Closing Recap

Wednesday, February 19, 2020

Equity Market Recap

·     U.S. stocks just continue to make all-time highs with markets exhibiting “zero” fear, with the Nasdaq Composite topping the 9,800 level for the first time ever (high above 9,838), and the S&P 500 trading to its all-time best as investors continue to fear missing out on the ongoing stock rally. Technology and Energy sectors help pace the gains, boosted by strength in semiconductors and energy stocks boosted by a bounce in WTI oil as well as well received earnings results from FANG, CXO and DVN. The amazing part was that as stocks were making all-time highs, gold prices were at seven-year highs, the U.S. dollar touched three-year highs while Treasury prices remain strong with yields hovering near very low levels. Worldwide central bank stimulus has certainly been part of it including recent moves by China to help companies deal with the recent impact of the coronavirus. China’s Ministry of Industry and Information Technology said overnight the government would connect factories with technology companies to identify weak links in their supply chains. The Fed’s Neil Kashkari with surprising comments today saying he sees no imminent change in rates and is comfortable with rates where they are and sees the Fed sitting here for next 3-6 months, but said his best guess is next rate move would be down, not up. Even surging inflation data points today in the form of PPI failed to worry markets (recall the Fed has indicated in the past it will tolerate stronger than 2% inflation for a sustained time before it will consider hiking rates), while housing market data hit their best levels in over 13-years.

Economic Data

·     Producer prices (PPI) for January jumped the most in more than a year, rising 0.5% above the 0.1% estimate (after a 0.2% boost in Dec), boosted by rises in the costs of services such as healthcare and hotel accommodation. In the 12 months through January, the PPI advanced 2.1% (vs. est. 1.6%), the biggest increase since May, after rising 1.3% in December. Excluding food, energy and trade services components, producer prices increased 0.4%, the most since April.

·     Housing starts for January fell -3.6% to 1.567M, but was better than the expected decline of -11.2% to 1.428M as the prior month was upwardly revised to 1.626M (highest since Dec 2006) from 1.608M; Building permits surged to a near 13-year high, up 9.2% to 1.551M (above est. 1.45M and highest levels since March 2007), pointing to sustained housing market strength amid lower mortgage rates. The 30-year fixed mortgage rate is at an average of 3.47%.

Commodities

·     Oil prices jumped along with gains in stocks, as WTI crude rose $1.24, or 2.4% to $53.29 per barrel to its best levels in roughly three weeks ahead of inventory data tonight and tomorrow. Prices got a boost after the U.S. imposed sanctions on an arm of Russian oil giant Rosneft, as well as reports of a further decline in Libyan oil output according to some reports. China reports of slowing cases on the coronavirus also helped ease demand concerns.

·     April gold rises $8.20 or 0.5% to settle at $1,611.80 an ounce, its 5th straight day of gains and still at best levels since March 2013, failing to fall despite surging stock prices, possibly higher on rising inflation fears after strong PPI data, while the coronavirus impact still remains.

Currencies & Treasuries

·     The U.S. dollar was broadly higher vs. counterpart currencies, moving to its best levels against the Japanese yen since May of last year (up 1.35% at 111.38), as the overall dollar index (DXY) traded to fresh 3-year highs. The euro dipped to its lowest levels since May of 2017 as well on strong US data and continuing weaker data out of the Eurozone. Treasury market’s remain higher as yields still weak with the 10-year at 1.56% and the 2-year at 1.41% as stocks, bonds, gold all surging on the day, holding levels after the FOMC minutes.

Sector News Breakdown

Consumer

·     Retailers; Adidas (ADDYY) said business in Greater China is down 85% since the Chinese New Year on January 25 while a lower level of shopping traffic is also being seen in Japan and South Korea; GRMN rises as posts Q4 revenue of $1.1B, above the $1B estimate with EPS of $1.89 well above the $1.05 estimate and issues upside 2020 guidance; WMT gives back most of yesterday’s gains (shares rose Tuesday despite miss on top, bottom line)

·     Autos; TSLA shares jumped after Piper raised its price tgt to $928 from $729; in auto parts, APTV said given recent COVID-19 developments, it is lowering its 1Q20 revenue and EBIT guidance reflecting a significant level of production delays through February; SAH shares sunk despite Q4 adjusted EPS of 97c topping the 88c estimate on better sales

·     Consumer Staples; APRN Q4 revenue fell 33%, as the company spent less on marketing while its customer base also shrank 9% to 351,000 compared with the previous quarter/said it was considering going private and announced closure of its Arlington, Texas facility; NOMD expects to report Q4 organic revenue growth of 1.7% and adjusted EBITDA of approximately €116M and sees 2020 organic revenue growth in the low-single digit range and adjusted EBITDA of approximately €440M to €445M vs. €456M consensus; COTY has launched the sale of its professional hair and nail products business, according to Bloomberg which could bring in as much as $8B for the company; SPB reaffirmed its FY20 guidance during its presentation today at the CAGNY conference today; FDP falls as reported Q4 adjusted loss per share of (45c) missing est of up 3c on weaker sales of $1.03 billion below the estimate $1.07 billion

·     Restaurants; DNKN was downgraded to hold at Argus saying they expect the company to perform solidly over the next several quarters but think that the company’s relatively modest growth prospects and high valuation are likely to restrict further share price gains; WING reports system-wide domestic comparable sales of +12.2% in Q4 vs. +12.0% est. and comp sales were up 8.9% at company-owned outlets during the quarter/adjusted EBITDA rose 13.2% to $14.2M; CMG rises to new all-time highs and posts 9th straight day of gains

·     Housing, Home Retail & Building Products; BBBY announced a $1B capital allocation strategy, including plans to spend $400M in capex and return up to $600M in capital primarily in the form of share repurchases; HVT reported 4Q EPS and sales above expectations, as merchandise availability improved, and selection stabilized; LZB reported 3Q EPS that was above expectations, driven by strong margins in the quarter and 10.5% written same-store sales were the strongest in many years; DOOR shares rise on earnings beat of 69c vs. est. 58c and better 2020 guidance as sees adj Ebitda $310M-$345M vs. est. $314.6M

·     Transports; Dow Transports underperformed the broader markets and well off 52-week high of 1,359 about a month ago (1/17), with shares of Ryder (R) falling a 4th straight day following a weak outlook last week; shares of CAR among top gainers with rails and airlines mixed

·     Casino & Leisure movers; SGMS shares slumped as reported a -7% Q4 AEBITDA miss as all segments ex-Digital were soft while mgmt also pushed back their 5.5x net leverage target to 2021E, with year-end 2020E now guided to 6.0x, citing tempered expectations around the Gaming business; FUN reports attendance rose 3.9% to 5.074M during the seasonally slower Q4 period as in-park per capita spending fell to $46.44 vs. $47.20 a year ago and adjusted EBITDA came in at $54.58M vs. $68.12M a year ago; SSTI soars after reporting Q4 adjusted EBITDA of $3.2M vs. $2.5M to go along with a revenue and EPS beat; RCL downgraded to hold from buy at Argus as firm noted the cruise liner recently announced that it had cancelled an additional 10 cruises in Southeast Asia (it had previously cancelled eight) due to the coronavirus outbreak. It also warned that the 18 cancellations would reduce 2020 earnings by $0.65 per share

Energy

·     E&P and equipment sector; CXO Q4 EPS was 11% above consensus and 4Q19 oil production was 3.7% above consensus while 1Q20 oil production guidance was 2.4% below consensus, and 4Q19 capex was 1.2% above consensus; FANG Q4 EPS was in line with consensus, but 4Q19 capex was 3.7% above consensus while 4Q19 production was pre-reported; in research NOV was downgraded to hold at Argus as E&P customers reduce capital spending amid low oil prices, and focus on strengthening their balance sheets and returning capital to shareholders; RIG was downgraded to sell at Argus as they remain concerned about challenging conditions in the offshore drilling market despite the company’s relatively new fleet; GEL sinks to its lowest in more than a decade after Q4 earnings and revenues both come in well short of expectations.

·     Utilities & Solar; ENPH shares surged after better Q4 revs and gross margins – 4Q adj revs $210M vs. est. $205.4M, and 4Q adj gross margin 37.3% vs. est. $35.4% (results helped boost shares of SEDG as well); RUN was downgraded at KeyBanc on valuation; utilities pulling back from record highs as investors rotate out of defensive sectors with the S&P 500 and Nasdaq at new highs; nearly all 20 components in negative territory today after many hit 52-week highs on Tuesday

Financials

·     Consumer finance and lending; ALLY shares fell after agreeing to buy CardWorks, a non-prime credit card and consumer finance lender for $2.65B as it looks to diversify its consumer product offerings (CardWorks has $4.7 billion in assets and $2.9 billion in deposits); LC rises as reports better-than-expected Q4 profit, helped by higher loan originations and said it would buy U.S. digital lender Radius Bank in a cash-and-stock deal valued at $185M; 52-week highs for PYPL, MA, Visa, GPN in the card, payment sector

·     REITs; EXR reported a 4Q beat, though KeyBanc said fundamentals appear poised to decelerate more than anticipated in the year ahead, resulting in a ~1% guidance miss at the midpoint; ACC initial same-store revenue guidance for fall 2020 implies 50 bps of acceleration at the midpoint (+1.5% to +3%) vs. the prior year; KRG reported a 1c quarterly beat, but after stripping 2c of lease term fee income, KeyBanc said it suspects results may fall slightly short of consensus while FY20 FFO guidance missed Street expectations by ~2.5%; PSB reported 4Q19 core FFO that missed consensus expectations, while the 4Q cash SSNOI growth accelerated vs. the 3Q19 pace; QTS posted an FFO beat, record new leasing ($27.7M) in the quarter, and continued momentum into 2020; ROIC reported in-line 4Q results highlighted by steady 3.5% SSNOI growth, solid leasing activity, and a year-end portfolio leased rate of just under 98% but 2020 FFO guidance missed

Healthcare

·     Pharma movers; MRK received a Complete Response Letter (CRL) from the FDA regarding its application for six-week dosing for Keytruda (pembrolizumab); BHC posts Q4 net loss of $1.52B vs. year-ago loss of $344M as the company accrued legal reserves for resolving a share price lawsuit, while Q4 sales rise nearly 5% to $2.24B, helped by demand for its eye care products with in-line rev forecast

·     Biotech movers; INCY announced that the second Phase 3 study from the TRuE-AD clinical trial program evaluating ruxolitinib cream in patients with atopic dermatitis met its primary endpoint; BLUE shares tumbled, downgraded at Raymond James noting 4Q19 financial report included a number of extending and ambiguous timeline updates for the LentiGlobin program, which included a wider than expected Q4 EPS loss

·     Medical equipment and devices; ABT will partner with PODD to offer a personalized diabetes management system via the combination of its FreeStyle Libre 2 glucose sensing technology with the latter’s Omnipod Horizon Automated Insulin Delivery System; CODX said it has received new orders for its vector control tests and equipment from mosquito abatement districts following attendance at several vector control conferences; DXCM signs a non-exclusive commercialization agreement with PODD aimed at combining its current and future continuous glucose monitoring systems with the latter’s tubeless insulin delivery Pod; MYO following its agreement with HOMELINK enabling the company to process out-of-network claims for its MyoPro powered arm and hand brace; Agilent (A) reported F1Q results, which had core revenue growth of +2.4% (light vs. consensus of 3%-3.5%), with coronavirus impacting some of the quarter and its F2Q guidance also reflected continued impact of coronavirus

·     Healthcare services and providers; AMZN’s virtual health clinic for employees is now live in Seattle for workers and dependents operating out of the corporate headquarters; HQY substantially raised its guidance for FY20 (January year-end) as mgmt indicated it is seeing healthy interest for multi-product deals and believes it is executing on its strategy; AMED shares pulled back from near all-time highs the day prior as Q4 revs missed views ($500M vs. $512M est.) while revenue guidance bracketed consensus; SDC shares slumped midday after a Reuters report that its top dentist and public face is at risk of losing his California license following a two-year state dental board investigation

Technology, Media & Telecom

·     Internet; GRPN shares fell after Q4 profits, and revenues falling well short of expectations (revs tumbled nearly 24% from the prior year to $612.3M, vs. expectations for $705M) while said it plans to exit the Goods category and focus on local experiences

·     Semiconductors; NVDA upgraded to outperform at Bernstein and up tgt to $360 from $300 saying the company’s March 19 analyst day and the completion of the Mellanox acquisition are two potential catalysts for the shares; ADI reports Q1 results that beat on earnings but narrowly missed on revenue while sees Q2 revs of $1.35B (vs. est. $1.38B), plus or minus $50M, which was reduced by $70M to account for the potential coronavirus impact (in-line gross margin but lower operating margin)

·     Software movers; ADBE tgt raised to $430 at UBS saying its survey of Creative buyers, and analysis of the data shows both growing adoption and increasing ARPU within the CC base; ADSK tgt raised to $224 at KeyBanc based on increased confidence in near-term growth prospects; ATVI, CRM, ADSK, ANSS, NOW, INTU, ADBE among tech names in the S&P 500 setting 52-week highs today

·     Media & Telecom movers; DISH posts Q4 rev of $3.24B, beating estimates of $3.15B and said pay-TV business loses 194,000 subscribers in the quarter, fewer than the 334,000 it lost a year earlier while EPS of 69c was 10c better as net income rises 15.4% to $389M; QUAD shares jumped after its Q4 beat and strong 2020 outlook

·     Hardware & Component news; NTAP was downgraded to hold from buy at Argus as believe the company faces challenges ahead that will prevent NetApp from growing its EPS in fiscal 2020/we then look for an uncertain earnings outlook fiscal 2021; TIVO rises after guidance topped expectations