Mid-Morning Look

Friday, October 16, 2020

Another day, another market rally as stock on track for solid weekly gains, erasing losses earlier in the week. Strong retail sales data and improving sentiment data helped lift markets while a sharply lower industrial production weighed on confidence (for a moment). Safe haven and defensive assets slide following another spike in U.S. stocks, with Treasury yields inching higher as prices fall, the dollar slips and gold prices are little changed. Transports one of the few market weak spots (after Dow transports hit record highs several times this week) as truckers under pressure following disappointing earnings results from JBHT and MRTN. Industrials higher as Dow component BA rises on its 737 MAX deemed safe to fly by the top European aviation regulator while CAT was upgraded to buy and street high $220 tgt at Wells Fargo. Overall, another broad-based rally as investors continue to pile into equities in hopes of a stimulus deal, a Democratic sweep (which would likely garner even larger stimulus aid payments), general upside euphoric momentum with tech leading gains daily. At the same point, markets dismissing the impact of rising COVID-19 cases and its threat to the global economic rebound. It has also been a good week for underperforming sectors such as energy and financials.

Economic Data

·     Retail sales for September much stronger than expected, rising 1.9% easily topping to 0.7% estimate and above August at 0.6%; retail sales ex-autos rise 1.5%, above the 0.5% estimate and retail sales ex-autos/gasoline rise 1.5% vs. est. 0.5%

·     Industrial production for Sept fell an unexpected -0.6% vs. est. +0.5% (Aug was up 0.4%), while U.S. Sept capacity utilization rate fell to 71.5% from August 72% and below consensus 71.9%; Sept manufacturing output -0.3% vs. est. up 0.7%

·     Business Inventories for August rose 0.3% vs. est. 0.4% and above the July 0.1% reading

·     University of Michigan sentiment prelim for Oct 81.2 above consensus 80.5 and final Sept 80.4 while survey of consumers expectations index prelim oct 78.8 vs. final Sept 75.6 and consumers current conditions index prelim oct 84.9 (consensus 88.5) vs. final Sept 87.8

Sector Movers Today

·     Industrial & Machinery; NAV shares rose after CNBC reported that Volkswagen’s Traton is very close to a deal to acquire what it does not own of the Navistar for $44.50 per share; in machinery, AGCO upgraded to buy from neutral and raise tgt to $95 from $70 at Citigroup and see it as our best SMID idea over the next 12 months given improving global ag markets and near-record wide valuation discount to DE; CAT upgraded to Overweight from Equal Weight and raise tgt to $220 from $160 at Wells Fargo as expects earnings to substantially improve beginning in 2021 due to anticipated revenue growth from global growth acceleration

·     Solar sector; has been massive outperformer in recent weeks amid rising investor expectations to the potential clean energy infrastructure spend and federal renewable mandate legislation that may be passed in a scenario of a Biden win and Senate sweep; SEDG upgraded to neutral from sell and raise tgt to $283 from $142 at Goldman Sachs saying that SolarEdge’s strong balance sheet has proven to be attractive against this uncertain global macro backdrop, while downgraded MAXN to sell from neutral with $15 tgt as see heightened downside risk in the near-term given the aforementioned margin/pricing/FCF concerns; FSLR downgraded to Neutral from Buy at bank America with $88 tgt saying after the latest run-up, sees the stock as being more fairly valued at its current level

·     MedTech and Equipment; ISRG falls as Q3 EPS and revs topped consensus, while shipped 195 da Vinci systems in 3Q20, down -29% vs. 3Q19 (275) but up 10% vs. 2Q20 (178) – Opco also noted the co anticipates the oncoming onslaught from MDT’s HUGO system in the near future; SWAV presented results from the DISRUPT CAD III trial, which examined the use of coronary IVL in severely calcified lesion which Opco said didn’t live up to the hype while Canaccord raised its tgt to $87 from $60 saying results showed that the trial met both its primary safety and effectiveness endpoints following treatment with SWAV’s C2 Coronary IVL catheter; BSX shares fell yesterday Boston’s Acurate neo valve at its investor day (gen-1, not neo2) failed to show non-inferiority to MDTs Evolut valve; EAR 7.85M share IPO priced at $18.00

·     Transports; truckers get a disappointing report from JBHT as earnings of $1.18 missed the $1.27 estimate on revs $2.47B topping the $2.36B view while saying Q3 intermodal revenue fell -2.3% YoY to $1.21B; MRTN with mixed results as EPS beat but revs of $216M missed; Barclays upgraded their transport sector view to Neutral from Negative as well as upgrade WERN to Overweight and both NSC and HTLD to Equal Weight saying this year has been challenging on several fronts, but investment process remains grounded in fundamentals, which have clearly recovered ahead of previously bearish expectations

Stock GAINERS

·     BA +4%; as Europe’s top aviation regulator reiterates changes to 737 MAX have made the jet safe to fly in the region before end-2020 – the executive director of the European Union Aviation Safety Agency (EASA), in an interview with Bloomberg News, said the agency was performing final document reviews ahead of a draft airworthiness directive it expects to issue next month

·     CIT +20%; FCNCA and CIT jointly announced today that they have entered into a definitive agreement under which the companies will combine in an all-stock merger of equals https://on.mktw.net/2H7G7X2

·     FLEX +14%; was upgraded to outperform and raise tgt to $16 from $12 at RBC Capital as believe the market is underappreciating FLEX’s 100% ownership interest of NEXTracker, the world’s largest solar tracking company

·     HTZ +96%; after the car-rental company secures debtor-in-possession financing totaling $1.65 bln from some of company’s pre-petition first-lien lenders

·     IP +1%; paper stocks (PKG, WRK) rise as North American containerboard box shipments, a key demand gauge rose 8.8% in September to 34.9 billion square feet from 32.0 Bsf a year ago, according to the Fibre Box Association

·     LH +4%; DGX and LH receive positive CMS announcement as updated reimbursement levels for COVID PCR testing removes the uncertainty around pricing

·     NAV +21%; after CNBC reported that Volkswagen’s Traton is very close to a deal to acquire what it does not own of the Navistar for $44.50 per share (NAV later confirmed that an offer of $44.50 has support of its two largest shareholders)

Stock LAGGARDS

·     GLPG -7%; reported that GLPG1972 failed to meet its endpoints in a phase II osteoarthritis study, showing no significant difference vs placebo in any treatment

·     ISRG -3%; Q3 EPS and revs topped consensus, while shipped 195 da Vinci systems in 3Q20, down -29% vs. 3Q19 (275) but up 10% vs. 2Q20 (178) – Opco also noted the co anticipates the oncoming onslaught from Medtronic’s HUGO system in the near future

·     JBHT -7%; earnings of $1.18 missed the $1.27 estimate on revs $2.47B topping the $2.36B view while saying Q3 intermodal revenue fell -2.3% YoY to $1.21B

·     NKLA -9%; after Bloomberg noted its CEO said the startup can go it alone – could revert to ‘base plan’ without GM and planned pickup will be abandoned without manufacturing partner

·     SLB -6%; reported a 3c EPS beat for Q3 but revenue slumps 38% to $5.26B, missing estimates of $5.38B ahead of HAL earnings on Monday

·     TACO -15%; declines despite quarterly beat on EPS and sales and systemwide comps rising 4.1%

Syndicate:

·     Aligos Therapeutics (ALGS) 10M share IPO priced at $15.00

·     Eargo (EAR) 7.85M share IPO priced at $18.00

·     Kiromic BioPharma (KRBP) 1.25M share IPO priced at $12.00

·     Praxis Precision Meds (PRAX) 10M share IPO priced at $19.00

·     Royalty Pharma (RPRX) 17.3M share Secondary priced at $42.00

·     Tarsus Pharmaceuticals (TARS) 5.5M share IPO priced at $16.00

·     Sapiens (SPNS) 3.4M share Secondary priced at $29.50