Mid-Morning Look

Wednesday, January 06, 2021

U.S. stocks open mixed to slightly lower before skyrocketing (though several pockets of strength throughout – solar, cannabis, building products, banks) as it appears Democrats have won control of the Senate, providing a “Blue Sweep” with control of the White House and Congress as well, giving President-elect Joe Biden a greater chance to pass significant policy changes. Stocks were mostly lower overnight, led by a sharp decline in technology, but as remains the case, investors take any opportunity to “buy on dips” as the S&P at highs up 0.75% and the Nasdaq with a more than 150 bounce off the lows back above the 12,800 level. The ADP Jobs report for December misses bigly, as private sector payrolls jobs decreased for first time since April (-123K vs. est. +60K) – ahead of the nonfarm payroll report Friday – but markets shrug off. Rising cases of Covid being offset with vaccine hopes (though the roll-out has gone slower than many had hoped). The 10-year Treasury yield is up nine basis points, and above 1% for the first time since the February/March panic. S&P Financials around 1-year highs, benefitting from the jump in Treasury yields. Gold prices at lows down -$23.20 or 1.2% at $1,931.20 as markets add to riskier bets (Bitcoin +3% at $34,850), while the dollar is mixed on the day.

Implications of the Democratic Senate victory: Big Tech stocks stumble, electric vehicle stocks gain as Georgia election digested. Wedbush this morning said the impact of the Georgia Senate elections is a clear negative for Big Tech as they expect much more scrutiny and sharper teeth around FAANG names (AAPL, AMZN, FB, GOOGL) with potential (although still a low risk) legislative changes to current anti-trust laws now on the table. At the same point Wedbush said a Blue Senate is bullish for the EV sector (TSLA, GM, FSR), with a greener driven agenda now certainly in the cards for the next few years – as believe a doubling down on EV tax credits and further consumer incentives and government initiatives around the EV sector will be on the horizon. Separately, solar stocks (FSLR, SPWR, SEDG) which could give further support to a strong “green energy” push expected under the Biden administration and cannabis names (TLRY, CGC, APHA) surging on the Senate wins as well – recall Biden and Harris have voiced support for decriminalizing marijuana on a federal level and are expected to adopt a more pro-cannabis legalization agenda.

Economic Data

·     ADP Jobs report for December misses as private sector payrolls jobs decreased for first time since April. Ahead of Friday’s monthly US jobs report, ADP private payrolls registered a miss, falling -123,000 compared to consensus expectation of a +60,000 increase.

·     Markit U.S. services sector final PMI for December at 54.8 vs flash reading 55.3 and final November 58.4; services sector final new business index for December at 54.6 (lowest since August) vs flash reading 55.0 and final November 57.6; the composite PMI for December at 55.3 vs flash reading 55.7 vs final November 58.6

·     Factory Orders for November rose +1% vs. +0.7% consensus estimate and slightly below the +1.3% prior reading (revised from +1%) as shipments rose +0.7% and unfilled orders fell -0.1%; factory orders ex-defense +1.0 pct vs. Oct +0.8 pct

Sector Movers Today

·     Auto sector: TSLA new record highs and up a 9^th straight day as Morgan Stanley boosted its tgt to Street high $810 from $540 (Bull case $1,232) saying despite the extraordinary run in the share price, they continue to believe that Tesla can outperform vs. our sector in 2021; NSANY said Q4 sales of 243,133 units, down 19.3% YoY and total 2020 U.S. sales decreased 33.2% to 899,217 units; Piper noted overall app downloads for 7 major used car platforms (CARG, CVNA, VRM, TRUE, KMX) fell by 13% YoY in Q4 as decline mirrors a general softening in the overall used car market – said only CARFAX (owned by IHS Markit) grew downloads. Wedbush said a Blue Senate is bullish for the EV sector, with a greener driven agenda now certainly in the cards for the next few years. We believe a doubling down on EV tax credits and further consumer incentives and government initiatives around the EV sector will be on the horizon, which is a major positive for TSLA, GM, FSR, and other auto players/EV supply chain; Ford (F) said Q4 sales drop was about 10%, beating the 12% decline forecast by analysts

·     Consumer Staples; KO receives its 3^rd straight day of an analyst downgrade as Deutsche bank lowers to Hold from Buy (RBC cut on 1/4, and Guggenheim on 1/5); PEP and KDP downgraded to in-line from Outperform at Evercore ISI on new macro view which calls for a strong cyclical-driven earnings recovery in 2021, continued U.S. dollar weakness and emerging market strength, and higher commodity prices; Kellogg (K) downgraded to neutral at Piper as expect Kellogg’s top-line and earnings growth trajectory to lag peers over the next 1-2 years; BYND downgraded to neutral from overweight at Piper saying the company’s current retail trends fail to keep up with his expectations for Q4

·     Transports; broad strength in transports early, led by truckers, freight and rails (modest weakness in airlines) as the Dow Transports outperformed; JBHT was upgraded to Buy from Neutral at Citigroup and moving target up to $165 as they believe we are entering a multi-year earnings growth cycle, most similar to 2012-2015, which could see ~80-100% EPS growth over three years; in rail cars, GBX shares slide after reporting a larger than expected Q1 EPS loss of (30c) and revs of $402M missed the $481M estimate

·     Financials: Banks and broader financials broadly higher (BAC, C, GS, JPM, WFC) as the 10-year Treasury yield moves above the 1% level for the first time in about 9-months as investors hedged against the risk of more U.S. fiscal spending and borrowing. The election results in Georgia have led to the belief that the Democratic controlled Senate will vote in favor to add to the debt levels (more stimulus measures, higher spending), which will cause interest rates to rise, yields to rise, which is favorable for the banks

·     Housing & Building Products; ZG upgraded to Outperform from Neutral at Wedbush as expect real estate technology adoption will accelerate with an opportunity to transform this industry – raise tgt to $167 from $118; FND tgt upped to $110 from $88 at Guggenheim and reiterate Buy rating ahead of 4Q earnings as see the potential for our base-to-bull case for independent share shift to play out into 2021; OPEN initiated with an Outperform rating and a $31 tgt at Wedbush as they see a large market opportunity that they expect to have accelerated coming out of the pandemic; in builders, MDC said Q4 2020 new home deliveries increased 7% to 2,564 from 2,389 and Q4 2020 net new home orders increased 72% to 2,708 from 1,574; in building products, MAS jumps, while VMC rises on Stephens upgrade to overweight saying with demand holding in better than expected and good weather trends in the quarter, think 4Q20 should come in better

·     Utilities & Solar; Solar names (TAN ETF, FSLR CSIQ, SPWR, etc.) were lifted by the Democratic sweep in GA runoffs, seen as positive under Dem sweep which could give further support to a strong “green energy” push expected under the Biden administration; Wells continues to like the long-term fundamental set up for utilities, naming AEE, ATO, CMS, DTE, ES, H.cn, NI, PEG, SO and WTRG as their top picks, upgrading CNP and EIX to Overweight on the opportunity for multiple expansion in 2021, but downgraded BEP, BPEC, CPK, FE, IDA, PCG, PNM and SJW to Underweight and BIPC to Equal-Weight on value and AEP to EW as they have less conviction in their prior overweight thesis; JPMorgan downgraded ORA to Neutral from OW on valuation, keeping their $86 pt after the stock rose ~28% since mid-November

Stock GAINERS

·     CGC +11%; cannabis names higher on Democrats winning Senate races in Georgia (party more favorable to industry) as TLRY, CGC, APHA among gainers

·     CHNG +33%; as Optum, a part of UNH agreed to acquire the company for $25.75 per share in cash; says acquisition will boost UnitedHealth EPS https://on.mktw.net/38iz7li 

·     DKNG +4%; and PENN rise as according to the NY Daily News, Governor Cuomo will make the revenue-generating measures of online sports betting a central part of his policy proposals to be laid out in next week’s State of the State address https://bit.ly/35dq6YK

·     TSLA +3%; price tgt raised to $810 from $540 (Bull case $1,232) at Morgan Stanley saying despite the extraordinary run in the share price, they continue to believe that Tesla can outperform vs. our sector in 2021

·     WBA +2%; as ABC to acquire majority of WBA’s Healthcare businesses for ~$6.5B, comprised of $6.275B in cash and 2M in ABC common shares as transaction is expected to close by the end of AmerisourceBergen’s 2021 fiscal year

·     VMC +7%; rises on Stephens upgrade to overweight saying with demand holding in better than expected and good weather trends in the quarter, think 4Q20 should come in better (also sector getting a boost on increased spending under Democratic sweep)

·     ZION +9%; massive rally underway in under-owned banks given the sharp spike in Treasury yields, with KEY, CMA, CFG, MTB, HBAN all sharply higher

Stock LAGGARDS

·     BYND -2%; downgraded to neutral from overweight at Piper saying the company’s current retail trends fail to keep up with his expectations for Q4

·     CHA -3%; CHA, CHL, CHU in focus again as the NYSE to proceed with delisting three Chinese telecom companies (comes a day after reversed a decision from last week to delist U.S. listed shares of China Mobile Ltd, China Telecom Corp Ltd and China Unicom Hong Kong Ltd)

·     CVNA -3%; Piper noted overall app downloads for 7 major used car platforms fell by 13% YoY in Q4 as decline mirrors a general softening in the overall used car market (CARG, TRUE, VRM)

·     GBX -5%; shares slide after reporting a larger than expected Q1 EPS loss of (30c) and revs of $402M missed the $481M estimate

·     NOW -3%; weakness in tech today (ADBE, PAYC, SPLK, OKTA) as investors rotate back into recovery and under-owned names (financial, energy, building products)

Syndicate:

·     AdaptHealth (AHCO) 8M share Secondary priced at $33.00

·     Alexandria Real Estate (ARE) 6M share Spot Secondary priced at $164.00

·     Fate Therapeutics (FATE) 4.421M share Secondary priced at $85.50

·     NGM Biopharmaceuticals (NGM) 4.63M share Secondary priced at $27.00

·     Titan Medical (TMDI) 6.5M share Spot Secondary priced at $1.55