Closing Recap

Friday, December 18, 2020

Equity Market Recap

·     U.S. stocks slipped on Friday, though still posted strong gains on the week, with only a small pull back from record highs the day prior for the Dow, S&P 500, Nasdaq, and Russell 2000. Investors remain focused on the prospect of a possible $900 billion coronavirus relief package out of Washington, but as of late day Friday, no deal yet to speak of. Markets also await emergency vaccine approval for Moderna’s drug late Friday, which would mark the second one to hit the market after Pfizer began rolling out its vaccine this past week. Today’s action saw added volatility amid quadruple witching, the simultaneous expiration of stock-index futures and individual-stock futures as well as stock-index options and individual stock options. The day coincides with high volume and comes as Tesla Inc. (TSLA) is expected to be added to the S&P 500 index following the close of Friday trade.

·     Still, there were a few developments late day causing a drag on stocks as Federal Reserve Bank of Dallas President Robert Kaplan said Friday that he believes it will be time for the central bank to start pulling back on its bond-buying stimulus efforts when it is clear the economy is recovering strongly. Those comments pushed stocks lower late day, which had already seen weakness as both sides in Washington again failed to come up with an agreement on stimulus despite comments all week that they were getting close. Also concerns on Brexit as the UK and EU are still without a trade deal ahead of its deadline. Cyber-attack threats also weighed on sentiment after Microsoft said it found malicious software in its systems as part of a suspected Russian campaign that has hit multiple U.S. government agencies by taking advantage of the widespread use of software from SolarWinds (SWI), while economic data was mostly disappointing.

·     In sector news; cyber security stocks were among the biggest winners (FEYE, PANW, QLYS, PFPT, CRWD, FTNT) as cyber-attack disclosures from entities such as Microsoft Corp boost demand for security technology after finding malicious software in its systems related to a massive hacking campaign. Energy stocks were among the biggest decliners on profit taking (EOG, SLB, VLO) despite WTI crude ending at 10-month highs and rising for a 7^th consecutive week. Transports slipped despite better earnings out of Fed-Ex (FDX) as investors focused on the lack of guidance. Retailers active into “Super Saturday” shopping day and Nike (NKE) earnings after the close as well as positive analyst calls.

Commodities

·     Oil prices extended their weekly gains as WTI crude rose 74c or 1.53% to settle at $49.10 per barrel, its highest close in almost 10 months as U.S. lawmakers worked toward finalizing a stimulus deal that may boost near-term demand ahead of a broad roll-out of the Covid-19 vaccine. Oil prices posted their seventh weekly gain in a row, rising over 5%, also helped by the ongoing vaccine rollout and hopes for an economic recovery. As demand hopes rise, oil and gas rigs rise for a 4^th straight week as the Baker Hughes (BKR) showed the U.S. gas rig count up 2 to 81, oil rig count up 5 to 263 as total rig count rises to 346.

·     Gold futures for February slip -$1.50 to settle at $1,888.90 an ounce (snapped a 3-day win streak), but given the weaker dollar, gold prices managed a 2.5% advance on the week (2rd straight weekly gain). Attention remains on Washington into the weekend as pressure mounts on lawmakers to deliver more coronavirus relief aid.

Currencies & Treasuries

·     The U.S. dollar pares recent losses as the dollar index (DXY) recovers off its lowest levels since mid-2018 (hit 89.73 low Thursday), moving back above the 90 level but has remained in a downward trend amid weaker economic data and flight to riskier assets along with expectations of more stimulus for Americans. The Dollar/Yen recovered after printing nine-month lows of 102.87 on Thursday, while the euro and Pound remained higher despite Brexit fear weakness. In Treasury markets, yields remain in a tight range despite stocks touching new record highs again this week, as the 10-yr holds in 0.9%-0.99% range (ending near 0.94%, up a few bps today).

Sector News Breakdown

Consumer

·     Retailers: rising ahead of NKE earnings tonight as well as “Super Saturday", or the last Saturday before Christmas, which is expected to see over 150 mln American shoppers. The National Retail Federation (NRF) said yesterday shoppers could be up by more than 2 mln versus last year; in research, Jefferies upgraded shares of both Macy’s (M) with $14 tgt and KSS (47 tgt) to Buy ratings; Bank America reiterated Buy rating on top kids/teens pick CRI and upgraded PLCE to Neutral based on view of a healthier backdrop for the children’s apparel market; DKS as partnered with online-grocery platform Instacart to enable same-day delivery from more than 150 stores; in office furniture, SCS Q3 EPS 8c beat by 5c but sales of $617.5M missed the $628.8M estimate (follows weaker outlook from peer MLHR yesterday)

·     Auto sector: TSLA shares surge ahead of expected addition into the S&P 500 index later today with its inclusion official on Monday, December 21 as part of the highly anticipated index rebalancing; VLDR announced a multi-year contract Motional, a robotaxi provider that is controlled by Hyundai, in which VLDR is the exclusive long-range Lidar provider; electric vehicle names outperform led by gains in BLNK, SOLO, FSR, AYRO, NIO

·     Housing & Building Products; housing space has been on fire, following a strong earnings report and upbeat delivery guidance from LEN the day prior and better housing starts data; Barclay’s said that Homebuilders represent attractive relative value in a compelling housing environment, with strong pricing bolstering returns on equity as they upgraded PHM, TMHC ratings (to OW from EW) and downgraded LEN (to EW) – while on building products, they have less conviction that earnings will be stronger than is already appreciated, expect decelerating R&R growth, and slowing margin expansion as they downgraded MAS and OC (to EW from OW) but designate BLDR their new Top Pick

·     Consumer Staples & Restaurants; SAFM downgraded to neutral from buy with $140 tgt at Goldman Sachs saying they see a more balanced risk/reward in shares post FY4Q20 results, with rising grain costs and an uneven recovery in foodservice markets; DRI posted mixed Q3 results as EPS beat but sales were just below views ($1.66B vs. $1.68B est.) with comp sales down (-20.6%) and said it expects Q3 sales to come in at 65% to 70% of prior-year levels, as certain U.S. states have re-introduced some COVID-19 restrictions

·     Leisure and Gaming; in RV space, WGO as posts Q1 adj. income of $1.69 easily topping the 98c estimate as Q1 revenue of $793.1M also beat the $752.5M est. driven by strong end-consumer demand for its products; ABNB initiated with a positive rating and $180 tgt at Susquehanna (rises for 3rd straight day after falling the first three days of trading after shares opened well above its IPO price (opened at $146 after pricing at $68) – recent high $165 and low $121.50; IGT signs agreement to license exclusive IP rights for GALAXIS and SYSTEM2Go to Modulus; PENN tgt raised to $101 from $85, maintain buy and DKNG tgt raised to $60 from $55 at Bank America and remains neutral rated in online gaming – meanwhile, a sports betting bill in Ohio did not reach the Senate floor in the final days of the legislative session which weighed on online gaming

Financials

·     Bank movers; NTRS was upgraded to Buy with a $112 pt from Neutral with a $99 pt at Deutsche; Jefferies favors asset managers BLK, ICE, and BX for 2021 given M&A momentum and a market structure that will ease in the second half of the year after facing early challenges; Citi lists SCU, KKR, LPLA, BLK, APAM, and CME as their 6 top picks for 2021 across financials; Truist upgraded IBTX to Buy with a pt raise to $75 from $66, saying the name is positioned to outperform peers who face revenue growth challenges given slow loan growth and low interest rates; OCFC was upgraded to Buy from Neutral at DA Davidson who also raised their target to $24 from $17

·     Insurance; HIG announced a $1.5B share buyback program; Credit Suisse lifted its price target on AJG to $132 from $117 and maintain their Outperform rating on stronger brokerage revenues due to FX tailwinds; Credit Suisse downgraded AEG to Neutral from OP; PGR Total personal auto policies in force of 16.5M increase 11% Y/Y with direct policies up 13% to 8.88M and agency policies up 9% to 7.62M/November net premiums written of $2.96B increase 14% Y/Y

·     Consumer Finance; JMP said the “Buy Now Pay Later” emergence is a potential disruptor to the private label industry and represents both a complementary offering and potential competitive threat to card issuers, and they also lowered their Q4 estimates on ADS after they disclosed marketing expenses that were greater than the prior forecast at a recent investor conference and raised their price targets on PYPL to $250 from $215 and SYF to $36 from $32; Wedbush sticks with FIS and PYPL as their top 2 picks and adds V and MA as top picks, choosing these 4 stocks due to the common theme of a gradual improvement in transaction volumes for travel and hospitality and brick-and-mortar merchants post-pandemic, which will boost revenue growth and margins; FTFT signed share exchange agreement to acquire Asiasens Investment Holding as its entry into the Indonesian market; SQ was upgraded by Autonomous Research

·     REITs; In mortgage REITs, BTIG notes that recent dividend raises, including yesterday’s by MFA (to 7.5c from 5c, current yield 7.6%) and TWO (to 17c from 14c, current yield 10.3%), reflect strengthening liquidity positions; KBW downgraded TWO to Market Perform and upgraded RWT, PMT, NLY, NRZ to Outperform

·     Financial Services; in mortgage finance, BTIG raised its price targets on NMIH to $32 from $30, ESNT to $58 from $51, and MTG to $16 from $13, and lowered RDN to $26 from $28; MODN announced it has entered into an agreement to acquire Deloitte’s life sciences pricing and contracting solutions business and underlying technology for $60M in cash; CURO rises after saying it would benefit from the merger deal between Katapult Holding Inc., about 40% owned by CURO, and FinServ Acquisition Corp. FinServ said Friday that Katapult would become a publicly traded company through a merger with the special purpose acquisition company

Healthcare

·     Pharma movers; JNJ said it has fully enrolled participants for the first late-stage trial of its COVID-19 single-dose vaccine candidate; MESO shares fell after saying the Data Safety Monitoring Board noted the company’s trial of remestemcel-L in ventilator-dependent patients with moderate to severe acute respiratory distress syndrome due to COVID-19 is not likely to meet its endpoint; KPTI announces FDA approval of Xpovio (Selinexor) as a treatment for patients with multiple myeloma after at least one prior therapy

·     Biotech movers; an FDA advisory panel recommended that MRNA’s Covid-19 vaccine be cleared for broad use, setting the stage for the FDA to grant an expected emergency-use authorization by late Friday. The advisory panel’s vote was 20-0, with one abstention, to recommend use of the Moderna vaccine for people 18 years and older; GLSI 660K share secondary priced at $40.00; MREO surged after entered into a license and collaboration agreement for setrusumab, a monoclonal antibody in clinical development for osteogenesis imperfecta, with RARE

·     Healthcare services and providers; CNC reaffirms FY2020 total revenues guidance of $109.8B-$111.4B vs. consensus of $111.26B and adjusted EPS of ~$4.90-$5.06 vs. consensus of $4.99; WBA said it had begun administering PFE’s COVID-19 vaccine to residents and staff at U.S. long-term care facilities as plans to administer the vaccine to about 3 million residents and staff in 35,000 long-term care facilities; XRAY cut to hold this morning at Stifel after saying checks suggest that its likely on the back end of the Omnicam to Primescan upgrade product cycle

·     MedTech and Equipment; BEAT rises after PHG agreed to buy the provider of remote cardiac diagnostics and monitoring, in a deal worth $2.47 billion $2.8B with debt), with BEAT holders to receive $72.00 per share, a 16.5% premium to yesterday’s closing price https://bit.ly/3aojdHx ; SNN upgraded to Outperform, with a new target price of £17.50 as expect a strong recovery as the world emerges from the COVID-19 pandemic; MASS 6.5M share IPO priced at $20.00

Industrials & Materials

·     Industrial & Machinery; MYE upgraded to overweight and $25 tgt at KeyBanc citing an ambitious vision for growth & value creation; AGCO, CMI named as top picks in machinery into 2021 at Bernstein and introduce the tactical pairing of short URI vs. long OSK after machinery stocks are on track to end the year outperforming the S&P by 13% and expect this trend to continue; APOG reported mixed 3Q with light revenue and better EBITDA and EPS benefit from cost reduction efforts, a Q/Q decrease in backlog, balance sheet improvement and no forward guidance

·     Transports: FDX shares slipped despite a big beat on profit and revs (though analysts note headline results had the benefit of a low tax rate), but FDX did not provide a F21 EPS outlook which disappointed some investors; overall Dow Transports still held up well despite the selling pressure post FDX earnings as UPS fell in sympathy

·     Aerospace & Defense; SPCE shares tumble after files prospectus related to the resale of up to about 112.96 mln shares of common stock by the selling stockholders; AIR posted 28% fall in Q2 revs to $403.6M, mossing the Street est. of $409.4M saying sales to commercial customers fell 48%, primarily due to continued impact of COVID-19

·     Metals movers: U.S. Steel (X) issued lower outlook as sees Q4 EPS loss (85c) vs. est. loss (57c) and Q4 Ebitda about $55M vs. est. $95.3M (worse outlook than peers STLD, NUE yesterday); CDE was downgrades at both Canaccord and Roth Capital

·     Chemicals; DD says its board has approved the separation of DuPont’s Nutrition & Biosciences business through an exchange offer (split-off); DOW was upgraded to overweight and raise tgt to $60 from $47 at JPMorgan saying business conditions in the middle of December for commodity chemicals look much better than they did two weeks before; FUL was upgraded to Buy from Neutral at Citigroup with $61 tgt saying company’s portfolio has transitioned from commodity to specialty glues for end markets including automotive; CE was downgraded to in-line from outperform with $145 tgt

·     Paper & Forest sector; CIBC said following revisions to their commodity outlook, they upgraded RFP and WFSTS to Outperformer from Neutral and increasing our rating on UFS to Neutral from Underperformer. Downgraded rating on ACAZF to Neutral from Outperformer – says heading into 2021, continue to favor wood products equities within our Paper & Forest Products coverage universe given attractive supply/demand fundamentals for U.S. housing. Raised EBITDA forecasts for next year by 20%-30% across most wood products names

Technology, Media & Telecom

·     Semiconductors: The U.S. confirmed recent Reuters reports that China’s biggest chipmaker (SMICY), along with 80 other companies, will be added to the U.S. Commerce Department’s Entity List which will deny them access to U.S. technology from software to circuitry, on top of less severe curbs imposed in September, when the U.S. placed it on an export restrictions list for supplying the military.

·     Software movers; MSFT said it found malicious software in its systems as part of a suspected Russian campaign that has hit multiple U.S. government agencies by taking advantage of the widespread use of software from SolarWinds (SWI); Internet security names (CRWD, QLYS, FTNT, FEYE) benefitting from the hacking news; PLTR downgraded to underperform at CSFB with $17 tgt (from $13) as see valuation disconnected from fundamentals with the stock now trading over 50% above our previous blue-sky scenario and see risk/reward skewed to the downside; GLUU filed an infringement lawsuit against Reworks, the developer of Redecor, which has emerged as a competitor to Glu’s largest game, Design Home; ASUR 2.6M share Secondary priced at $7.25

·     Media & Telecom movers; VIAC, IHRT and DISCA all downgraded to Underperform from Neutral at Bank America due to challenging near term fundamentals saying in the case of the video-related stocks, i.e. VIAC and DISCA, they must transition their business models to DTC, already a competitive field from both traditional media cos. and also well capitalized FAANGs; FUBO tacking on to yesterday 18% advance initially after positive Motley Fool pick

·     Tech services, supply chain; FLEX downgraded to Neutral at JPMorgan on valuation, pt remains $17 noting the stock, up 41% YTD (S&P 500 up 15.2%) and is trading above our 2021 price target and risk-reward looks balanced at this point

·     Hardware & Component news; BB shares fell after saying Q3 losses widened as sales decreased while software and services revenue growth was in line with the company’s projections; revs fell to $218M from $267M YoY vs. est. $221.7M; SNE is pulling CD Projekt’s (OTGLY) video game Cyberpunk 2077 from its PlayStation Store and offering full refunds after gamers complained it was rife with bugs