Mid-Morning Look

Monday, October 19, 2020

Stocks turn south, erasing earlier gains as investors eagerly await stimulus news. Overnight futures advanced with market sentiment higher to start the week after U.S. House Speaker Nancy Pelosi said on Sunday that although there remain a wide range of differences with the White House, she was hopeful that a stimulus package could be passed before the Nov. 3 election as she set a deadline late Saturday that “decisions must be made by the White House” within 48 hours. Markets also with a watchful eye on earnings as roughly 80 S&P components are expected to report results this week. Hopes of a coronavirus vaccine by the year-end also keeping investors engaged after Pfizer said this weekend it could be ready to apply for emergency-use authorization of its COVID-19 vaccine by late November. The U.S. dollar edged lower as investors boosted bets that an agreement in Washington on a fiscal stimulus package ahead of the upcoming U.S. election, also sending Treasury prices lower and yields higher. Commodity prices getting an early boost as well. Good China data also helping as China’s gross domestic product grew 4.9% in July-September from a year earlier, slower than analysts’ forecast, but faster than the second quarter. Stocks opened higher but have since slipped to morning lows.

Sector Movers Today

·     Industrial & Machinery; Barclay’s upgraded LECO to an overweight saying it has a best-in-class return profile and diverse exposure to a global manufacturing recovery into 2021, upgraded AGCO to EW, and downgrade URI to Underweight, all which reflect their end-market hierarchy two quarters from a machinery trough; LII issues improved revenue guidance for the year, guiding to a decline of -5% to -9%, better than the prior view of -10% to -15% and said Residential revenue rose 13% and set a new record for any quarter at $722M (good read for HVAC names TT, CARR); SNA downgraded to Underperform from Neutral at Longbow citing concerns around lack of Tools segment organic growth and deteriorating credit collections; OSK upgraded to buy at Bank America with a $97 target calling it the higher quality and more defensive of the two major aerial suppliers to the equipment rental industry

·     Transports; Airlines stocks (UAL, DAL, AAL, ALK, JBLU) gained after a study completed by BA, UAL, and the DoD showed that the risk of Covid-19 exposure on an airline is “virtually nonexistent” if passengers remain masked; additionally, the TSA reported more than 1 million passengers yesterday, the first time topping the benchmark since March 16; AAL is preparing to operate a daily 737 MAX flight between Miami and New York from Dec. 29 to Jan. 4, with flights available for booking from Oct. 24; KSU was upgraded to outperform at BMO Capital as believe that KSU’s network sits on significant volume growth opportunities and faces fewer growth hurdles than most U.S. rail networks; truckers look to rebound after dragging transports lower Friday on weak JBHT results

·     Metals & Materials; FCX tgt raised to $21 at UBS citing a 12% increase in China property completions next year, a +2% lift in China’s power grid spending funded and a global, ex China demand recovery from a low COVID-related base; AEM downgraded to Equal Weight art Barclay’s while hiked gold targets by an average of 8% and base metal targets by 4% – say given view that copper and gold prices could face downside in 2021, they remain picky on valuation (have the most upside to target on NEM and GOLD; SON is implementing a $50/ton price increase for all grades of uncoated recycled paperboard (URB) in the United States and Canada, effective with shipments beginning November 16, 2020; TSE issues upbeat Q3 guidance saying many end markets experienced strong demand recovery in Q3 after weak demand during Q2

·     Retailers; LB price target was raised to $50 from $42 at JPM who remains OW on the stock; VFC was downgraded to Underweight at Bofa who sees the company losing market share to NKE after reporting Q2 revenue fell 11%; Wells Fargo raised their targets on NKE, ADDYY; GPS tgt raised to $24 from $21 at RBC as see Thursday’s investor event as an important milestone for the new GPS management team to outline opportunities for value creation with growth drivers Old Navy and Athleta, productivity stabilization at Gap brand and Banana Republic aided by specialty store closures, and cost reduction efforts while balancing the mix shift to online; in auto retail, ORLY upgraded to outperform at Raymond James saying they historically have been hesitant to recommend owning the stock due to valuation concerns but the current valuation is actually attractive for a long-term

Stock GAINERS

·     BSTC +44%; to be acquired by ENDP for $88.50 per share, in deal valued at about $540M (net of approximately $120M in cash acquired) https://bit.ly/37m2wLu

·     FLDM +8%; said it will provide millions of noninvasive, saliva-based tests for the coronavirus to qualifying U.S. colleges and universities at a cost as low as $5 per test – FLDM’s test has received emergency use authorization from the FDA

·     FLEX +4%; adds to last Friday gains after RBC and JPM said the market is underappreciating FLEX’s 100% ownership interest of NEXTracker, the world’s largest solar tracking company

·     HAL +2%; reported a Q3 EPS beat while revs fell short of consensus $2.98B vs. est. $3.09B) and said the pace of activity declines in the international markets is slowing

·     OSUR +18%; said it received emergency use authorization from the U.S. FDA for a saliva collection and stabilization device in Covid-19 testing

·     RESI +34%; shares surge after a deal to be sold to a group led by Pretium and Ares Management (ARES) in all-cash purchase values Front Yard at $2.4B expected to close in Q1 of 2021, with holders expected to get $13.50 per share https://bit.ly/2HfhQyv

·     SGH +6%; entered into an agreement with CREE to purchase the Cree LED Products business unit for up to $300M, including fixed upfront and deferred payments and contingent consideration

·     TSE +8%; issues upbeat Q3 guidance saying many end markets experienced strong demand recovery in Q3 after weak demand during Q2

Stock LAGGARDS

·     AEL -10%; agreed to a strategic partnership with BAM, which will reinsure as much as $10B of American Equity’s fixed index annuity liabilities and make a 19.9% equity investment in the company at $37 per share – AEL rejects ATH and MassMutual’s takeover proposal made public earlier this month, saying it undervalues the company https://bit.ly/2HbIdWg

·     AERI -13%; downgraded to underperform at Bank America and cut tgt to $9 from $14 saying post COVID-19 pathway looks daunting”; adds risk/reward still unfavorable for AERI

·     CXO ; confirmed prior reports last week as COP to buy the E&P company in a deal valued at roughly $10B, paying $49.30 per share as CXO holders will receive 1.46 shares of ConocoPhillips for each share held https://on.mktw.net/34dro69

·     MD -6%; $ downgraded to sell and tgt cut to $12 at Deutsche Bank saying they are constructive on its ongoing strategic transformation and the simplification of its business model, but believe elements out of its control will pressure the company’s low-mid SD organic growth targets and constrain its ability to generate operating leverage for targeted margin expansion

·     VNO -2%; Evercore upgraded KIM to In-Line from Underperform and downgraded KRC to In-Line from Outperform and cut VNO to underperform from in-line