Mid-Morning Look

Wednesday, September 23, 2020

The rollercoaster for U.S. stocks continued today as the S&P 500 and Nasdaq Composite, after snapping their 4-day losing streak yesterday, retreated early on profit taking and as data showed domestic business activity nudged down in September. The Dow is being supported by component Nike (NKE) which posted a blowout quarterly result last night. Manufacturing data from IHS Markit offset early gains after vaccine news from JNJ which said it initiates pivotal global phase III clinical trial of Janssen’s covid-19 vaccine candidate begins global final-stage trial of single-shot covid-19 vaccine in 60K people. Doubts over the next coronavirus relief bill as well as a selloff in heavyweight technology-related stocks have weighed on investor sentiment this month, with mega cap tech feeling the brunt. One of the tech darlings, Tesla (TSLA), had its shares fall after its hyped Battery Day yesterday failed to impress investors. Energy among the early decliners with tech while industrials lead. Also, travel-related shares rebounded from losses earlier this week.

Economic Data

·     U.S. IHS Markit September flash services PMI at 54.6 vs 55.0 in august, flash composite PMI at 54.4 vs 54.6 in August and flash manufacturing PMI at 53.5 vs 53.1 in August

Sector Movers Today

·     Retailers; NKE reported a significantly better-than-expected Q1, led by digital sales +83%, with both EMEA & NA (where digital was up ~+100%) importantly also essentially seeing sales improve to flat, while gross margin also posted upside (shares of rivals UA, ADDYY, LULU, FL among names moving in sympathy early); LULU says set to resume share buybacks (remaining to be repurchased under program is $263.6 mln); TGT launches cash tender offers for up to $1.75 billion of debt securities; HAS upgraded to outperform at BMO based on an improving outlook for the toy industry, benefits from stay-at-home, and good brand positioning; PTON and NLS rise after AMZN denies partnership with Echelon on fitness bike

·     Housing & Building Products; in homebuilders, KBH posted strong Q3 results that beat on EPS and revs and as overall net orders grew 27% y/y (well ahead estimates) with a solid +50% y/y growth rate in August, but issued subdued 4Q rev/margin guide and an in-line FY’21 rev guide; CVCO was upgraded to Buy at Craig Hallum and maintains a buy on SKY as both stocks have pulled back even as the underlying fundamentals have been improving, pointing to prices of lumber tripling recently and this having a near-term impact on margins

·     Industrial & Machinery; waste sector rating changes at JPMorgan as they upgraded WCN to Overweight, while downgraded RSG to Neutral, and WM to Underweight saying they believe the worst of the COVID-19 shutdowns is behind us, and all of the waste service providers that they cover have proven to be more resilient than expected; Bernstein initiated ten names in the machinery and E&C sector with outperforms on CMI, AGCO, TRMB, PWR, and J and recommend the pair trade of Long URI/Short CAT and highlight DE as an attractive stock to buy on a pullback while saying now is the time to get more positive on the sector

·     Transports; on rails, RBC updates estimates ahead of Q3 and outlines channel checks where they found that Intermodal and Grain carloads are trending positively into Q4 as top ideas are CP given its operations focused mgmt & attractive valuation and UNP; Credit Suisse cuts PT for UAL to $37 from $41, DAL to $37 from $42 and ALK to $45 from $51; raises JBLU to $11 from $10 and LUV to $46 from $45 while expects U.S. passenger traffic to fall 62% this year, and then recover to about 68% of 2019 levels next year, 86% by 2022, and 96% by 2023

·     Software movers; ZI upgraded to overweight at Wells Fargo citing the company’s end-market growth opportunity as companies are shifting budgets from travel & expense to tech due to work-from-home constraints; ZM trades to new record all-time highs; with a week to go ahead of its expected direct listing on the NYSE, big data analytics company Palantir Technologies offered financial guidance saying it expects Q3 revenue of $278-280M (+46-47% Y/Y) with operating income of $60-62M

Stock GAINERS

·     HAS +4%; upgraded to outperform at BMO based on an improving outlook for the toy industry, benefits from stay-at-home, and good brand positioning

·     JNJ +2%; initiates pivotal global phase III clinical trial of Janssen’s covid-19 vaccine candidate begins global final-stage trial of single-shot covid-19 vaccine in 60,000 people

·     MNOV +11%; following encouraging preclinical data on its intranasal COVID-19 vaccine candidate, BC-PIV SARS-CoV-2 as results from a mouse study showed that the vaccine induced high titers of serum IgG and mucosal IgA neutralizing antibodies against the S1 antigen of the SARS-CoV-2 virus

·     NKE +8%; reported a significantly better-than-expected Q1, led by digital sales +83%, with both EMEA & NA (where digital was up ~+100%) importantly also essentially seeing sales improve to flat, while gross margin also posted upside

·     PTON +5% and NLS; after AMZN denies partnership with Echelon on fitness bike

·     WDC +9%; upgraded to buy from hold and raise tgt to $62 from $44 at Craig Hallum saying new CEO is making the appropriate decision to separate the HDD and flash businesses within WDC

Stock LAGGARDS

·     ACB -22%; the cannabis company slides after guiding Q1 revs to be between C$60M-C$64M, below the estimate of C$69.6M after Q4 revenue falls 5% to C$72.1M from a year earlier

·     ACIU -49%; after it and partner Roche Holding unit Genentech reported its experimental therapy to treat patients with early Alzheimer’s disease did not meet efficacy main goal in mid-stage trial

·     ALB -8%; lithium producers ALB, LTHM, SQM came under pressure after TSLA outlines plan to halve the cost of its batteries yesterday (lithium is used in EV batteries) – Tesla said at its “Battery Day” event that it has got rights to a lithium clay deposit in Nevada

·     GMAB -11%; slides on announcement that it was locked in a legal battle with its partner JNJ over royalty payments for its key cancer drug

·     SFIX -11%; despite a Q4 beat amid softer Q1 guidance – while F1Q21 outlook of mid/high SD growth may be disappointing, it reflects fewer adds/loss of active clients in F3Q20, but not the resumption of growth

·     TSLA -4%; shares slide with the Battery Event catalyst behind them and disappointing investors as some of the innovations showcased at the event were “close to working” and some three years away from fruition

Syndicate:

·     Bentley (BSY) 10.75M share IPO priced at $22.00

·     Corsair Gaming (CRSR) 14M share IPO priced at $17.00

·     GoodRx (GDRX) 34.615M share IPO priced at $33.00

·     Laird Superfood (LSF) 2.65M share IPO priced at $22.00

·     National Storage (NSA) 4.5M share Spot Secondary priced at $33.15