Closing Recap

Monday, January 25, 2021

Equity Market Recap

·     It was an extremely volatile trading session again on Monday as the Nasdaq Composite touched another intraday record high (rising for a 5^th straight day) to highs of 13,728 – but not before a mini flash crash late morning that saw a quick drop to lows around 13,368 before recovering, as investors brace for what is expected to be a strong week of earnings (111 of the S&P 500 report this week – with 13 of them Dow components). Roughly 60% of the S&P report the next 2-weeks, with big-cap tech highlighting this week’s results (AAPL, AMD, FB, MSFT, TSLA among those due to report), while Dow components AXP, VZ, JNJ, MMM also report tomorrow morning. Meanwhile, a mania unlike anything seen in the stock market in some time grabbing media attention, with a massive “short squeeze” taking some stocks to meteoric levels in a stampede higher on no specific news or headlines was among the top stories again on CNBC today (names like GME, BB, CCIV, EXPR, FUBO, PLTR, AMC, BBBY, FIZZ, GSX among them lately). Cyclicals such as energy, financials, materials, and leisure/travel, the ones that lifted the Russell 2000 to record highs in December and early January, took the brunt of the selling today. The telltale sign of the market reversal today could have been when the CBOE Volatility index (VIX) was trading higher when stock markets were near their best levels of the day. Keeping a floor under this market remains hopes of additional fiscal stimulus measures with President Biden pushing for another $1.9 trillion in added funds after Congress has already doled out $4 trillion in 2020 to help with the virus economic impact – while the Fed keeps rates at record lows. Vaccine news could be a near-term catalyst for reopening stocks if Johnson & Johnson’s (JNJ) vaccine shows 80% or greater efficacy, according to an Evercore ISI survey (data expected soon).

Commodities

·     Oil prices edge higher, with WTI crude up 50c or 0.96% to settle at $52.77 per barrel, while natural gas prices rise over 6% to $2.60 mln btu ahead of colder weather forecasts. Brent crude gained 47c or 0.85% to settle at $55.88 per barrel. Gold prices slipped -$1.00 to settle at $1,855.20 an ounce, slipping for a 3^rd straight session as the aggressive pullback in stocks late morning and rotation into bonds supported the U.S. dollar.

Currencies & Treasuries

·     Treasury yields slipped to three-week lows as investors rotated back into defensive and safe-haven assets with stock volatility picking up into big earnings reports. The 30-year yield dropped over 5 bps to below 1.80%, while the 10-year yield dipped about 5 bps to 1.04% (well off its 1-year highs around 1.18% 2-weeks ago). The U.S. Treasury sold $60B in 2-year notes at a yield of 0.125% compared to 0.127% when issued prior as the bid-to-cover (demand) stood at 2.67 and indirect bidders awarded 56.62% and directs 15.65%. The U.S. dollar advanced to a near one-week high against a basket of currencies, as a burst of volatility in stock markets around the globe sapped investors’ appetite for riskier currencies. The euro was down around 0.25% against the dollar as German business sentiment slumped to a six-month low in January. Note the U.S. Federal Reserve meets on Wednesday and Fed Chair Jerome Powell is expected to reinforce recent views that the Fed has no plans to wind back the Fed’s massive stimulus any time soon.

Sector News Breakdown

Consumer

·     Retailers; GME trading momentum madness continued on Monday, trading up as high as $159.18 before sliding and turning negative briefly around $60 (not a typo on either side, rising as much as 144%) after the wild trading last week. Several highly concentrated short interest related stocks have been rising on no specific related news, causing a massive disconnect – hasn’t stopped stocks from irrationally “squeezing higher” over the last 2-weeks (GME shares came into the day up 245% MTD) – other names not leveraged to consumer /retail such as BB (+111% YTD into today), PLTR (up 38% MTD), EXPR (up 96% MTD), CCIV (+123% MTD), BBBY (+70% MTD), AMC (+65% MTD) all heading into today – and all indicated much higher again; DKS was upgraded to outperform with $85 tgt at Wedbush as analysis indicates that investors are underestimating DKS’ sales & especially margin potential in FY21 as they anchor on company comments for operating margins in FY21 to exceed FY19’s 5.1%; AEO upgraded to Outperform from Sector Perform with a $30 price target at RBC Capital saying current Aerie momentum with runway ahead across channels coupled with inflecting margins, they see room for shares to run; strong gains early in retail– DDS, M, JWN, KSS, EXPR, DBI  – before air came out of the market.

·     Consumer Staples; JPMorgan downgraded food services providers SYY, USFD to Neutral, taking profits saying highly profitable independent and business oriented hospitality sectors will be lingering impact; KMB Q4 adj EPS $1.69 vs. est. $1.60 and sales $4.8B vs. est. $4.71B as reports Q4 organic sales growth of 5% vs. consensus of +2.5% while approved 6.5% increase in dividend and authorized a new $5B share repurchase; MGPI said it is buying Luxco Inc. for cash consideration of $238 million and 5 million MGP shares

·     Restaurants; CMG tgt to $1640 from $1550 and SHAK to $97 from $83 at Cowen – noting a pick-up in January industry sales, optimism around the industry’s 2021 sales recovery and each have room to further increase delivery menu prices to attain parity in flow-thru vs in-store orders; JPMorgan cut TXRH to Underweight in restaurant space and upgraded CAKE to Neutral and add to casual dining exposure, especially OW-rated BLMN and DRI and adding to MCD, WEN, while say to use SBUX, SHAK as source of funds

·     Leisure and Gaming; CCL shares fell as delayed additional voyages further into the year, extending its revenue drought in the U.S.; voyages on Carnival Magic, Carnival Paradise and Carnival Valor will be delayed until November (sunk cruise lines); online travel names also hit hard today (BKNG, EXPE, TRIP)

Energy

·     Energy stock movers; Bank of America upgraded SLB to Buy with a $31 pt from Neutral as international markets are likely to supply the majority of incremental oil production in 2022 and beyond as US companies face more regulatory scrutiny along with higher royalties and taxes, and SLB generates more than 80% of international revenue; Atlantic upgraded HAL to OW with a $23 target; HESM guides 2021 net income to $590-620M, adj EBITDA of $860-890M, DCF $750-780M, capex to reduce to $160M, adj FCF $610-640M which will sufficiently fund targeted distributions with excess of $100M; Stifel says recent earnings from HAL, BKR, SLB and preliminary results from PUMP, SOI were above consensus and bode well for pressure pumpers LVRT, BOOM, WHD, and the results also show U.S. land outpaced expectations and momentum has continued into 1Q21, international activity remains sluggish but will likely bottom in 1Q21 with potentially solid 2H21 improvement, portfolio rebalancing and cost-out programs enacted in 2020 have bolstered margins and imply increased profitability going forward; RDSannounced it agreed to acquire German company Ubitricity, a provider of on-street EV charging

·     Utilities & Solar; the defensive utility index (UTY) outperformed on the day, among the top sectors rising over 1.5%; SPI started construction of a solar project in Hawaii; FSLR sold its US development platform to Leeward; SOL has entered into securities purchase agreements with several institutional investors for the purchase and sale of 10M ADSs, each representing 10 ordinary shares, at a purchase price of $25/ADS, in a registered direct offering; RUN said preliminary data showed Q4 gross earnings assets of $6.92B and net earnings assets of $2.9B

Financials

·     Bank movers; banks among laggards early after surging to start the New Year initially on rising rates and economic recovery hopes; CADE reported Q4 Adj EPS $1.57 vs est. $1.48 and adj pre-provision rev $542.5M; Credit Suisse upgraded WFC to Outperform with a $40 pt after the bank’s Q4 results provided clarity on its path to improved returns; Piper downgraded TRST to Neutral as its thesis as a safe credit haven is no longer beneficial to the stock as credit for 1-4 family mortgages has not been as bad as feared last April; Piper also upgraded SASR to OW after their Q4 earnings included a lower loan loss provision but also better revenue trends which increased 2021 and 2022 EPS estimates; Maxim increased their price target on SIVB to $600 from $510 and maintained it as their top bank pick; Raymond James raised their price targets on Outperform-rated OZK to $41 and BOCH to $11.50, and upgraded ACBI ($20 target) and FVCB ($19 target) after Q4 earnings exceeded forecasts and consensus for each; After earnings, JPMorgan reiterated its Overweight ratings on ALLY, BKU, FHN, MCB, Neutral ratings on KEY, MTB, PBCT, and UW ratings on FHB, UMPQ, while raising its price target on OW-rated WBS to $58 from $50, and reiterated HBAN as a top pick, saying they would buy the weakness in the stock after it reported pre-market Friday; Canaccord reiterated SI as a Buy and raised its price target to $90 given its impressive Q4 deposit growth and bolstered balance sheet after Bitcoin’s recent price appreciation, and its status as an almost irreplaceable cog within the digital asset ecosphere

·     SPAC news; Bill Foley’s SPAC Foley Trasimene Acquisition Corp. (WPF) is near a deal to take U.S. benefits services provider Alight Solutions public at a valuation of $7.3b including debt, Reuters reported https://reut.rs/2Y8RDXg ; IACAU announced it will merge with a wholly-owned subsidiary of Taboola in a deal valued at approximately $2.6B and it will trade under the new symbol TBLA; LCY signed a merger agreement to take The Hillman Group, a hardware and home improvement company, public at an implied valuation of $2.642B https://bit.ly/3oaJwEk; SPRQ, a Chamath Palihapitiya-led PIPE partnered with APO, announced it will merge with Sunlight Financial, a residential solar financing platform; TSIA entered into a definitive merger agreement to bring Latch public in a transaction valuing the Company at an equity value of $1.56B

·     Insurance; AON said natural catastrophes resulted in $97B in insured losses in 2020, 40% above the average for this century, in a year when insurers also faced hefty bills due to the coronavirus pandemic; Argus raised its price target on TRV to $156 from $138 after their earnings

·     Consumer Finance; Piper reiterated PYPL at OW and SQ at Neutral after its review of January finance app download data showed the fastest growing apps all have crypto trading functionality; Loop said they would be buyers of PYPL, SQand GPN on any weakness resulting from their Q4 earnings reports and they lowered estimates across their payments coverage to account for Q4’s activity slowdown; BTIG believes there could be significant long-term growth potential in mortgage finance, seeing the highest near-term valuation upside in MFA and listing RWT, NRZ, EFC as other Buy-rated stocks; ATM operator CATM was sold to NCR for $39/share in an all-cash transaction valued at approximately $2.5B; In real estate, Goldman initiated Buy ratings on NMRK ($10 pt), CIGI ($101 pt), JLL ($187 pt), CBRE ($74 pt), and CWK ($15.50 pt) at Neutral

Healthcare

·     Pharma movers; MRK announced it is dropping out of the Covid-19 vaccine race. It announced this morning that it will stop developing both formulations of a vaccine it was working on after trial participants failed to generate a strong immune response to either; RHHBY said that its eye treatment Faricimab met its primary endpoint in two phase 3 studies; EXEL initiated Phase 1 trial evaluating of XL102 alone or in combination with other anti-cancer agents in patients with inoperable locally advanced or metastatic solid tumors; AUPH rises after receiving FDA approval late Friday of its therapy LUPKYNIS for adult patients with active Lupus Nephritis; AZN announced positive headline results from the Phase 3 ELEVATE-RR study evaluating Calquence in patients with previously treated, high-risk chronic lymphocytic leukemia in comparison with Imbruvica

·     Biotech movers; MRNA said laboratory studies demonstrated that its COVID-19 vaccine can still protect people against two new coronavirus variants: the B.1.1.7 that was first identified in the United Kingdom, and the B.1.351 strain, out of South Africa; in research, REGN upgraded to Outperform with $630 tgt at BMO as believe Regeneron is well positioned heading into 2021 and see current levels as an attractive entry point, CNST upgraded to Outperform as include CPI-0209 revenue projections following a Phase 2 clinical strategy in three tumor cohorts, upgraded KOD to outperform and downgraded ALNY to Market Perform as believe shares are fairly valued following its steep climb (+35% in one week) in January, with limited clinical catalysts

·     Healthcare services and providers; GDRX initiated with a BUY rating and a $52 PT at Guggenheim as believe GDRX can continue to disrupt the medication purchasing process and capitalize on the ongoing trend toward digital behavior in healthcare, leveraging a large and engaged user base; OPRX with positive Q4 prelim PR with revenue of ~$16M, up 117% y/y (vs. est. $11.2M), and positive GAAP NI and also noted a $170M pipeline exiting Q4

Industrials & Materials

·     Transports; Dow Transports slipped early, down over 400 points from record highs early last week following earnings results in the sector (rails, airlines); the sector rebounded off lows along with a broad based recovery ahead of a big earnings week

·     Metals & Materials; CLF rises after saying said it sees Q4 revenue of $2.2B-$2.3B, above consensus of $1.82B and a more than fourfold increase over the year-ago period; in chemicals, MOS upgraded to Buy at Citigroup on expectations for further phosphate (DAP) price appreciation as global phosphate markets shot up last week (+$45/t to $450/t), driven by lower phosphate exports from China and underlying strength in the grain markets; Wells Fargo below the Street on 2021/2022E EBITDA for OI and taking a more cautious view on a volume rebound over the next 12-24 months; LIN announces new up to us$ 5 bln share repurchase program

Technology, Media & Telecom

·     Semiconductors; AMD earnings expected to report tomorrow; Citigroup said they favor semiconductor names over semiconductor capital equipment in 1H21 on peaking WFE run rate. We move MRVL (TP $64) to our #1 pick and NVDA (TP $600) to our #2 pick and lower LRCX (TP $660), and KLAC (TP $360) down by 2 spots on our ranking list. On the materials and components group, we maintain ENTG #1 and move IIVI to our #2 pick. AMKR and CCMP remain top Sell ideas. $100B WFE in 2025: No change in our constructive long-term cyclical growth equipment view underpinned by rising or mid-teens capital intensity. We assume $80B WFE in 2023 and $100B in 2025; overall, semis have remained on fire with auto, industrial, memory, smartphone leading the way only to be held back by supply

·     Hardware; Software movers; AAPL shares touch record highs ahead of earnings later this week (Wednesday 1/27); SAP spin out Qualtrics (XM) has upsized its IPO from 49.3M to 50.4M shares and the price range also increased again from the initial $20-24 to $27-29; ZI announces offering of $300 million of senior notes due 2029; BB shares jumped to 10-year highs (Oct 2011) on track for 7^th straight day of gains – worth noting that while BB surged 43% last week, insiders sold roughly $1.7 mln worth of shares; BIGC rises following positive mention by Hedgeye

·     Media & Telecom movers; IMAX downgrade from Buy to Neutral w/ $17.90 pt at Goldman Sachs on valuation saying while well-positioned to benefit from a global box recovery given its capital light business model and focus on tentpole content, view these strengths as largely priced in; AMC said that any talk of an imminent bankruptcy is "completely off the table" after raising an additional $917 million to help cushion the blow from the pandemic; WWE completes strategic licensing agreement with NBCU’s Peacock service and issues 2021 adjusted Oibda guidance range of $270M-$305M and operating income of $209M; VIAC shares leading in the S&P as tgt raised to $50 at Guggenheim today (follows tgt hike to $55 from Needham late last week); SBAC, EQIX among names to buy in year of digital infrastructure, according to Barron’s saying soaring demand for bandwidth and the rollout of 5G helped propel tech stocks higher in 2020