Mid-Morning Look

Tuesday, November 24, 2020

Wall Street opens sharply higher following news of President Trump finally approving the start of the formal transition process to President-elect Joe Biden, ending weeks of political uncertainty. Trump said via Twitter that he had told his officials to begin “initial protocols” involving the transfer to Biden “in the best interest of our country.” The news was just the latest of a strong of positive catalysts that have lifted stocks over the last few weeks, including several upbeat vaccine related clinical trials (PFE, MRNA, AZN), with strong efficacy levels which has spurred the upside spike in the reopen trade as travel, cruise, leisure, theme parks, energy, retail and restaurants, REITs among the biggest gainers (and again leading today), while defensive utilities, healthcare have seen weakness as well as large cap tech underperform amid a rotation into cyclicals. Small Caps have been a big stand out as the Russell 2000 hits another all-time highs, while both the Dow Jones Industrial Average and Dow Transports also at record highs. Same trades that have worked for the last few weeks continue again today – energy, financials, “reopen” trade – selling defensive related sectors (and gold) as investors go “all-in” on the economic recovery trade. Markets also gaining comfort as former Fed Chairperson Janet Yellen is expected to be named the next Treasury Secretary – headlines late yesterday and momentum continues into today.

Economic Data

·     Consumer confidence index 96.1 vs. est. 98.0 and vs. October revised 101.4 (previous 100.9), while the present situation index 105.9 in Nov vs. Oct revised 106.2 (previous 104.6) and the expectations index 89.5 in Nov vs. Oct revised 98.2 (previous 98.4)

·     Richmond Fed composite manufacturing index +15 in Nov vs +29 in October as shipments index +20 in Nov vs +30 in Oct and services revenues index +13 in Nov vs. +19 in Oct

Sector Movers Today

·     Aerospace & Defense; BA has been a big boost to the Dow Jones and S&P over the last week after getting recent approval for resumption of its Max 737 flights (has also boosted the entire supplier sector – SPR, AYI, HAYN, RTX, TGI, MOG) – today, European regulators give draft approval to BA’s 737 MAX, paving the way for a formal flight clearance in January after an almost two-year ban; HWM upgraded to buy at Argus saying after enduring its worst quarter of the pandemic, the outlook is brighter; AER upgraded to buy at Bank America with $47 tgt with the management turning optimistic that the worst for the company may be in the past; GE warned employees that more job cuts are coming to its jet-engine business because of the pandemic’s impact on commercial air travel even with the promise of a vaccine on the horizon, DJ reported; LORL announces special dividend of $1.50

·     Transports; KNX, WERN and SNDR downgraded in trucking sector at Citigroup while upgraded LTL carrier ARCB after flagging our initial concerns about euphoric 2021 estimates several weeks ago – think that it will be difficult for shares to shrug off peak-cycle fears in the coming months as data turns from excellent to simply good; rail price tgts raised at RBC Capital saying CP preferred name in space as up tgt to $C506 and also raise tgt prices on CNI, UNP, NSC, CSX as view the valuation lift as a function of solid performance during the pandemic in which margins mostly held up despite volume volatility, and reflecting higher multiples in the market as a whole; XPO defended at Truist saying weakness yesterday in response to Blackstone stepping away from possible purchase of XPO’s European Logistics business in an overreaction

·     MedTech and Equipment; Agilent (A) Q4 beat 98c on $1.48B (+6% core) vs. consensus 93c on $1.401B while Q1/FY21 guidance light – issued FY21 guidance with revenue of $5.6B – $5.7B (+4%-6% core growth) and adj. EPS of $3.57-$3.67; ALGN tgt raised to $525 at Piper saying highlights from ALGN’s biennial investor day included strong November commentary, a reiteration of LRP targets established by management 2.5 years ago, and growing evidence the digitization of orthodontics is driving Invisalign adoption; MDT said its profit fell for Q2 as revenue slid due to continued declines in medical procedures amid the Covid-19 pandemic

·     Retailers; more than a third of Americans plan to spend less on holiday shopping in 2020 year over year, compared with 18% who aimed to cut back last year, according to a survey of 2,000 people by credit-card provider Discover; BBY reported Enterprise comparable sales +23% vs est. +13.8%, adj EPS $2.06 vs est. $1.72, rev $11.85B vs. est. $10.98B, and U.S. comp sales, international comps, appliance comps, computing and mobile phone comps, and consumer electronic comps that all beat their respective estimates; DKS Q3 adj EPS $2.01 on revs $2.41B, both topping estimates ($1.05 on $2.23B), as same-store sales rose over 23% and e-commerce sales rose 95%, and the company names current President Lauren Hobart as their new CEO effective Feb 1 following Ed Stack stepping down; TIF Q3 EPS $1.11 on rev $1.01B, both beating estimates, comp sales +1%, and the company guides Q4 comp sales to decline mid-single digits; MOV Q3 EPS 70c on revs $169.86M vs estimated 48c on $142M

·     Apparel retail stores; BURL reported Q3 adj EPS 29c on revs $1.67B (ests. 16c on $1.54B), and comparable sales fell 11.1% in Q3, narrower than the estimated -16.3% decline after rebounding in Sept and Oct following a weak August with depressed back-to-school demand, though the company warns of a slow start to Q4 as MTD Nov comp sales have declined in the low double digits YoY; URBN posted Q3 EPS 78c, a record profit for the company that tops est. 44c, on revs $969.6M vs. est. $924.2M, driven by +17% sales increase at its Free People brand, and same store sales were flat vs. est. -4.2% decline; ANF Q3 adj EPS 76c bested expectations of a breakeven quarter on sales $819.7M that also beat expected $739.4M; CHS Q3 EPS loss (48c) on Q3 sales $351.4M (misses est. $375M), comp sales -24.1%

Stock GAINERS

·     ACB +29%; amid a surge in the cannabis sector after news of Trump finally approving the start of the formal transition process to President-elect Joe Biden. Biden’s presidency is expected to support decriminalization of marijuana (CGC, CRON, APHA, TLRY also strong)

·     AMBA +7%; posted strong results/guidance, benefiting from the auto recovery and is seeing troughing demand in its IP security business – Q3 revs narrowly beat on slightly better guidance

·     BA +3%; European regulators give draft approval to BA’s 737 MAX on Tuesday, paving the way for a formal flight clearance in January after an almost two-year ban

·     GE +5%; upgraded to Outperform from Perform at Oppenheimer and raised the tgt to $12 saying operationally, GE has clearly set a positive direction with broadening momentum

·     NTNX +4%; announced 1Q21 results ahead of expectations, with $71M in new ACV vs. KeyBanc $30M estimate, driving $138M in ACV billings vs. their $120M estimate

·     SPI +18%; as its all-electric zero emission shuttle bus will serve the Santa Cruz trolley, replacing their existing wooden trolleys and helping to promote the City’s sustainability goals

·     UAL +7%; rebound continues for travel, leisure, gaming sectors on vaccine hopes

·     WFC +6%; upgraded to outperform from underperform at Raymond James as headwinds stemming from the account opening scandal that broke more than four years ago begin to rescind

Stock LAGGARDS

·     AEM -2%; Gold prices tumble further on rotation into riskier assets, sending gold miners lower (AEM, AUY, GOLD, NEM) as development of COVID-19 vaccines drives investors to riskier assets

·     DAC -14%; 3.1M share Block Trade priced at $11.00 – Cerberus Capital Management discloses it divested remaining stake in the marine freight and logistics co

·     DY -12%; after profit for Q3 rose as expenses fell, while revenue declined, as Contract revenues were $810.3M, down from $884.1M YoY and fell 9.4% on an organic basis

·     HRL -2%; posts a 3% fall in Q4 net sales to $2.4B, missing est. $2.59B as Organic net sales fell 4%, and profit dropped 8.2% to $234.4M as the most recent Covid-19 surge has created uncertainty

·     QDEL -4%; as Covid-testing companies slide further on upbeat vaccine news

·     SDC -6%; 10M share Block Trade priced at $11.75 from largest shareholder and board member, Clayton Dubilier & Rice