Closing Recap

Wednesday, December 09, 2020

Equity Market Recap

·     U.S. stocks erased initial gains, with major averages falling sharply from record highs as markets appeared tired by the ongoing bickering in Washington, as Democrats quickly rejected the White House’s latest stimulus offer of over $900B on Tuesday evening, hours after Senate Majority Leader Mitch McConnell proposed a much narrower path. Technology was the biggest decliner, falling as much as 2% (worst drop since the end of Oct), dropping about 300 points off intraday record highs above 12,600 as investors took some profits following a massive 5-week run. The day’s action comes after the S&P 500 and the Nasdaq finished at record closing highs on Tuesday. Meanwhile, the market continues to monitor the rise in virus cases and increase in lockdowns, weighing those developments against the rollout of a vaccine as markets are widely anticipating an FDA approval of upcoming vaccines from Moderna (MRNA) and Pfizer (PFE). Senate Leader McConnell said the Democrats "brushed off" his proposal for a relief bill that would leave out liability protection and state aid. Hopes for a vaccine-linked economic recovery and more domestic fiscal stimulus sparked demand for economically sensitive stocks early such as banks, energy, consumer, and industrials again (which held up well despite the midday market dump).

·     IPOs a big story today with DoorDash (DASH) opening at $182 a share in its trading debut after the food delivery company priced its 33M share IPO at $102, well above its prior price range of $90-$95, while not to be outdone, C3.ai (AI) shares more than doubled in its IPO debut as shares opened at $100 per share after pricing 15.5M shares at $42 overnight. AirBnB (ABNB) is expected to price its initial public offering on Wednesday night with recent range $56-$60. The market climb since the Presidential election has been nothing less than spectacular with stocks bouncing on the slightest pullback as everyone appears to get into the cyclical rotation, SPAC craze, electric vehicle (EV) growth story and small cap recovery – and most recently the reopen trade as transports, leisure, lodging, retail and restaurant names seeing strength day after day.

Commodities

·     Oil markets held up relatively well despite the broader stock market pullback off all-time highs, as WTI crude slips 8c to $45.52 per barrel, but off earlier lows of $44.95 after bearish inventory data. Energy markets held up well as travel and leisure names outperform on expectations of an FDA approval for upcoming vaccines in the next week. Oil prices rolled this morning after bearish inventory data as crude stocks, gasoline and distillate inventories rose sharply last week, the Energy Information Administration said The EIA said crude inventories rose by 15.2 million barrels in the latest week to 503.2 million barrels, vs. ests for -1.4M barrel drop. Gold prices dropped sharply, as February gold slides 1.9%, or $36.40 to settle at $1,838.50 an ounce as the dollar was steady and commodity prices dropped with stocks.

Currencies & Treasuries

·     The U.S. dollar index edges higher by about 0.25% back above the 91 level (highs 91.20), off earlier lows of 90.68 as the buck looks to recover off 2 ½ year lows. The U.S. Treasury sold $38B in 10-year notes at a yield of 0.951% vs. 0.947% when issued prior, with bid-to-cover (demand) at 2.33 and indirect bidders awarded 62.3% and directs 14.7%. Treasury yields held up despite the market pullback late day, as the 10-year stayed around 0.93% (up 2 bps), in a lackluster session.

Sector News Breakdown

Consumer

·     Retailers; GME shares dropped after Q3 revenue missed views on a same-store sales decline of (-24.6%) and filed a mixed securities shelf; COLM downgraded to neutral at Bank America to reflect our more challenged near- to medium-term outlook and see potential headwinds to its recovery; DBI reports total sales fell 30.1% in Q3 and comparable sales were off 30.4% vs. -25.4% est.; TPX provided another market update as now expects EBITDA growth of 30% on +LDD sales (was high teens on +LDD) and targeting the repurchase of $280m for 2020, including $100m in Q4; TPR pt raise from $30 to $40, reit Outperform and Best Ideas for 2021 at Cowen; VRA slides as Q3 was weaker than expected, but profit rose, helped by a drop in expenses ($124.8M vs. est. $130M) while comp store sales fell around (-19%), with store traffic still hurt by the pandemic; PRTY advances strategy to create North America’s leading party platform enters agreement to sell certain international operations to Endless LLP

·     Auto sector; XPEV priced its 48M share Secondary $45.00; JPMorgan sees a favorable setup for auto dealerships into 2021 with preference for used-only over franchise dealers, and they see the most upside at OW-rated VRM, and continue to like OW-rated LAD and CVNA as long-term core holdings, with further outperformance from here likely to come from continued execution on robust growth expectations, but downgrade KMX to Neutral as same-store unit growth is likely to continue to underwhelm expectations in the near term while on-line only peers are likely to outpace on both y/y and absolute units; JPMorgan also raised its pt on TSLA following yesterday’s $5B offering, but its new $90 pt is 86% off yesterday’s closing price, as the analyst maintains their UW rating and advises investors to not add the stock ahead of its inclusion in the S&P 500 on 12/21, saying shares are dramatically overvalued after rallying more than 800% since Dec 2018 despite analysts’ consensus EPS moving lower for every year from 2020-2024

·     Housing & Building Products; LOW announces new $15B repurchase program; reiterates its outlook for operating results for Q4 and unveils strategy to drive market share acceleration at its 2020 investor update; LOVE Q3 EPS 16c vs. est. loss (88c) on better revs $74.7M vs. est. $66.1M as EBITDA $6.0M vs consensus ($10.2M) and comps +53.5% vs consensus +16.0%; building products sector-initiated coverage at UBS with buys on DHI ($94 tgt), FBHS ($105 tgt), LGIH ($140 tgt), MAS ($71 tgt) and NVR ($5,558 tgt) which are seen as top picks saying that the divergence between residential and commercial builders may persist on the other side of the pandemic (sell rated on AWI, OC and SUM)

·     Consumer Staples; UNFI posts Q1 2021 adj. EPS 51c, below est. 74c, on sales $6.67B, also missing est. $6.81B, and posts net loss of $1M (2c/share) vs $383.9M loss YoY; CPB Q1 adj EPS $1.02 (est. $0.78) on sales $2.34B (+7.2%, beats est. $2.32B), driven by bulk purchases of soups (+21% alone, meals and beverages +12%) ahead of the winter, though Q2 guidance is soft (net sales +5-7% vs est. +6.5%, adj EPS 81-83c vs. est. 83c); HRL was downgraded to Hold from Buy at Argus on projected slowing retail sales growth in FY21 on low product inventories and decelerating EPS growth in FY22; TWNK was added to JPMorgan’s Analyst Focus List as a growth idea with 37% upside on its $19 target, which was raised from $17

·     Leisure and Gaming; DASH 33M share IPO priced at $102.00, above its recently raised price range of $90.00-$95.00 but shares surged, as opened well above at $182; in cruise lines, Cunard, a part of CCL, has extended its pause in operations due to the ongoing travel constraints in place across the world; in online gambling, PENN, DKNG, FUBO shares active, outperform amid the potential of sports betting in New York after Assemblyman Gary Pretlow told PlayNY that he had a call earlier this week that "solidified a commitment" from Assembly Speaker Carl Heastie to include sports betting in a revenue bill; upbeat vaccine news lifts leisure and travel again

Energy

·     Energy stock movers; WTI now expects its Q4 production to average between 34,700-36,900 barrels of oil equivalent per day, up from 31,500-35,000, of which 34% is estimated to be oil, 11% natural gas liquids, and the balance natural gas; TALO 8.25M share Secondary priced at $8.90 and was downgraded to Sector Weight at KeyBanc on the dilutive capital raise; JPMorgan downgraded BE on valuation after the stock has risen 310% YTD and through their previous $22 target, though they set a new $26 pt; TOT was downgraded to Hold from Buy at Berenberg

·     Inventory data: API showed a surprise build of 1.14M barrels of oil for the week ending Dec. 4, a build of 6.44M gasoline barrels, distillate inventories show a build of 2.32M barrels and Cushing inventories show a draw of 1.85M barrels. The EIA today said crude inventories rose by 15.2 million barrels in the latest week to 503.2 million barrels, vs. ests for -1.4M barrel drop while crude stocks at the Cushing, Oklahoma, delivery hub fell by 1.4 million barrels. U.S. gasoline stocks rose by 4.2 million barrels in the week to 237.9 million barrels, above views.

·     Utilities & Solar; JKS announced the sale of up to $100M of its American depositary shares; JPMorgan still sees further upside potential in alternative energy on economic-based growth, government stimulus, and ESG flows even after their stocks under coverage in the sector outperformed the S&P 500 (+192% vs +15% YTD), and says residential solar is their preferred segment with installers RUN and NOVA being their top picks on accelerating customer growth (forecasted solar installations to grow ~22% YoY in 2021), and HASI as their top income idea and suitable for long-term investors seeking exposure to renewables with less technology risk due to its unique business model and declining cost of capital; JPM also upgraded to ARRY to OW from N despite its rich valuation after the stock’s recent underperformance (down over 20% from late Nov vs +2% for S&P); SWI submitted a Form 10 registration statement with the SEC regarding a potential spin-off of its managed service provider business

·     Refiners; ; Wells upgraded DK to Overweight with a pt raise to $25 from $12 and downgraded HFC to Underweight, reflecting the risk/reward associated with the recovery in refining margins and the very different commitments to renewable diesel expansion and capex that are likely to unfold in 2021, favoring DK’s option to buy into a smaller facility post-construction over HFC’s project execution risks of constructing two separate facilities and ongoing capex requirements related to normal refining operations

·     MLP Sector; Citi said MLPs screen better than C-corps, and ranks WES as the best in the sector, says WMB and ENB remain core recommendations, EPD is a core holding, ET offers the most upside despite seeming to remain in permanent purgatory, and they also like MMP, MPLXand NS as stocks that screen above average, though they remain on the sidelines on KMI and OKE

Financials

·     Financial Services; CATM receives acquisition proposal from Douglas Braunstein, founder of Hudson Executive Capital LP and Apollo Global Management Inc for $31 per share in cash, which implies a premium of 19% to stock’s last close https://bit.ly/3m0idf0 ; INTU 1.376M share Block Trade priced at $368.50; MGI said it delivered 136% year-over-year cross-border transaction growth and 135% year-over-year revenue growth for November in its direct-to-consumer digital business, MoneyGram Online (MGO)

·     Consumer Finance; MA announces new $6B share buyback program and raises quarterly dividend to 44c from 40c pe share; ADS tgt raised to $95 at Truist saying while the pandemic creates N-T volatility, we believe the new management team has made progress in positioning the company to grow L-T.

Healthcare

·     Pharma movers; Britain’s medicine regulator has advised that people with a history of significant allergic reactions do not get PFE/BNTX’s vaccine after two people reported adverse effects, England’s National Health Service (NHS) said; RCKT shares jump after it reported positive early data from the Phase 1 trial of RP-A501 in treating Danon disease; HOOK 3.4M share Spot Secondary priced at $11.75; ELAN downgraded to hold at Argus; PRTA reports positive 9 month results from phase 1 long-term extension study of prx004, the first investigational anti-amyloid immunotherapy for the treatment of ATTR amyloidosis; DCTH 1.46M share Spot Secondary priced at $13.25; ABBV announces positive late-stage data for upadacitinib in Ulcerative Colitis; NTEC surges as enters into a cannabinoid research partnership with London-based company GW Pharma for an undisclosed research program that will employ its drug delivery system; LLY said its Verzenio data shows decrease in breast cancer recurrence

·     Biotech movers; PSTI plunges after saying it decided to end late-stage study of its treatment for critical limb ischemia as the decision follows an independent data monitoring committee’s review, which found the study is unlikely to meet its main goal by the time of the final analysis; KURA 8.11M share Secondary priced at $37.00; UTHR said the FDA has granted orphan drug designation to its Treprostinil for the treatment of patients with idiopathic pulmonary fibrosis; SNDX 5.435M share Secondary priced at $23.00; INO reports positive data from a mid-stage study of its experimental drug candidate, VGX-3100, for treating patients with anal dysplasia caused by a strain of human papillomavirus; LPCN said the FDA approved its testosterone replacement therapy, tentatively

·     Healthcare services and providers; OMCL shares rose after Bloomberg reported BAX has expressed interest in buying the company but notes that no final decisions about the deal have been made https://bloom.bg/3gttsvc ; CVS says 44,000 long term care facilities have selected CVS for covid-19 vaccine – operation warp speed vaccine summit; WBA says 30,000 long term care facilities have chosen Walgreens for covid-19 vaccine- operation warp speed vaccine summit; VSPR and category-creating beauty health company HydraFacial entered into a definitive merger agreement pursuant to which HydraFacial and Vesper Healthcare will combine, and after which HydraFacial will become a public company https://bit.ly/36XIQg6

Industrials & Materials

·     Aerospace & Defense; AVAV reported adjusted fiscal Q2 EPS of $0.48 topping est. $0.31 as organic sales growth in the quarter was 11%, with revenues hitting $93M, well ahead of expectations and guidance and gross margins increased to 44% due to a favorable mix; BA delivered a 737 MAX to UAL, the first carrier to receive a newly produced model of the jet after U.S. regulators lifted the 20-month grounding last month

·     Metals & Materials; metals stocks among best performers the last few weeks on China economic recovery, stimulus hopes in the U.S. and hopes a Covid-19 vaccine will boost the economic recovery in 2021; U.S. Steel (X) upgraded to buy from hold with $22 tgt at Argus; Morgan Stanley initiates coverage of the NA steel industry with an In-Line view noting he US S&P steel index up 38% over the last three months vs. the S&P 500 up 11%, thinks the risk-reward is less compelling from here, but notes that NA steel equities are under-owned (OW on STLD and EW on NUE, X); gold miners fall (NEM, GOLD, AEM) as bullion prices retreated after optimism driven by more progress on the COVID-19 vaccine front boosted hopes for a smoother economic recovery

·     Chemicals, OLN was upgraded to Overweight with $32 tgt at Wells Fargo as believe strong chlorine fundamentals and OLN’s new strategy to leverage its #1 global chlor-alkai position under new CEO should drive stronger EPS in 2021 than expected

Technology, Media & Telecom

·     Internet; FB dropped late day after the FTC sued Facebook, alleging that the company is illegally maintaining its personal social networking monopoly through a years-long course of anticompetitive conduct; overall, group down with broader market, having failed to surge the last few weeks amid rotation into cyclical and Smallcap stocks with AMZN, GOOGL, NFLX, FB holding, but not rallying; CHWY solid Q3 beat and above-consensus Q4 guidance for +43-45% sales growth and noted volume trends accelerated in October and remained at elevated levels through November

·     Semiconductors; STM shares tumble after the company lowered most of its midterm targets and pushed them back a year to 2023 – lowered midterm forecasts for gross margin, operating margin, and earnings before interest, taxes, depreciation, and amortization margin; PLAB drops after posting Q4 earnings and revenues below consensus saying revenue fell due to geopolitical factors and softness in some sectors in which it operates and guides Q1 midpoint below consensus views ($145M-$150M vs. est. $152.1M)

·     Software movers; FEYE shares fell after the Internet security company said they were hacked in company blog post; says internal hacking tools were stolen and that it is working with affected vendors; MDB delivered a strong Q3 with revenue/EPS coming in well ahead of consensus estimates, reflecting normalizing Atlas customer usage (now 47% of revenue vs. 44% QoQ) and robust total (+42.1% YoY, accelerating from 1Q/2Q) and large customer (+30.5% YoY) growth; GWRE reported F1Q21 ARR of $513M that topped Street estimates of $511M and the upper end of guidance ($509-512M). Revenue and EPS ($170M / $0.17) also came in ahead of consensus expectations ($164.6M / -$0.05) aided by better-than-expected term license helped by duration ($1M above plan); AI 15.5M share IPO opened at $1oo after it priced at $42.00 in a big day for new issues; PUBM 5.9M share IPO priced at $20.00 (opened above $25)

·     Software research, JPMorgan upgraded cyclically sensitive names ADSK, ALTR, CDNS, INTU, PTC, VRSN, WIX – downgraded high multiple names AVLR, NET, CRWD, DOCU, OKTA, VEEV, ZM; Stocks still waiting for revenue improvement – downgraded PS, SCWX, MODN, SSNC and Secular changes in cyber security – downgrading CHKP, FTNT, PANW saying changes by no means reflect anything on the tremendous operating condition of these names, but rather our view that an expanding economy could cause sector rotation and potential performance headwinds for these types of stocks like they did in 2010; NICE raised to buy at Davidson saying has benefited in the current environment although take the view that most significant benefits will be longer-lasting

·     Media & Telecom movers; AT&T Inc. (T) received bids for its DirecTV unit valuing the satellite-TV service at more than $15 billion including debt, according to Reuters https://bit.ly/39RSy5H ; DIS upgraded to overweight from equal-weight at Wells Fargo as think Disney is set to complete its transformation into a global streaming content company including the deep Disney brands (Disney+), general entertainment (Star, Hulu, Disney18+) and eventually global sports (ESPN+); NLSN top gainer in the S&P after the company outlines its “New Nielsen” model and FCF guidance at its investor day; KeyBanc initiated media with overweight and $177 tgt on DIS,, equal-weight ratings on DISCA and FOXA and an underweight on VIAC as believes the media industry is entering secular decline and sees ViacomCBS as one of the most exposed, as its streaming services lack original content and global reach and recommended selling shares; NYT total advertising revenues in Q4 of 2020 are expected to decline approximately 20% YoY; WMG 6.9M share Block Trade priced at $31.50

·     Hardware & Component news; MTSC to be acquired by APH in a $1.7B deal, with MTS shareholders will receive $58.50 per share held, representing a premium of 51.9% to the stock’s close on Tuesday. https://on.mktw.net/37RHH94 ; ROKU tgt raised to Street high $375 from $220 citing a new distribution agreement with Discovery+, new distribution agreement with HBO Max and additional inroads in the international market; ROKU also preferred over NFLX at Needham as suggests a pair trade