Closing Recap

Monday, April 20, 2020

Equity Market Recap

·     In a time of unprecedented events, things even got stranger today, as U.S. stocks fell broadly after the expiring May NYMEX crude oil futures contract ended at negative -$37.63, down over 300% in a mass unloading due to zero demand. The headline above is not a typo and marks a first time that an oil contract traded negative, ahead of June becoming the front month contract later tomorrow, as traders who needed to unload the physical commodity ahead of expiration had to find a price they could do it, as WTI crude fell over $55 on the day. The news hurt energy stocks, but not as much as one would expect as the June contract was last around $21 per barrel. The chaos that the coronavirus has unleashed on the global economy very evident in the oil complex with no demand as travel has come to a near standstill with people forced to stay at home. The oil move grabbed all the headlines this afternoon, as the coronavirus took a back seat, though cases and deaths in New York, New Jersey and Italy all eased in the last 24-hours. Earnings the next big story with some 20% S&P companies “expected” to report this week, but we may see some delays due to the impact on the virus on operations/financials.

·     Energy, utilities, real estate, industrials and financials were the biggest drags on the market today while biotech names a true bright spot, helping the Nasdaq Composite initially before the late day broad market pullback, as the IBB ETF trading to 52-week highs above the $128 level (reports have noted the gains in mega tech such as AMZN, NFLX, GOOGL, AMD pacing market gains – but biotech has quietly been a market standout over the last few weeks as well). The Dow Jones Industrial Average dropped weighed down by BA and DIS (analyst downgrades) as well as energy with XOM, CVX falling amid the plunge in oil prices. Markets remain at odds on the extent of the economic damage stemming from the coronavirus pandemic and how quickly businesses will recover and today’s sharp drop in oil is a reminder on just how impactful it could be. Markets failed to rally on reports of more help for small businesses as Democratic leaders and Treasury Secretary Steven Mnuchin said they were close to striking a deal to replenish a roughly $350 billion small-business program. The Stoxx Europe 600 closes 20% above March low, enters bull market; Italy reports 2,256 new virus cases, fewest in almost 6 weeks, another sign that cases are slowing. Treasury prices were little changed most of the day with the 10-year yield staying just above the 0.6% while the dollar was mixed with no major U.S. economic data today.

Commodities

·     Oil prices turned negative! For the first time ever, oil sellers had to pay buyers to take oil futures as the May contract turned negative, with WTI crude falling over 300%, down over $55 per barrel, as the contract traded from about $18 per barrel on Friday to -$37.60 today. Prices were hammered a day ahead of expiration before rolling to June contract front-month tomorrow, with those prices last around $20 per barrel. The coronavirus pandemic has ravaged global economies, threatening to erase an entire decade of demand growth, slashing thousands of jobs, cutting cap-ex by over 40% for majors and wiping out hundreds of billions of dollars from company valuations. The gaping demand/supply imbalance, caused by the demand-destroying virus-containing lockdowns across many of the world’s countries and the inability of oil producers to plug the gap, continues to drive crude prices lower. The plunge in oil comes as no one wants to take physical delivery at this time amid record low demand and no place to store it as well. Gold prices gain $12.40 or 0.7% to settle at $1,711.20 an ounce, getting a boost as the dollar faded and the tumble in oil prices indicate the slowing risk appetite.

Sector News Breakdown

Consumer

·     Retailers; UAA was upgraded at BMO Capital saying with shares down 52% since early-February (vs. XRT (-21%) & SP500 (-11%)) and lagging meaningfully in the recovery rally vs. YTD lows, ongoing heavy revenue declines appear well-understood; TPR drawing down $700M from its $900M revolving credit facility to add to cash balances and said it is suspending its quarterly cash dividend beginning in Q4 of fiscal 202 and share buybacks

·     Restaurants; SHAK announced $150M equity raise, $140M from underwritten offering led by JP Morgan, and the balance through ATM ("at-the-market") offering to strengthen its balance sheet; CAKE secured a $200M investment from private equity firm Roark Capital saying the deal enhances the company’s liquidity position to navigate the near-term COVID-19 landscape and bring back affected staff to work as soon as practicable; the leading restaurant lobby on Monday asked Congress for $240 billion in federal aid, saying the industry has suffered more than any other and needs a dedicated fund to stave off disaster.

·     Housing & Building Products; USCR guides Q1 revenue above consensus as sees prelim revs of ~$334M vs. consensus of $321.14M and said it plans to reduce capital spending and modifying operating structure to maximize financial strength and flexibility; LL said it is taking a series of measures to enhance liquidity and manage costs as it grapples with the impact of the coronavirus pandemic including cutting costs, managing inventory flow, deferring payments and working with lenders to temporarily expand its credit facility; homebuilders feeling the pain still from job losses and fears of inventory staying on the market with stay at home restrictions in place with shares of LEN, TOL, KBH, MTH among movers),

·     Leisure movers; NCLH has hired Goldman Sachs Group Inc. to explore financing options that could include the sale of a stake in the company, Reuters reported; PTON downgraded to underperform at BMO citing concern that accelerating membership growth, related to Covid-19-related stay-at-home orders, will prove a pull-forward of demand, rather than an expansion of it

·     Casino sector; WYNN CEO called for the Las Vegas Strip to reopen in mid- to late May, as long as a number of health precautions are taken; Bernstein said channel checks indicate that Macau’s gross gaming revenue (GGR) for April 14-19 period plunged around 97% year-over-year, to an average daily (ADR) rate of just 25 million patacas, or around $3.1 million; Nomura lowered tgts in the sector and downgraded LVS to neutral from buy

Energy

·     Energy stocks dropped, but pared losses despite oil prices plunging to turn negative and settle the May contract down $55 on the day to -$37 per barrel (June contract trades tomorrow – last around 421 per barrel). Prices plunged as storage space ran low for the glut of crude no longer needed by economies hard hit by the coronavirus. Energy stocks started the day much lower, but many perked up off the lows with lots of negative news already baked into prices. Oil prices have collapsed this year, with governments across the world attempting to slow the spread of the coronavirus pandemic by banning travel and directing billions of citizens to stay in their homes.

·     Stocks news; more bad news in oil services sector as HAL reported in-line quarterly EPS and revenue (revs $5.04B vs. $5.74B a year ago) but it will reduce overhead and other costs by $1B, cut capital spending 56% to $800M and improve working capital/recognized a $1.1B impairment and other charges to adjust its cost structure to current market conditions; in research, Bank America upgraded CXO, PSX to buy and cut COG to underperform

·     Refiners; Bank America said it emphasizes yield and total return PSX (to Buy) replaces PBF (to Neutral) on our Buy list for US refiners ahead of what we expect to be the worst quarter for the sector in a generation; Piper said for both the IOCs and the refiners, the upcoming results window will likely prove useful only in so much as management teams are willing to speak on the operational maneuverability available to confront near-term sector headwinds (preferred Picks: CVX, COP, HFC, and PSX)

·     Utilities and Power; NS said it will cut planned 2020 capital spending to $165M-$195M, a $145M and 45% reduction at the midpoint from previous projections and 60% below 2019 levels; also says it identified $20M-$30M of controllable expense reductions for the full year; PEG was downgraded to neutral at Mizuho as believe it is fairly valued at these levels, pricing in much of the upside associated with a business mix that is evolving into a more pure-play regulated utility

Financials

·     Bank movers; picture was mixed for banking stock today, with shares of BOH, MTB, TFC, ONB rising despite mixed quarterly results after major banks tumbled last week on softer earnings and higher credit loss provisions. PSEC downgraded at Raymond James saying new dividend policy coupled with PSEC’s election to temporarily modify its asset coverage ratio calculation leave us materially concerned with the state of PSEC’s portfolio and liquidity position; as energy prices plunged, fears of bankruptcies rose in the oil patch, raising concerns for banks that are highly leveraged to energy loans such as TCBI, BOKF, CADE, TCBI

·     Real Estate sector; Stephens upgraded CLGX to overweight while downgraded RDFN and FAF to equal-weight from overweight after making broad-based estimate shifts given the evidence from a host of leading-indicators" that help frame near-term housing transaction declines

Healthcare

·     Pharma movers; EXEL and its partner BMY reported topline results for their Phase 3 CheckMate -9ER trial evaluating Opdivo in combination with CABOMETYX in previously untreated advanced renal cell carcinoma (RCC)/the trials met its primary (PFS) and secondary endpoints (OS); ABBV was upgraded to outperform from sector perform at RBC Capital as expect it to see greater 2020 COVID-19 impact than peers, with consensus still too high/but shares reflect that; NVS said it would conduct a Phase III clinical trial of hydroxychloroquine in hospitalized patients with COVID-19 disease, after reaching an agreement with the U.S. FDA; ESPR shares rise after signing an agreement potentially worth hundreds of millions of dollars with Otsuka Pharmaceutical Co. for the development and commercialization of Nexletol and Nexlizet tablets in Japan

·     Biotech movers; the biotech ETF (IBB) rises to fresh 52-week highs as the index helps pace gains; NBY shares jumped on the heels of an agreement with Shenzhen Microprofit Biotech Co., Ltd. to become the exclusive U.S. distributor of a rapid, finger prick test to determine the presence of COVID-19; ASND reported Phase 2 four week data from its study of TransCon as a replacement therapy for hypoparathyroidism, with the PaTH Forward Trial meeting key objectives; INCY was granted FDA accelerated approval to Pemazyre, the 1st treatment approved for adults with certain types of previously treated, advanced cholangiocarcinoma; ANIX agreed to collaborate with OntoChem GmbH to discover and develop antiviral candidates for the potential treatment of COVID-19; SGEN announced Friday that tucatinib (brand name Tukysa) was approved by the FDA ~4 months ahead of its 08/20 PDUFA date; CDXC announced results from preclinical research on cells and animal tissue infected with COVID-19 cadaver investigating the effect of viral infection on levels of nicotinamide adenine dinucleotide (NAD) within the cell; GILD was downgraded by two analysts (BMO and Wells Fargo)

·     Healthcare services and providers; HCSG was upgraded at Baird to Outperform citing improving funding picture for its customers, much better set earnings expectations, record-low absolute and relative valuation, and now a better environment to hire personnel; in the CRO sector, Baird downgraded shares of ICLR and MEDP estimates saying the market may be unrealistically discounting COVID-19 impacts in some names as they lower sector exposure (says would expect greater upside in names currently most discounted SYNH, PRAH, PPD); RAD expands COVID-19 testing to 11 new store locations; tests now available in 24 locations across 8 U.S. states

Industrials & Materials

·     Industrial & Machinery; several analyst comments in the industrial sector as Goldman Sachs upgraded shares of ALSN, OSK to buy, while downgraded shares of MTW, TEX to neutral in the machinery sector noting outperformance of ALSN/OSK vs. TEX/MTW by 20% YTD, but given the depth of the production downturn, they believe cyclical compounders are well positioned to generate cash flow at the trough and lead the recovery. Citigroup upgraded PCAR to buy (also positive on CMI) while downgraded ALSN as think truckload-related stocks can continue to work as investors gravitate towards the groups that will be earliest to recover post the exogenous virus shock. As the truckload market begins to swing from relative capacity surplus towards equilibrium, and spot rates improve, we expect multiples to expand ahead of expected earnings

·     Aerospace & Defense; in research, Citigroup said they are throwing in the towel far too late for BA as they downgrade shares noting the company has unique challenges beyond a dimmer aero picture. Looking through COVID, SPR offers more compelling risk/reward on a recovery trade, although it’s still risky & hard to time since air travel is still under significant pressure; Goldman Sachs upgraded SAIC to a buy and downgraded BAH to neutral saying organic revenue growth is accelerating at SAIC and decelerating at BAH, SAIC trades at a near record discount to Government IT & Services and the S&P500 while BAH is near a record premium; in news, Der Spiegel reported Germany will order 45 fighter jets from BA to replace aging craft as will order 30 F/A-18 Super Hornets and 15 EA-18G Growlers to replace aging Tornado jets; DCO rises after guiding Q1 revs above $170M earlier , above the $155M estimate and said it expects gross margin percentage of more than 20% for a fifth consecutive quarter

·     Transports; UAL said it expects to get $5B from the U.S. though payroll support plan and expects to borrow $4.5B from U.S. and get $5b in aid/said it has $6.3B of cash and equivalents as of April 16 which includes $2B undrawn revolving credit/Q1 prelim revenue $8B, down 17%; tanker stocks extend gains (NAT, STNG, DSX among them) as companies using tankers as storage facilities to store oil – getting increased ship rates – from March 30^th, Supertanker freight rates are on the rise again as producers, refiners and traders scramble to secure ships for transport or storage amid an increasing global glut of oil. Freight rates for VLCCs along the Middle East to China route today were assessed at ~$180K/day, up from $125K on Friday and a weekly low of $90K on Wednesday, Reuters reported

·     Metals & Materials; in chemicals, DD said it sees better-than-expected Q1 results on coronavirus-led demand; guided Q1 EPS 82c-84c vs. est. 68c/also upgraded to overweight at JPMorgan with ~45% capital appreciation potential to year-end saying shares screen as too cheap; in paper, PKG shares were downgraded to hold at Argus which reflects the impact of the COVID-19 pandemic on paper consumption in businesses, schools and offices

Technology, Media & Telecom

·     Semiconductors; AMD shares outperform in semi space, outperform and nears its 52-week highs of $59.27 as top gainer in the semi index which is lower by a few points on the day (CCMP top decliner followed by drops for equipment names AMAT, LRCX); WDC among top decliners in the semiconductor space after Cleveland Research downgraded to underperform from neutral

·     Media & Telecom movers; DIS was downgraded by two analysts (UBS and Credit Suisse) noting the COVID-19 outbreak is impacting every one of Disney’s segments, with Parks being hit the hardest as they lower estimates; OUT was downgraded at Morgan Stanley saying in 2020, Outfront’s transit contracts have an aggregate minimum guarantee to its municipal partners of $228 mm, levels we would expect Outfront to fall below even in our base case, creating additional margin and FCF pressure; TGNA Q1 prelim results topped estimates for profit and revenues while suspended its guidance for the year

·     Equipment & Component news; FLIR rises on Reuters report that AMZN has started to use thermal cameras at its warehouses to speed up screening for feverish workers who could be infected with the coronavirus; JNPR upgraded at JPMorgan to overweight on the best risk/reward amongst the traditional networking names given the resilience of (admittedly low) top-line expectations helped by robust telco spending, and the upside opportunities from incremental company-specific drivers into the cloud and enterprise segments; COMM was downgraded at JPMorgan on increasing challenges to EBITDA improvement even out in 2021 with the higher demand uncertainty in certain key-markets stemming from a weaker macro environment exiting 1H20; IBM expected to report earnings tonight after the close