Mid-Morning Look

Friday, June 19, 2020

U.S. equities are on track for a strong day (and week), recovering nicely after last week’s broad market pullback, as improving trade news with China helped offset the growing concerns of rising cases of the coronavirus in parts of the country (and China). Overnight, Bloomberg reported China plans to accelerate purchases of US farm products to comply with phase one trade deal after buying fell behind recently due to coronavirus disruptions. The news was welcomed on Wall Street with a thunderous rip higher on the open, though increased volatility is expected today given the Quadruple witching options expiration today, occurs on the third Friday of the month of every quarter, in March, June, September, and December, and refers to the simultaneous expiration of single-stock options, single-stock futures, and stock-index options and stock-futures. Markets have enjoyed a strong rebound for the March lows, now recovering more than 40% in most cases with the Nasdaq Composite again not far from its record highs. The concerns of excessive valuations, record levels of debt and deteriorating fundamentals remain a concern as well as the recent rise in COVID-19 cases – but will it still not be enough to fight the Fed which has implemented various monetary and stimulus related measures to try and keep the economy afloat during this global pandemic that shut the world down for nearly 2-full months? Just today, Boston Fed President said “the continued spread of the novel coronavirus could hamper the U.S. economic rebound from the pandemic, and more fiscal and monetary support will likely be needed.” Rosengren repeated his view that the U.S. unemployment rate will likely be “at double-digit levels” at the end of 2020 and cautioned against reopening the economy too quickly after the end of lockdowns aimed at containing the virus. The dollar slips after a brief move higher Thursday, while commodity prices are jumping, led by gains in oil and gold and Treasury prices are little changed. Energy stocks among the early leaders as WTI crude tops the $40 per barrel level and several analysts’ positive on specific companies, prompting positive rating changes (OXY, DVN).

Sector Movers Today

·     E&P sector; CLR said it will restore some production but keep 50% curtailed; in research, Mizuho upgraded DVN to Buy and raised OVV to Neutral, while downgraded CXO to Neutral as believe oil price strip has found a floor through 2021 at $40/bbl; E&P’s OXY and EOG were both upgraded to buy from hold (OXY tgt to $25 and EOG to $70) saying for OXY it is in the position to continue improving its balance sheet and says EOG remains one of the most opportunistic large E&Ps by materially flexing all operations and finances

·     REITs; PSA was downgraded from Buy to Hold at Argus amid concern about the stock’s high valuation after a recent run-up in the share price and see better opportunities in other areas of the REIT sector, such as wireless towers, data storage, and healthcare; JPMorgan said it remains bullish on single-family rental REIT stocks, raises 2021 FFO/share estimates for AMH and INVH by 7% and 13% respectively and says for smaller cap RESI 2021 FFO/share estimate up 17% to reflect core business trends including strong rent collections, leasing traffic that has rebounded to levels comparable with last year, and higher occupancy

·     Chemicals; HUN was downgraded to neutral at Seaport Global saying recovery in the prices of MDI, a chemical used primarily to manufacture polyurethane, seems uneven and slower than expected; UBS said they believe stocks with exposure to driving related consumables (fuel, replacement tires) will see a quicker recovery in volumes as highlight CBT and OEC (carbon black for rubber/tires) and GRA (refining catalysts) as relative beneficiaries in this trend; DD tgt raised to $65 from $60 and reiterate overweight at Wells Fargo as continue to believe the “remain co” is undervalued where the quality of the portfolio should stand out during 2Q20; NTR ests reduced at JPMorgan to reflect lower fertilizer prices in nitrogen, phosphate and potash, and higher acquisition-related SG&A expenses in the Retail division

·     Media & Telecom movers; AMC shares rise after saying it will open the bulk of its U.S. theaters on July 15 (450 locations in mid-July), with the remaining 150 opening up on July 24^th; CMCSA estimates raised at JPMorgan to reflect current cable momentum, somewhat improved trends at Sky and NBC, and recent commentary from management at industry conferences (raise 2Q broadband adds to 285k from 225k on continued strength from 1Q trends); FOXA was upgraded to neutral at Macquarie citing improving trends for advertising revenue

Stock GAINERS

·     AMC +5%; after saying it will open the bulk of its U.S. theaters on July 15 (450 locations in mid-July), with the remaining 150 opening up on July 24^th – with limited capacity

·     JBL +3%; after mixed Q3 results as EPS missed but revs beat as Diversified Manufacturing Services revenue gained 13% Y/Y, and Electronics Manufacturing Services dropped 2% – guidance showed Q4 EPS 45c-86c on revs $5.8-6.6B (vs. est. 68c/$6.15B)

·     MPC +6%; after the WSJ reported overnight it is in talks with potential suitors for its Speedway gas-station business, reviving a sale that fell apart in the early stages of the COVID-19 crisis

·     OXY +4%; upgraded at SunTrust to buy (along with EOG), while DVN shares also rally in energy space after Mizuho upgraded shares

·     PENN +3%; announced that 30 of its 41 gaming and racing properties have resumed operations, representing more than 70% of the Company’s regional gaming portfolio in 13 of the 19 states in which it operates

·     STLD +4%; as guides Q2 adjusted EPS 40c-44c above consensus of 26c while notes Q2 earnings from the company’s steel operations is expected to be significantly lower than Q1 due to lower shipments and selling values as a result of the temporary closures

·     WKHS +13%; as BTIG boosted its Street-high price target to $10 saying the cargo vehicle-maker is on the cusp of getting the green-light from the Department of Transportation for the first delivery of its C-series vans

Stock LAGGARDS

·     KEY -2%; early weakness in the banking sector on no specific news, but many names pulling back (PBCT, PNC, HBAN, CFG, CMA, FITB)

·     KMX -3%; slips on mixed Q1 as lower revenue in F1Q was limited by more than just reduced vehicle sales as dealerships closed during the coronavirus pandemic

·     WORK -3%; downgraded to sell from neutral at Goldman Sachs saying competition from Microsoft Teams to weigh on long-term growth and market share

Syndicate:

·     BeyondSpring (BYSI) 1.93M share Spot Secondary priced at $13.00

·     DraftKings (DKNG) 40M share Secondary priced at $40.00

·     Forma Therapeutics (FMTX) 13.88M share IPO priced at $20.00

·     Genetron (GTH) 16M share IPO priced at $16.00

·     Intellicheck (IDN) 1.54M share Spot Secondary priced at $6.50

·     Kratos Defense (KTOS) 13.5M share Secondary priced at $16.25

·     Progenity (PROG) 6.667M share IPO priced at $15.00

·     Repare Therapeutics (RPTX) 11M share IPO priced at $20.00

·     Repro Med Systems (KRMD) 3.125M share Spot Secondary priced at $8.00

·     Yatra (YTRA) 12.5M share Spot Secondary priced at 80c