Closing Recap

Monday, October 12, 2020

Equity Market Recap

·     U.S. stocks were broadly higher on Monday showing signs of irrational exuberance and euphoria as technology stocks provided the biggest boost to major averages without any specific news on the day to account for the full day surge. Dow component and tech giant Apple rose over 6% ahead of a special event on Tuesday, where they are expected to unveil the new iPhone with 5G capabilities and Amazon.com also rose 6% ahead of its annual Prime Day shopping event on Oct. 13 and 14. Main indexes are now up four straight sessions amid optimism that a coronavirus relief package will eventually happen, along with positive sentiment ahead of earnings this week in banks. The White House on Sunday called on Congress to pass a stripped-down coronavirus relief bill as negotiations on a broader package ran into resistance late last week after its $1.8 trillion offer was dismissed by the House (and getting pressure from Senate Republicans as too much as well). Rising expectations of a Biden win in next month’s presidential election has also helped main indexes climb to one-month highs as a victory for Democrats could ease the trade war with China and resulting tariff pressures on the U.S. economy. Bets also rising the Democrats may secure control of the Senate in the November election, making it a full sweep which would lay the ground for a large stimulus package to be passed by Congress. There was no major economic data while bond markets were closed given the holiday in the U.S. Goldman Sachs said today in a note that a vaccine is more important than the election, which is more important than Q3 results as markets remain volatile ahead of the three potential market catalysts. Stocks added to gains after major averages posted their biggest weekly advance in over 3-months (S&P rose 3.8%), while Smallcaps paced gains rising more than 6% last week. In sector movers, Dow Transport index touched a record intraday high for a 4^th straight session with several rails setting new yearly highs (CP, CNI, UNP), while the semiconductor space another one at record highs (SOX) following M&A talk last week in space and upbeat guidance into earnings.

Commodities

·     Oil prices were one of the few weak spots in the market today, as WTI crude dropped -$1.17 or 2.9% to settle at $39.43 per barrel and Brent dropped -$1.13 or 2.64% to settle at $41.72 per barrel as offshore output rises after Hurricane Delta passes, as force majeure at Libya’s largest oilfield was lifted, and markets still feeling the effects from a Norwegian strike affecting production that ended late last week. Hurricane Delta, which inflicted the biggest blow in 15 years to energy production in the U.S. Gulf of Mexico last week, was downgraded to a post-tropical cyclone at the weekend. Natural gas settles higher 5.1% at $2.881, highest since March 2019, on forecasts for colder weather (note producers kept 47% of US Gulf offshore natural gas output shut from Delta storm, as per BSEE earlier). Gold prices edged higher, rising $2.70 to settle at $1,928.70 an ounce, holding near 3-week highs ahead of much upcoming uncertainty related to the election, the stimulus deal and earnings uncertainty.

Sector News Breakdown

Consumer

·     Retailers; DDS shares jump after Berkshire Hathaway investment manager and one of Warren Buffett’s lieutenants R. Ted Weschler disclosed a large position in the retailer (overall ownership of 1.08 million Dillard’s shares, a 5.89% stake); LEVI upgraded to overweight and $22 tgt at Morgan Stanley citing impressive revenue acceleration and positive 3Q EPS highlight mgmt’s swift response to a pressured retail environment; GME downgraded to Hold at Jefferies after recent run-up in shares, pausing to formulate a more robust blueprint of LT value opportunities; Susquehanna upgraded shares of BOOT to neutral and SHOO to positive in footwear

·     Auto sector; Ford (F) upgraded to buy from hold at Benchmark and introduces PT of $10 saying new management team of CEO Jim Farley and CFO John Lawler will be seen as significant upgrades by investors; GM China sales grow 12% to 771,400 vehicles in Q3 compared with a year earlier, marking its first Chinese quarterly sales growth in two years; WKHS entered into a note purchase agreement under which it will sell $200M aggregate principal amount of its 4.0% senior secured convertible notes due 2024 to two institutional lenders (shares also add to last week gains after Roth Capital said Friday sees positive outcome for Workhorse in USPS contract)

·     Housing & Building Products; BECN upgraded to Outperform, new $43 price target at Baird as September-quarter residential roofing demand looks strong based on their roofing Survey with residential volumes up low double digits and higher shingle pricing.

·     Consumer Staples; KDP will become a component of the Nasdaq-100 Index and the Nasdaq-100 Equal Weighted Index prior to market open on Oct. 19, switching from the NYSE; BYND announced the limited-time launch of the Beyond Burger at 210 KFC locations in China; PEP upgraded to Buy from Neutral and raise price target to $169 from $148 at Citi

·     Restaurants; Raymond James said they continue to maintain a cautiously optimistic stance towards COVID re-opening beneficiaries within our restaurant, as they upgraded TAST to Outperform from Market Perform as remain comfortable with above consensus 3Q EBITDA while saying BLMN, TXRH top picks (both strong buy rated) and reit OP on DRI along with later-stage recovery ideas including PLAY and RUTH (which was also upgraded at Stephens today) as well as CHUY (clean balance sheet, upside to 2H consensus on benefit of the reopening/recovery in TX & FL), and FRGI depressed valuation + recovering sales trends, solid B/S)

·     Leisure and Gaming; MGM downgraded to underweight at Barclay’s given view that LV faces a longer road to recovery than the regional gaming markets and Macau and that the upside from Roar Digital could have a minimal impact on valuation due to the JV structure; CCL cancels Miami and Port Canaveral cruises for Nov. 2020; DKNG was initiated outperform and $76 tgt at Credit Suisse and tgt raised to $65 at Oppenheimer

Energy

·     Energy stock movers; one of the few weak sectors in the S&P as oil dropped for a second day as operations in the U.S. Gulf of Mexico started to resume following Hurricane Delta and Libya took a major step toward reopening its biggest field. Libya also took an important step toward reviving its battered oil industry by reopening its biggest field

·     Utilities & Solar; solar industry active after Roth Capital said President Trump’s withdrawal of bifacial exclusion could come in 15 days and is leaves both JKS and CSIQ negatively impacted while they view this development as a positive for FSLR as thin film panels are excluded from the 201 tariffs – said could be a modest negative for NOVA and RUN, but SPWR could be better-positioned given its MAXN supply agreement as IBC panels are exempt; SOL fell after the company entered into securities purchase agreements with several institutional investors for the purchase and sale of 1.5 million ADS at $3.25, in a registered direct offering

·     Utilities; PNW downgraded to Underperform from Neutral at Bank America following a sharp rally in shares relative to the peer group as attribute the early Oct rally to ACC staff recommendations filed in the pending rate case, which calls for a 9.4% headline ROE and includes APS’ proposal for inclusion of SCR recovery in rates; PCG falls after telling California regulators that its power equipment may have contributed to igniting the Zogg Fire, which has killed four people cited in an 8-K filing Friday

Financials

·     Bank movers; GS reportedly may scale down its financial targets due to the pandemic slowing its planned business model revamp; BLK, C, JPM, GS, BAC, PNC, USB, WFC, MS, TFC, ALLY, BK, CFG, STT are scheduled to report earnings this week; KEY recommended and underweight FITB in pair trade at Citigroup saying while FITB is relatively better positioned for low rates, this has been well telegraphed and consensus has reset expectations, while expectations for KEY look too low

·     Asset managers; AB mentioned positively in Barron’s noting asset managers are hot properties at the moment, with activist investor Nelson Peltz taking stakes in Invesco (IVZ) and Janus Henderson (JHG) and pushing them to merge, while Morgan Stanley (MS) has agreed to pay $7B for Eaton Vance (EV). One of the hottest in the industry should be AllianceBernstein, offering a growth story and a nearly 9% yield; BEN reports $1.419T AUM for September, a slight decrease from $1.441T in Aug but more than double September 2019’s $692.6B total; TROW, VRTS, WDR, LAZ, APAM also report AUM for September that are slightly lower than August’s totals

·     Insurance; JPMorgan with several changes as they downgraded TRV to Underweight from Neutral which reflects concerns about a declining ROE, lackluster business trends, and potential risks to EPS estimates. Also, while the stock has pulled back in 2020, it has materially outperformed other large cap commercial lines stocks such as AIG, CB, and HIG. CB upgraded from Neutral to Overweight to reflects its superior franchise while MMC downgraded from Overweight to Neutral as feel that the risk-reward in the stock is less compelling; BTIG said they believe the valuations of private mortgage insurers (ESNT, RDN, MTG, NMIH) would be much fuller if the market better recognized another significant mitigant: the reduction in tail risk enabled by the insurers’ use of insurance-linked notes (ILNs)

·     REITs; BDN downgraded from Buy to Hold at Argus due to unfavorable timing on the company’s upcoming lease expirations. Brandywine faces expirations that amount to 11% and 13% of 2021 and 2022 projected annualized revenue, respectively, well above the peer averages for these years of 8% and 7%. Rene

Healthcare

·     Pharma movers; PFE downgraded to neutral at Atlantic saying with the failure of Ibrance in all early breast cancer indications now complete, they no longer see a path to above industry growth for PFE Biopharma; ATXI plunges after the FDA declines to approve the company’s acute pain treatment; ALXN said the U.S. FDA approves higher dose of co’s therapy, Ultomiris, to treat two types of blood disorders, atypical hemolytic uremic syndrome (aHUS) and paroxysmal nocturnal hemoglobinuria; BHC licenses Eyenovia pediatric myopia treatment; MNK said it secured a broad consensus with key stakeholders on a comprehensive Chapter 11 restructuring

·     Biotech movers; ALKS said the FDA advisory committee voted in support of ALKS’s drug candidate, ALKS 3831, as a potential treatment of schizophrenia and bipolar disorder in adults; SGEN and Astellas Pharma Inc. announced positive topline results from the second cohort of patients in the pivotal phase 2 single-arm clinical trial known as EV-201; REGN shares active after its CEO said Sunday that Trump’s case is merely “a case of one,” and the treatment still needs more testing before its efficacy is known.

·     Healthcare services and providers; AMWL rises after analyst’s pick up coverage – at least 4 rated OP/buy and 3 with neutral/holds – Piper with $44 tgt high; CVS tgt raised to $75 as believe CVS offers some compelling value with an 11% FCF yield and a 3.4% dividend yield; in animal health, Credit Suisse raised tgts on several names (ZTS, ELAN, CHWY, PETS, PDCO, IDXX) saying survey suggests robust veterinary demand in Q3, as 80% of practices experienced volume growth of 3% on avg. basis

·     MedTech and Equipment; ABT received an emergency-use authorization from the FDA for a test to detect antibodies for the new coronavirus (its Architect and Alinity platforms); PKI announced that it anticipates reported and organic revenue growth of approximately 35% and 33%, respectively for Q3; ZYXI shares fell after lowering its revenue guidance for the third quarter due to lower than expected orders in the second and third quarter related to Covid-19.

Industrials & Materials

·     Industrial & Machinery; CAT, ROK positive mention in Barron’s this weekend saying technology is no longer just about tech stocks — and industrial companies stand to benefit as the two are among the companies harnessing the powers of data and automation in ways that should make their sales more consistent and their bottom lines more profitable in the years to come; in the HVAC sector, Keybanc said they favor CARR and TT as well as upstream supplier RBC (PT to $110), into earnings, and are more neutral on LII and WSO as believe Residential HVAC momentum sustained through 3Q20

·     Transports; Dow Transports trading at record highs for a 4th straight day; Barclays upgraded ALGT in airline sector to overweight and downgraded UAL to EW saying with US airline revenue down roughly 70% heading into 4Q20, we contemplate the slow path to recovery for the sector, which will likely be defined by leisure demand; CP, CNI, UNP among rails touching 52-week highs in surging transport space

·     Paper sector, BMO Capital upgraded shares of WRK, IP, PKG and GEF all from Market Perform to Outperform saying it is the first time they have recommended any of these names in more than two years. The drivers are much better-than-expected demand growth as well as an improved pricing outlook. A November $50/ton containerboard hike appears a “done deal.”

Technology, Media & Telecom

·     Big Tech/Internet; TWTR upgraded from Hold to Buy at Deutsche Bank with $56 tgt saying they are now starting to hear more positive feedback in the ad channel and would take advantage of the opportunity to build a position now; AMZN shares jump ahead of its 2-day Prime Event starting today; AAPL shares surging ahead of tomorrow’s iPhone event; SNAP pt was raised to a street-high $35 (from $25) at UBS, and to $32 from $28 at Deutsche Bank; EU regulators are drawing up a “hit list” of up to 20 large internet companies, likely to include Silicon Valley giants such as FB and AAPL, that will be subject to new and far more stringent rules aimed at curbing their market power as per the Financial Times

·     Semiconductors; Philly semi index (SOX) setting a record high, up nearly 2% at 2,440; Truist initiated AMD at Hold with a $90 pt and lifted its pt on NVDA to $653 from $550 and reiterated its Buy rating; Cowen initiated Outperform ratings on POWI and MTSI JP Morgan named QCOM as a top pick in hardware on earnings upside from 5G and a near-term benefit from Huawei’s share moderation in smartphones, and also included LITE as a top pick on valuation and ahead of the upcoming iPhone launch

·     Software movers; TWLO to buy customer data platform Segment for $3.2 bln in an all-stock deal and following the deal, Segment to become a part of TWLO; NET releases a cloud-based network-as-a-service solution, Cloudflare One which will protect and accelerate the performance of devices, applications, and entire networks to keep businesses secure; HUYA is acquiring DOYU in an all stock deal, with each Doyu shareholder receiving 7.30 Class A ordinary shares of Huya, and each Doyu ADS receiving 0.730 ADS of Huya. https://bit.ly/34OjVJR

·     Media & Telecom movers; Digital TV Research says a new forecast suggests U.S. pay TV revenue will drop to $56B in 2025, and global pay TV revenue is headed for a 15-year low by then, having declined from a peak of $105B in 2015. And the global number will drop to $152B in 2025 – below even 2010’s $175B (watch shares of cable names ATUS, CHTR, CMCSA, VZ, DISH; OMC was upgraded to overweight at Barclay’s as sees a number of positive catalysts for the shares following the recent underperformance

·     Hardware & Component news; CSCO and ANET downgraded to neutral from buy at Citigroup as they see corporates elongating their asset useful life and shifting purchasing decisions to other initiatives; says stocks to buy CIEN, KEYS and MSI while stock to avoid include HPE, INFN, JNPR as see share loss by HPE to both DELL and NTAP and share loss from INFN to CIEN