sentiment. Quarterly earnings have significantly outperformed analyst expectations, surprising many, but despite the beats, many companies have shown sharp declines in profit and revenue on a YoY basis (so beating a much lower bar). Still not raising fear as the CBOE Volatility index (VIX) remains at lowest levels since early February. Oil prices are flat, as energy tries to rebound, but today’s gains again fueled by technology stocks.

Sector Movers Today

·     Consumer Staples; USFD reports sales fell 29.2% in Q2 off a 28.0% decline in case volume, both negatively impacted by social distancing measures and required closures of non-essential businesses that occurred during the quarter as a result of COVID-19; DEO reports organic sales fell 8.4% in FY20 to miss the consensus estimate of -6.3% while organic sales slumped the most in Asia with a 16% decline, while North America was the only region with growth; EPC falls after missing estimates for quarterly profit and net sales, as consumers staying at home due to COVID-19 lockdowns (less shaving)

·     Housing & Building Products; LGIH guidance for home closings in 2020 of 8.0K-8.8K exceeds the consensus estimate of 7.7K – positive momentum in May and June continued into July, helped by low interest rates and an undersupply of existing homes; SITE 2.15M share Spot Secondary priced at $123.00; TREX Q2 results easily top views on higher Q3 sales view of $215M-$225M vs. est. $194M, but analysts raised concerns about the forecast, which suggests gross margins will decline in the second half; TCS downgraded to sell at Goldman Sachs as sees downside risk due to the unlikely nature of a positive sales inflection, heightened competition, demand pull-forward, and the highly discretionary nature of the category; BMCH upgraded at Wedbush after quarterly results were above expectations on sales/EBITDA, including expense control in SG&A

·     Metals movers; Morgan Stanley cautious on copper producers as downgraded SCCO from Equal weight to Underweight saying despite good cash flow generation, SCCO’s premium valuation vs. peers and its own history seems unwarranted – firm also downgraded FCX with $12.50 tgt as believe good news is already priced into the stock at current levels; RS upgraded to buy with $115 tgt at Deutsche Bank as believe RS has further added credibility to its business model and showed the strength of its management team in handling a significant decrease in activity

·     Aerospace & Defense; BA announced a mixed shelf offering overnight; RBC Capital upgrades AJRD to Outperform while downgrades HXL to Sector Perform saying they think defense exposure continues to provide a more stable fundamental back drop and while investor concerns regarding the outlook for defense budgets has weighed on the sector’s valuation, we think it’s been overstated. The group has appreciated on average by 4% over the past 3 months, vs. +16% for the S&P 500; SPCE shares dip following 20.5M share stock offering (and earnings)

·     Software movers; TTWO announced record FY1Q results that came in well ahead of consensus, continuing a familiar theme among video game publishers that have reported quarterly earnings to date (beat helped by largest franchises, including GTA + NBA 2K); VRNS Q2 results were above expectations for virtually all headline metrics with ARR of $235.7M that grew +52% y/y vs. consensus of $225.5M or +45% as ARR comps become more challenging in the 2H/20 and Q3/20 guidance was above expectations; RNG and FIVN each reported strong revenue, earnings and cash flow upside in 2Q20, with the companies benefitting from robust cloud communications and contact center adoption; MIME posted $0.22/$115M, beating the consensus forecast of $0.16/$113M as revs rose 16% y/y (21% in constant currency) and raised its FY21 outlook for both revenue and adjusted EBITDA

·     REITs; INVH reported 2Q Core FFO/share of $0.32 (+4.4% y/y), vs. est. $0.31 and posted same store revenue, expense, and NOI growth of 2.0%, 1.3%, and 2.3%, respectively, compared to JPMe at 2.0%; VNO reported 2Q FFO/share on OP basis of $1.06, which was $0.06 ahead of consensus while leasing stats were actually a bit better than expected in 2Q with office spreads coming in higher (+12.1% GAAP/+14.1% cash); ESS reported 2Q Core FFO/share of $3.missing consensus of $3.32 while core NOI growth was much weaker than expected with y/y same store revenue, expense, and NOI growth of -3.8%, +6.0%, and -7.4%, respectively

Stock GAINERS

·     AMD +7%; after Jefferies price target to $95 saying they think INTC delays are ‘systemic’ and they think AMD share gains will accelerate, and that the AMD bull-case will morph from 30% share to 50% over the next 12-18 months

·     BLNK +18%; as Cushman & Wakefield agreed to engage brokerage force, network of property managers to offer blink services

·     BP +5%; halved its dividend overnight to 5.25c after reporting a record $6.7B loss; the figure included $9.2B in impairments across the group, largely due to BP’s revised forecast for oil and gas prices over the next three decades, and $1.7B of exploration write-offs

·     MOS +9%; posted a Q2 profit that easily topped consensus with an upbeat outlook amid strengthening fertilizer/agriculture markets in 2H (positive for NTR, CF) – Q2 potash sales volume of 2.6 mln tonnes vs. 2.2 mln tonnes a year earlier

·     SEDG +14%; reported 2Q20 results at the high end of guidance and above consensus (revs $331.9M vs. est. $318.4M), with GM slightly ahead of expectations while guiding revenue for 3Q20 in line

·     TTWO +3%; announced record FY1Q results that came in well ahead of consensus, continuing a familiar theme among video game publishers that have reported quarterly earnings to date

·     YRCW +14%; Q2 EPS loss ($1.09) on revs $1.02B vs. est. loss ($1.66) and $1.01B; secures $700M investment from US Treasury

Stock LAGGARDS

·     AIG -4%; swung to a loss for the second quarter driven in part by substantial costs tied to the pandemic as well as losses on the sale of most of its Fortitude Group Holdings LLC stake.

·     DBVT -41%; as the FDA declines to approve DBVT’s experimental skin patch called Viaskin Peanut to treat peanut allergies in children aged 4 to 11; FDA indicated need to modify patch and conduct an additional human study

·     EPC -10%; after missing estimates for quarterly profit and net sales, as consumers staying at home due to COVID-19 lockdowns (less shaving)

·     FCX -3%; downgraded at Morgan Stanley (along with SCCO) in copper sector as believe good news is already priced into the stock at current levels

·     MNK -21%; after saying it is working with external advisers to explore options including the possibility of a filing for reorganization in bankruptcy under Chapter 11 in the near-term (also reported earnings for quarter that beat)

·     RL -6%; as Q1 revenue fell -66% YoY to $487M, missing the $610M estimate (comes ahead of CPRI and KTB results later this week while TPR and FOSL report next week)

·     SPCE -12%; shares dip following 20.5M share stock offering (and earnings)

·     VYGR -11%; after announces termination of its research collaborations with biopharmaceutical firm ABBV to study and develop a type of antibody; VYGR retains full rights to the technology and certain novel antibodies developed as part of the collaborations