Mid-Morning Look

Wednesday, January 27, 2021

Stocks open lower in another high-volume day, as the Dow Jones Industrial Average is on track for its 5^th straight day of declines (which would be longest such streak since Feb 20-28th of 2020), while the Nasdaq, S&P, and Russell 2000 also slip (but have since rebounded well off the lows). Market pressure on cyclicals continues as investors rotate into defensive asset classes (Treasuries, the dollar, utilities, and staples) and out of recent winners, while large cap stocks fail to rally despite better earnings (AMD), though MSFT helping software stocks on its good results. The FOMC concludes its 2-day FOMC meeting later this afternoon and is expected to focus on keeping rates at record lows this year and more dovish monetary policy comments. However, the markets top story over the last week remains the high volume/popular trading in high short interest stocks, targets of retail investors, organized via Reddit’s WallStreetBets forum and other platforms, sought to push up a handful of heavily shorted stocks which are crushing hedge funds that are short (and likely forcing selling in winners to cover margin calls). Melvin Capital was noted this week of needing capital help following its short position in GME (which is up over 1,450% this month alone).

Shares of online trading sites Robinhood, Ameritrade, E*Trade, Fidelity Investments, and Charles Schwab all experienced outages, according to Downdetector.com this morning. So how did it come to this? The combination of no trading commissions from online brokers, as well as monetary policy intervention from the Fed by providing record low borrowing rates (forcing people to stocks by making all other instruments less attractive to put money in, i.e. cash, CDs, bonds) have had a massive impact. The U.S. government has also doled out $4 trillion in relief measures to individuals dealing with the pandemic impact with another near $2 trillion being talked about – couple with people out of work, and the impact of social media, more people are trading now more than ever.

Economic Data

·     Durable Goods Orders for Dec rose +0.2% below the 0.9% estimate while U.S. Dec durables ex-defense orders +0.5% vs. Nov +1.2%; durables shipments +1.4% vs. Nov +0.4%and Dec durables ex-transportation orders +0.7% vs. est. 0.5%

Sector Movers Today

·     Transports; in rails, NSC posted a 15c EPS beat for Q4 on a small revenue beat and raises dividend; CP announces a 5 for 1 stock split; CNI put up a better than expected Q4 result (EBIT +2% vs. our estimate, and slightly above the Street at +30bps), but EPS guidance falls short of expectations (downgraded at Cowen); in trucking, CHRW reported a strong set of 4Q results, beating the consensus sell side EPS estimate by 11% as total gross revenues grew 20% YoY as higher purchased transportation rates and scrambled supply chains raised demand levels; MRTN another positive mover early on earnings beat; KNX with Q4 EPS beat on in-line revs while expects FY2021 adjusted EPS in the range of $3.20-$3.40 vs. consensus of $3.36

·     Consumer Finance; COF reported Q4 EPS $5.29 on revs $7.3B, both beating estimates ($2.86 on $6.97B), authorized up to $7.5B for stock buybacks, its provision for credit losses decreased 20% to $264M, and the results attracted BMO to raise its estimates up to 13% and its price target to $154 from $150, implying 55% total return; Separately, COF December domestic credit card net charge-off rate of 2.41% increases from 2.29% in November but is down from 4.55% in December 2019; NAVI Q4 core EPS 97c vs est. 83c; Sam’s Club (WMT) partnered with SYF and MA and announced a new rewards program that provides additional value for cardholders, including expanded rewards and digital enhancements; SYF announces a $1.6B buyback program; MA and Visa (V) both downgraded to sector weight from overweight at KeyBanc on the prospect of sustained x-border travel headwinds and the associated

·     Semiconductors; AMD posted better than expected results and guidance, seeing broad based strength across PCs, datacenters, and semi-custom gaming console products as well as strength across its client PC business with new Ryzen products (stock slips amid high expectations); MXIM reported F2Q revenue of $628M, beating estimate of $606M and F2Q EPS of $0.73 was above the consensus estimate of $0.6; TXN posted 4Q20 results that were well above expectations, citing broad-based strength across auto, industrials, and personal electronics end markets and also benefited from having 80% of its fab capacity internal; AAPL to report earnings tonight, likely impact suppliers such as QCOM, AVGO, SWKS, STM

·     Retailers; GME shares surged as much as 200% in pre-market trading, topping highs of $365 (around 5:40 AM) but turned lower quickly after Hedge fund Melvin Capital disclosed it closed out its short position (CNBC first reported) following a huge loss, while Citron research also said this morning it closed out its short in the $90s; VFC shares drop after mostly in-line Q3 results (small EPS beat) after midpoint of FY rev forecast misses estimates; in research, DKS and KSS upgraded to buy at Citigroup as the firm downgraded BURL, FIVE, UAA and ULTA from Buy to Neutral to reflect a more balanced risk/reward as believe a recovery is underway, but it won’t be smooth; BBBY downgraded at Baird (3^rd analyst downgrade in 2-days); unusual trading again in several high short interest retailers with DDS, M, EXPR among names surging

Stock GAINERS

·     AAL +9%; big rally in airlines early, leading in an overall weak transport space after mixed earnings in truckers (CHRW) and rails (NSC, CNI)

·     CPB +5%; rotation into defensive and underperforming sectors such as food and consumer staples, with HRL all sharply higher

·     GME – shares have become the poster child of the recent mania of running names with high short interest – as shares of AMC, BBBY, IRBT, EXPR, SPCE, FUBO, DDS, M, TR, FIZZ, GSX, SKT are just some of the most recent names that have been targets retail investors, organized via Reddit’s WallStreetBets forum and other platforms, sought to push up a handful of heavily shorted stocks

·     MSFT +3%; delivered a strong 2QF21/Dec quarter, marked by big rev beat ($2.7 billion to $43.1 billion, +15% in c/c), a material EPS beat ($2.03 versus the Street at $1.64) and the Azure cloud segment accelerating slightly to 48% c/c growth

·     VIAC +7%; media names have outperformed over the last week, with big gains in VIAC, FOXA, DISCA among them

Stock LAGGARDS

·     BA -4%; posts a record $12B annual loss as it delayed its all-new 777X jet again and booked a $6.5B charge for the program and said it expects the 777X to enter service by late 2023, delaying the jet’s launch for the third time (Q4 net loss rose to $8.44B from $1.01B YoY)

·     CNI -3%; put up a better-than-expected Q4 result (EBIT +2% vs. our estimate, and slightly above the Street at +30bps), but EPS guidance falls short of expectations (downgraded at Cowen)

·     LB, PVH, AAP -4%-7%; winners in retail being sold off, rotating into 2020 losers (such as M)

·     SBUX -5%; reported F’1Q (Dec.) adj. EPS of $0.61 vs mid-December guidance of $0.50- $0.55 with Americas comps now down 6% (U.S. -5%) and Int’l down 3% (China +5%) and issued F’2Q adj. EPS guidance for $0.45-$0.50

·     VFC -4%; shares drop after mostly in-line Q3 results (small EPS beat) after midpoint of FY rev forecast misses estimates

Syndicate:

·     Catalyst Biosciences (CBIO) 8.7M share Spot Secondary priced at $5.75

·     DZS (DZSI) 4M share Spot Secondary priced at $14.00

·     Personalis (PSNL) 3.95M share Spot Secondary priced at $38.00

·     Plug Power (PLUG) 28M share Spot Secondary priced at $65.00

·     Qumu (QUMU) 3.225M share Spot Secondary priced at $6.75

·     Shoals Technologies (SHLS) 77M share IPO priced at $25.00

·     Scopus BioPharma (SCPS) 1M share IPO priced at $9.00