Closing Recap

Wednesday, January 27, 2021

Equity Market Recap

·     U.S. stocks tumbled on Wednesday, as the S&P 500, Dow (down a 5^th straight day for longest such streak since last February) and Nasdaq Composite fell sharply after Boeing (BA) reported a record annual loss, while declines on the Nasdaq were offset by strong results from Microsoft (MSFT). Meanwhile, investors await earnings tonight from some of the largest market cap names on Wall Street: Apple (AAPL), Facebook (FB) and Tesla (TSLA), along with many others. At the conclusion of its two-day meeting, the Fed kept borrowing costs at record lows and maintained its $120B of monthly asset purchases while saying they will no longer offer regularly scheduled one-month term repo operations after February 9. Fed Chairman Powell reiterated the FOMC’s commitment to providing liquidity and renew its call for further fiscal stimulus. Still, stocks found weakness as there were greater forces at work today, with sentiment turning sour amid wild market swings in specific names (namely high short interest related stocks). The CBOE Volatility index (VIX) rose around the 30 level, or about 35% to its highest levels since the election. Declines were across the board, with 10 of the 11 major S&P 500 sectors in negative territory while defensive sectors, including consumer staples edged higher. European stocks tumbled and the euro slid as extended coronavirus lockdowns drove the German government to slash its growth forecast for 2021.

·     The markets top story over the last week remains the increased volume/popular trading in high short interest stocks, targets of retail investors, organized via Reddit’s WallStreetBets forum and other platforms, pushing up a handful of heavily shorted stocks which are crushing hedge funds that are short (and likely forcing selling in winners to cover margin calls). Melvin Capital was noted this week of needing capital help following its short position in GME (which is up over 1,650% this month alone). Among the list of names seeing a huge amount of buying action that have been heavily shorted over the last few months include: GME (the poster child of this recent mania) as well as AMC, GSX, FIZZ, SKT, SPCE, TR, PETS, FUBO, NKLA, as well as handful of retailers M, BBBY, DDS, EXPR, FOSL, IRBT, BBW – the list goes on.

·     So what has caused the massive move in a basketful of stocks over the last few weeks in such meteoric fashion? Well, no trading commissions from online brokers helps, allowing investors more cost-effective access to trading. Monetary policy intervention from the Fed has boosting borrowing by providing record low lending rates (keeping rates at zero and essentially forcing people into stocks by making all other instruments less attractive to put money in, i.e. cash, CDs, bonds), issuing pools of liquidity to the markets. The U.S. government has also doled out $4 trillion in Covid-19 relief measures to American citizens dealing with the pandemic impact with another near $2 trillion being talked about – couple that with people out of work, and the impact of social media, more people are trading now more than ever. Herd trading mentality has been a big focus as well, both to the up and downside – not something necessarily new, but with investors targeting companies with huge, short interest, it has catapulted interest in names beyond fundamentals.

·     Sector movers: Dow components report mixed earnings as MSFT with a beat and raise but BA falls after reporting a record loss and delaying its 777X to late 2023; MMM jumps after JPMorgan upgrade and MCD slips ahead of earnings elsewhere in the index; GME, AMC, NOK, SPCE, BBBY continue to be swept up in a craze in high short-interest names; after earnings, STX surges to 52-week highs and COF outperforms after their beats while SBUX stumbles after its revenue and guidance miss estimates, and CHRW gives up some if its recent gains despite beating consensus; retail mixed as EXPR, FOSL, BBBY among stocks with high short interest surging from retail/Reddit hype, M one of the S&P’s top performers, DKS, KSS rise after being upgraded by Citi; VFC sinks after its guidance, and LB, GPS among worst in the S&P; AMD, TXN, MXIM all post strong quarterly results that beat analyst consensus but the stocks slide; HRL, CPB, SJM, K, GIS, KR, CLX all sharply higher as consumer staples lead the S&P gains today.

Federal Reserve Meeting Comments:

·     The Federal Reserve left its key overnight interest rate near zero and made no change to its monthly bond purchases, pledging again to keep those economic pillars in place until there is a full rebound from the pandemic-triggered recession. "The pace of the recovery in economic activity and employment has moderated in recent months, with weakness concentrated in the sectors most adversely affected by the pandemic", the U.S. central bank said in a policy statement released at the end of its latest two-day meeting. "The ongoing public health crisis continues to weigh on economic activity, employment, and inflation, and poses considerable risks to the economic outlook," it said.

Commodities

·     Oil prices rise as WTI crude gained by 24c to $52.85 per barrel; natural gas prices rise 3.9%-to-1-month highs of $2.76 ml btus – oil got a boost after U.S. crude oil stocks dropped by nearly 10 million barrels last week to their lowest since March at 476.7 million barrels as imports dropped off. Gold prices sink for a 5^th straight day (fresh one week low), pressured by a recovery in the U.S. dollar and ahead of the FOMC meeting later today. Also weighing on gold, the $1.9 trillion relief bill being discussed is seen as ambitious and Biden may not have the support to pass it.

Currencies & Treasuries

·     The U.S. dollar rose as investors turned to safe-haven instruments with stocks and Treasury yields slipping while the safe-havens drew buyers. The U.S. Dollar Currency Index (DXY) rose 0.56% higher at 90.666, its highest level in about a week, while the euro was further pressured after the German government slashed its growth forecast for Europe’s largest economy to 3% this year from last autumn’s estimate of 4.4%, caused by a second coronavirus lockdown. More risk sensitive currencies such as the Aussie dollar sunk on the day. Treasury yields dropped again, with the benchmark 2-year down around 3 bps to 1% (did dip below that level), as risk appetite hit a wall ahead of the Fed’s policy announcement.

Sector News Breakdown

Consumer

·     Retailers; GME shares surged as much as 200% in pre-market trading, topping highs of $365 (around 5:40 AM) but turned lower quickly after Hedge fund Melvin Capital disclosed it closed out its short position (CNBC first reported) following a huge loss, while Citron research also said this morning it closed out its short in the $90s. Note shares of GameStop have soared more than 600% in January after retail investors, organized via Reddit’s WallStreetBets forum and other platforms, sought to push up a handful of heavily shorted stocks; VFC shares drop after mostly in-line Q3 results (small EPS beat) after midpoint of FY rev forecast misses estimates; in research, DKS and KSS upgraded to buy at Citigroup as the firm downgraded BURL, FIVE, UAA and ULTA from Buy to Neutral to reflect a more balanced risk/reward as believe a recovery is underway, but it won’t be smooth; BBBY downgraded at Baird (3^rd analyst downgrade in 2-days); unusual trading again in several high short interest retailers: DDS, M, EXPR, FOSL, BBW surging

·     Consumer Staples; rotation into defensive and underperforming sectors such as food and consumer staples, with HRL all sharply higher; ACI was downgraded to Equal Weight saying while COVID tailwinds should drive positive near-term results and valuation appears inexpensive, they expect the stock to struggle as the pandemic benefit unwinds later this year; UNFI downgraded to Underweight at Wells Fargo (46% downside) on continued concerns about the long-term fundamental outlook of the business, and an unappealing valuation

·     Restaurants; SBUX reported F’1Q (Dec.) adj. EPS of $0.61 vs mid-December guidance of $0.50- $0.55 with Americas comps now down 6% (U.S. -5%) and Int’l down 3% (China +5%) and issued F’2Q adj. EPS guidance for $0.45-$0.50; MCD out with earnings tomorrow morning; EAT 2Q adj EPS $0.35 vs. est. $0.33 on revs $760.7Mm vs. est. $754.8Mm, company-owned comps -12.1% (Maggiano’s -47%, Chili’s -6.3%), said about 82% of Chili’s and 69% of Maggiano’s units were operating with open dining rooms; WEN was upgraded to Buy at Deutsche Bank

·     Leisure and Gaming; Truist upwardly revising estimates/PTs on marine stocks (BC, HZO, MBUU, MCFT) to reflect continuing strong demand into ’21 and the belief that many of our coverage names could actually benefit from the supply-constrained industry backdrop; online travel names (BKNG, EXPE) drop sharply for a 6^th straight day, pulling back after vaccine related run up

Energy

·     U.S. President Joe Biden will take a batch of executive actions on Wednesday to combat climate change, including pausing new oil and gas leases on federal land, cutting fossil fuel subsidies and bolstering measures to protect poor and minority neighborhoods from pollution. The orders will set the direction for the Democratic president’s climate change and environmental agenda and mark a reversal from his Republican predecessor Donald Trump, who sought to maximize U.S. oil, gas and coal output by removing regulations and easing environmental reviews.

·     Energy stock movers; HES reported Q4 adj EPS (58c) loss, narrower than the estimated (66c) and (60c) loss YoY, and revs $1.42B beat est. $1.2B; MKM initiated a Buy on BP with a $31 target; RBC reiterated RDSas their top idea in energy, as they expect buybacks to resume mid-2021 and they also see the company returning 46% of its market cap back to shareholders, which is at the top end of the peer group

·     Utilities & Solar; PLUG 28M share Spot Secondary priced at $65.00; Shoals Technologies (SHLS) 77M share IPO priced at $25.00; Piper downgraded SPWR to Neutral after shares have more than doubled YTD (vs. TAN +14%), which they attribute to the retail-driven move on high short interest stocks, not any material changes to their investment thesis; Guggenheim notes NEE beat their EPS expectations and NEP earnings continued displaying their top end distribution growth, capital redeployment, and efficient financing

Financials

·     Bank, Exchanges, Asset managers movers; FHN announces $500M share buyback; NYCB, FCF, UMBF, WSBC, TRMK, VBTX all posted EPS that beat consensus, and PB also reported EPS that was above estimates and authorized a buyback program of up to 4.65M shares; JPM announced it is launching a digital retail bank in the UK in the coming months; BX reported Q4 EPS $1.07 on revs $3.63B (consensus $0.89 on $2.29B) and AUM $618.6B (+8% YoY); NDAQ reported Q4 adj EPS 75 vs est. 73c; NYCB slips despite posting slightly better-than-expected Q4 non-GAAP EPS.

·     Insurance; ALL agreed to sell Allstate Life Insurance Company to entities managed by Blackstone (BX) for $2.8B; PGR Q4 EPS $1.20 misses est. $1.70, net premiums earned $3.16B (-68% YoY), net premiums written $2.79B (-71% YoY); WRB Q4 EPS $1.67 (est. 79c) on revs $2.31B (est. $2.10B), net premiums written $1.80B (vs. $1.66B YoY); RNR Q4 EPS loss ($1.59) was wider than the expected ($1.27) loss on revs $1.395B (est. $1.26B), gross premiums written $935.5M (+3.3% YoY), and its results fell short of expectations on all major metrics, including underwriting margins, premiums, and investment income according to JPMorgan

·     Consumer Finance; COF reported Q4 EPS $5.29 on revs $7.3B, both beating estimates ($2.86 on $6.97B), authorized up to $7.5B for stock buybacks, its provision for credit losses decreased 20% to $264M, and the results attracted BMO to raise its estimates up to 13% and its price target to $154 from $150, implying 55% total return; Separately, COF December domestic credit card net charge-off rate of 2.41% increases from 2.29% in November but is down from 4.55% in December 2019; NAVI Q4 core EPS 97c vs est. 83c; Sam’s Club (WMT) partnered with SYF and MA and announced a new rewards program that provides additional value for cardholders, including expanded rewards and digital enhancements; SYF announces a $1.6B buyback program; MA and Visa (V) both downgraded to sector weight from overweight at KeyBanc on the prospect of sustained x-border travel headwinds and the associated; PYPL price target was raised to $300 from $235 at KeyBanc who remains OW on encouraging e-commerce trends and digital accelerating prospects, and Morgan Stanley to $297 from $229 after more internet retailers began accepting it for payments and its attrition rate was below its 2-year average; Truist favors GPN over FIS, FISV but they trimmed their estimates on each given softer near-term merchant demand, uncertainty surrounding reopening, structural timing, and are unconvinced that these are beneficiaries of reopening, favoring digital native options with Buy ratings on SQ, LSPD, FOUR, RPAY

·     REITs; BXP Q4 FFO $1.37 vs. est. $1.59 and sees Q1 FFO $1.5301.57 vs. est. $1.62; Evercore upgraded PLD to Outperform with a $121 target; Goldman initiated SAFE at Buy with a street-high $101 target

Healthcare

·     Pharma movers; LLY, GSK and VIR have collaborated to evaluate a combination of two COVID-19 therapies in low-risk patients with mild to moderate symptoms; KMPH said the FDA has given it the green light to go ahead with clinical trials for its agonist replacement therapy KP879, following the agency’s review of the treatment’s Investigational New Drug (IND) application; AGIO announces phase 3 activate-t trial of mitapivat achieved primary endpoint in adults with pyruvate kinase deficiency who are regularly transfused; safety profile consistent with previously reported data

·     Biotech movers; REGN announced that researchers in Dr. David Ho’s Columbia University lab and Regeneron scientists have independently confirmed that REGEN-COVTM (Casirivimab and imdevimab antibody cocktail) successfully neutralizes the circulating SARS-CoV-2 variants first identified in the UK and South Africa; PSNL 3.95M share Spot Secondary priced at $38.00; ICPT shares rose after RBC Capital noted that after seeing that Ocaliva is no longer cited in FDA’s updated NISS webpage for Q3 2020, believes the regulator has completed the evaluation of the FAERS signal of the only commercialized therapy of ICPT

·     Cannabis; Piper out with a primer (most bullish on CRLBF and GTBIF), saying they believe the growth outlook for the US marijuana industry is attractive and estimate the US could be a $50B market by 2030 (2020E: $17.5B), even without any new legalization from new states or the federal government. If recreational marijuana is legalized federally, we believe the US could be a $115B market by 2030. US multi-state operators face regulatory challenges, and cost of capital is a key headwind, but access to capital should improve. US MSOs trade at about half of the multiples that Canadian LPs do, suggesting where MSOs could trade if able to list on NYSE or NASDAQ. Licenses are a key barrier to entry in the US, so establishing operations in limited license markets can help drive success (shares of TLRY, ACB, APHA, CRON move in sympathy)

·     Healthcare services and providers; in managed care, ANTM Q4 adj EPS $2.54 vs. est. $2.52, Q4 revenue $31.5B vs. est. $30.78B, medical-loss ratio was 88.9%, compared with 89% in the prior-year quarter and expenses grew 19% to $31.21B; EHC posted a solid 4Q20 beat, but issued a weaker than expected FY21 guidance, with EBITDA roughly 6% below the Street at the midpoint; WBA announced that it is naming Rosalind (Roz) Brewer as its next CEO effective March 15th

Industrials & Materials

·     Engineering & Construction (E&C); KeyBanc raised its tgt on PWR to $90 from $75, as believe it has more room to run, with the electrification/renewable thematic firming and the shift to baseload/recurring business likely to continue delivering; firm upgraded DY to Overweight saying with AT&T fiber capex ramping and rural broadband/wireless opportunities expanding, it appears that a top-line growth inflection is coming and downgraded MTZ to Sector Weight as view the recent outperformance as being supported by the likelihood that management will be able to capitalize on growth opportunities in renewables, telecom, and T&D to more than offset declining mainline pipeline activity.

·     Transports; in rails, NSC posted a 15c EPS beat for Q4 on a small revenue beat and raises dividend; CP announces a 5 for 1 stock split; CNI put up a better than expected Q4 result (EBIT +2% vs. our estimate, and slightly above the Street at +30bps), but EPS guidance falls short of expectations (downgraded at Cowen); in trucking, CHRW reported a strong set of 4Q results, beating the consensus sell side EPS estimate by 11% as total gross revenues grew 20% YoY as higher purchased transportation rates and scrambled supply chains raised demand levels; MRTN another positive mover early on earnings beat; KNX with Q4 EPS beat on in-line revs while expects FY2021 adjusted EPS in the range of $3.20-$3.40 vs. consensus of $3.36; AAL outperforms in airlines space up over 11% (note has 28% short interest) – vs. other airlines down slightly LUV, DAL, UAL which have very small short interest – all 4% or less as per Refinitiv

·     Aerospace & Defense; BA posts a record $12B annual loss as it delayed its all-new 777X jet again and booked a $6.5B charge for the program and said it expects the 777X to enter service by late 2023, delaying the jet’s launch for the third time (Q4 net loss rose to $8.44B from $1.01B YoY); GD missed estimates for quarterly profit and revenue, as its aerospace unit delivered fewer Gulfstream jets due to the COVID-19 pandemic, but 2021 revenue guidance sent shares higher

Technology, Media & Telecom

·     Internet; FB with earnings after the bell tonight (implications for social media names TWTR, SNAP); Craig Hallum recaps recent subscriber numbers from Disney+, HBO Max, and Peacock, which all point to very favorable traffic trends persisting for CDNs such as FSLY, AKAM, LLNW – (notes Disney+ had amassed 87M subscribers as of early Dec’20, which compares to their original goal of 75M by ’24. HBO Max has exceeded their subscriber expectations as well and Peacock had amassed 26M subscribers by early Dec’20, which compares to their original ’24 goal of 33M)

·     Semiconductors; AMD posted better than expected results and guidance, seeing broad based strength across PCs, datacenters, and semi-custom gaming console products as well as strength across its client PC business with new Ryzen products (stock slips amid high expectations); MXIM reported F2Q revenue of $628M, beating estimate of $606M and F2Q EPS of $0.73 was above the consensus estimate of $0.6; TXN posted 4Q20 results that were well above expectations, citing broad-based strength across auto, industrials, and personal electronics end markets and also benefited from having 80% of its fab capacity internal; AAPL to report earnings tonight, likely impact suppliers such as QCOM, AVGO, SWKS, STM

·     Hardware and Software movers; MSFT posted better-than-expected Q2 revenue growth of 50% for its Azure cloud computing service (topping views of around 41%) while Q2 overall revs of $43.1B topped the $40.2B estimate/said "Intelligent Cloud" segment, which houses Azure, rose 23% to $14.6B while also issued upbeat Q3 revenue outlooks across the board; AAPL earnings on deck tonight; CLS reported top-line miss of $20M in its Q4 earnings report to $1.39B (-6.7% Y/Y) revenue; FFIV shares slumped after Q2 eps guidance midpoint range missed the street est.; PLTR shares jumped following its demo day overnight; NOK surged on no specific news

·     Media & Telecom movers; AT added 800,000 net new phone subscribers who pay a monthly bill, beating analyst expectations of 475,300 customers, wrote down its premium TV business, which includes satellite television unit DirecTV, by $15.5 billion and reported 41.5 million U.S. subscribers for both its premium TV channel HBO and streaming service HBO Max in the fourth quarter, up from 38 million the previous quarter; NWSA upgraded to an Overweight at JPMorgan as shares continue to trade at a substantial discount to the company’s SOTP value; media names again outperformed the broader market with FOXA, DISCA, VIAC all rising