Mid-Morning Look

Monday, October 26, 2020

U.S. markets seeing major selling pressure in the early going for the “reopen” related trades such as travel/airlines, as cruise lines, theme parks, restaurants, retail, and lodging given the share spike in coronavirus cases in the U.S. and Europe (prompting tighter restrictions), while stay/work from home names (ZM, AMZN, NFLX, ETSY, CLX, TTWO, KR) seeing early strength. Stocks tumbled in the U.S. ahead of the busiest week of earnings coming up, as roughly 186 of the S&P 500 are expected to report over the next five days, including Thursday’s (10/29) barrage of Apple, Alphabet, Amazon, Facebook and Twitter. Top drags on the market today include: 1) Spain, Italy impose curfews and other restrictions as coronavirus cases spike; 2) software names fall after German software giant SAP which cut its guidance for 2020, 3) stimulus deal still not looking good ahead of election next week after House Speaker Pelosi and White House Meadows accused the other of moving goalposts in stimulus talks; 4) China said it would impose unspecified sanctions on the defense industry after the U.S. approved $1.8 billion in arms sales to Taiwan last week; 5) housing data disappoints as new home sales unexpectedly declined in Sept vs. consensus for a rise of over 2%. The Dow Jones Industrial Averages dropped below its 50-day moving average (28,025), while the S&P still holding above its 50-day MA (3,408). Oil prices fall with slowing demand fears rising given increased Covid-19 restrictions being instituted.

Economic Data

·     New Home Sales unexpectedly fell -3% to 959k in Sept, below ests for up 2.8% to 1.025M (it would have been the first time in over 16-years we had over 1 mln units of reached consensus); Sept home sales northeast -28.9%, Midwest -4.1%, South -4.7% and West +3.8%; Sept new home supply 3.6 months’ worth at current pace vs Aug 3.4 months and median sale price $326,800, +3.5 pct from sept 2019 ($315,700)

Sector Movers Today

·     Energy stock movers; E&P sector remains busy as industry consolidation continued this weekend as CVE agreed to buy Husky Energy Inc. (HSE) in an all-stock deal valuing Husky at about C$3.8 billion ($2.9 billion), the 4th deal in the E&P space in the last few weeks which included COP buying CXO, PXD acquiring PE and DVN buying WPX; another deal this morning as well as Contango Oil & Gas Co. (MCF) and Mid-Con Energy Partners LP (MCEP) said they have agreed to merge in an all-stock deal that values both companies at more than $400 million

·     Solar; Roth downgrades DQ to Neutral from Buy on political, non-market risks surrounding the forced labor situation in Xinjiang even though they do not believe DQ is using forced labor as there is a risk that it could become the proverbial baby thrown out with the bath water; Roth also upgrades FSLR to Buy from Neutral with $100 tgt into Q3 results as they see the narrative around FSLR serving as a go-to company for customers seeking security of supply and reduced reliance on the Chinese supply chain gaining further momentum amid the forced labor risk; Credit Suisse downgraded FSLR to Underperform (price target raised to $64 from $54) on valuation and unlikely extensions of Section 201 tariffs or new tariffs, and SPWR to Neutral from Outperform (price target raised to $16 from $12), as the current price already implies strong EBITDA recovery through 2022, though the company could also benefit from any extension of solar tariffs as its module supplier MAXN is exempted from tariffs on Asian suppliers; Credit Suisse also maintained its Outperform rating on RUN and raised its price target to $68 from $39 and set street-high price targets on NOVA ($38 from $26, maintain Outperform) and SEDG ($247 from $180)

·     Consumer Staples; KO mentioned positively in Barron’s, calling it as under-appreciated post-pandemic “reopening” play; SMPL Q4 EPS and sales ($222.3M vs. est. $205.4M) beats estimates boosted by a rebound in retail demand for its Quest protein bars and sees year Ebitda rising; in beverage space, CCEP made a bid to buy Coca-Cola Amatil in a deal worth ~$6.58B at an effective price of A$12.01 per share; SFM positive mention in Barron’s ahead of earnings with the publication citing increased stay-at-home dining

·     Pharma movers; JNJ said late Friday it’s preparing to resume a large clinical trial of its experimental COVID-19 vaccine after finding no evidence the vaccine caused an “unexplained illness” in a study volunteer that caused the company to pause the trial earlier this month; NVS reports positive Phase II interim analysis results for iptacopan (LNP023), an investigational oral treatment for C3 glomerulopathy (C3G), a rare renal disease, affecting young patients with a poor prognosis; MRTX said this weekend that prelim data from two studies showed its experimental drug adagrasib caused tumor to shrink or disappear in 45% of patients with non-small cell lung cancer (NSCLC); JAZZ said it has acquired SWTX’s fatty acid amide hydrolase, or FAAH, inhibitor program for an initial $35M and said it would assume all milestone and royalty obligations owed by SpringsWorks to PFE said the FDA U.S. FDA delayed its regulatory decision on approving its drug for treating low white-blood cell levels in patients with cancer

Stock GAINERS

·     DNKN +18%; after saying it is in talks to be taken private in a deal worth roughly $8.8 billion as it has held preliminary takeover talks with Inspire Brands (offering $106.50 per share), confirming a report by the New York Times over the weekend

·     ETSY +3%; another benefit from stay at home space with rising Covid cases – RBC said believe there is upside to the Street’s Q4:20 GMS estimates of $2.5B (9% Q/Q) – other names rising on stay at home benefit theme include AAPL, AMZN, NFLX

·     MRTX +11%; said that prelim data from two studies showed its experimental drug adagrasib caused tumor to shrink or disappear in 45% of patients with non-small cell lung cancer (NSCLC)

·     ZM +3%; after co launches end-to-end encryption for free and paid users – along with general work from home (WHM) stocks rising given the further increase in coronavirus cases, prompting tighter restrictions in Europe this weekend

Stock LAGGARDS

·     BA -2%; defense stocks pressured early after China said it would impose unspecified sanctions on the defense unit of BA, LMT and RTX after the U.S. approved $1.8 billion in arms sales to Taiwan last week, Bloomberg reported

·     HAS -7%; reported Q3 profit and revenue that beat expectations, and said deliveries are expected to improve in the fourth quarter, as shares opened higher before slipping with broader weakness

·     HCA -3%; as Q3 Ebitda and EPS misses estimates (Q3 Ebitda -10% YoY to $2.05B vs. $2.16B est. and EPS $1.92 vs. $2.32) and said same-facility admissions and equivalent admission fell 3.8% and 9%, respectively

·     SAP -22%; cut its guidance for 2020, saying the reimposition of lockdowns by some governments had hit its business, while hard-hit industries would now take longer than expected to recover, while abandoned medium-term profitability targets

·     UAL -4%; travel and leisure stocks under pressure following further increase in coronavirus cases, prompting tighter restrictions in Europe this weekend (Italy and Spain)