Closing Recap

Tuesday, January 12, 2021

Equity Market Recap

·     U.S. equities finish mostly higher, led by strength in Smallcaps as the Russell 2000 hit another record high with today’s gains led by energy and financials. Dow Transports also touched record highs today (boost by airlines), along with records for the S&P Industrials sector index and S&P 500 Financials index (on rising yields – ahead of earnings). Online retail related stocks with massive outperformance today across the board (EBAY, CHWY, OSTK, SFIX, W, ETSY). Oil prices hit fresh 10-month highs, gold prices slip, Treasury yields pullback from earlier highs and the dollar slips to lowest levels in over a week. Overall, major averages gained modestly (outside of outperformance in Smallcaps), though there were certainly big pockets of strength such as electric vehicles, airlines, airlines, banks).

·     Headlines in retail and healthcare companies dominated again ahead of presentations at the ICR Conference and JPM Healthcare conferences. Rising Treasury yields starting to play a part as financials seeing more strength as the 10-year hits above 1.18% for best levels since March (banks also rising on positive analyst calls as WFC upgraded at UBS, and ahead of key earnings this week). Housing stocks holding up well despite the recent uptick in yields (impacting mortgage rates). Also a busy week of IPOs with Affirm (AFRM), Playtika (PLTK), Poshmark (POSH) among those expected.

·     In Fed commentary: Delay in the rollout of coronavirus vaccines is now among the most substantial risks facing the United States, Kansas City Federal Reserve President Esther George said on Tuesday, with the economy poised for a "snapback" once the immunization program succeeds. Fed’s Mester said the U.S. economy will continue to require support from both monetary and fiscal policy as it recovers from the crisis caused by the pandemic and overcomes the challenges caused by a surge in infections. Federal Reserve Bank of Boston leader Eric Rosengren said he is upbeat about the U.S. economy’s outlook and that the central bank would continue to do all it can to support the recovery process.

·     Markets await more fiscal stimulus: President-elect Joe Biden said that he will deliver a plan costing "trillions" of dollars on Thursday. The proposal includes relief for state and local governments grappling with the pandemic, and new support for people who lost their jobs or cannot afford rent. Biden also called for raising the minimum wage to $15 and sending out $2,000 in direct cash payments.

Commodities

·     Oil prices touch fresh 10-month highs (rise 96c or 1.84% to settle at $53.21 per barrel) as tighter supply, rising demand and expectations for a drop in U.S. inventories offset concerns over rising coronavirus cases globally. A weaker dollar, the continued rollout of the Covid-19 vaccine along with fiscal stimulus measures has helped boost risk appetite and sent oil prices soaring (along with energy stocks). Accommodative measures from OPEC has also helped as Saudi Arabia plans to cut output by an extra 1 million barrels per day (bpd) in February and March to keep inventories in check. Oil also gained on the expectations for a drop in U.S. crude stockpiles (ests for stockpiles to fall by 2.7 million barrels for a fifth straight week of declines). The EIA estimated that U.S. output will fall to 11.1 million barrels a day this year (and to 11.5M barrels in 2022) after production dropped to 11.3 million barrels a day in 2020 from a record 12.2 million barrels a day in 2019. OPEC production is expected to average 27.2 million barrels a day in 2021, up from an estimated 25.6 million barrels a day in 2020. Oil futures remained higher after the report. Gold prices edged lower slightly, down -0.4% to $1,844.20.

Currencies & Treasuries

·     Treasury yields rise – then fall; U.S. 10-year Treasury yields rise highs of 1.18%, highest levels since March on expectations that new fiscal stimulus will boost economic growth and increase Treasury supply (before yields rolled late afternoon back to 1.13% after a strong 10-yr auction). The U.S. Treasury sold $38B in 10-year notes at a yield of 1.164% compared to 1.172% when issued prior as the bid-to-cover (demand) stood at 2.47 as indirect bidders were awarded 62.25% of the auction, primary dealers 19.99% and directs 17.77% (solid auction results). The U.S. dollar retraced recent gains after recovering off more than 2-year lows reached last week. Bitcoin prices again very volatile, rising as much as 4% and falling as much as 2% within the last 24 hours after yesterday’s intraday drop of as much as 23% to lows around $30,000.

Sector News Breakdown

Consumer

·     Retailers; ANF said it sees Q4 net sales down 5%-7% better than prior view of down 5%-10% (est. $1.12B), reflecting ongoing digital momentum offset by store closures and capacity restrictions in North America and EMEA; LE raises Q4 guidance and updates long-term financial targets; BOOT tgt raised from $47 to $65 at Cowen saying they remain buyers and are raising FY1, FY2, and FY3 EPS by +15%, 21%, and 7%, respectively; FIVE guides Q4 revenue of $835M to $840M vs. $825M consensus after seeing a 21.1% Y/Y jump for the nine-week holiday period; ETSY extends gains, rising for a 4^th straight day – recall Monday Jefferies said November and December traffic on ETSY accelerated to nearly 100%, up from 57% in October and representing the highest level of monthly growth since they started measuring traffic 2 years ago; ACI posted Q3 earnings beat expectations and the company raised its full-year expectations (now expects fiscal full-year 2020 identical sales growth of 16.5%, up from 15.5% previously, and adjusted EPS in the range of $3.05 to $3.15, up from $2.75 to $2.85 previously)

·     Auto sector; NIO announces $1.3B convertible senior notes offering; NIO downgraded to Neutral from Buy at Citigroup but raise tgt to $68.30 from $46.40 after the company unveiled its first sedan model, the ET7, at its Nio Day event on January 9 saying its good but not enough to make any critical changes from Tesla’s challenge; XPEV said it entered into a strategic cooperation agreement with five Chinese commercial banks pursuant to which it will obtain a credit line of RMB12.8 billion ($1.98 billion) with an extensive range of credit facilities; ACTC rises after saying it is taking commercial electric vehicle technology company Proterra Inc. public in a transaction that values Proterra at $1.6 billion; GM launches Brightdrop electric delivery vehicle business

·     Real Estate, Housing & Building Products; homebuilders get earnings from KBH after the close tonight (after strong returns for space in 2020 on low rates); LL downgraded to Hold from Buy at Mizuho following achievement of price target and noting the benefit from the favorable ruling that retroactively excluded certain LVT products imported from China from tariffs has lapsed, and this should hurt near-term margin and EPS growth; BTIG downgraded RDFN to Neutral and removed their $65 pt on valuation and upped their pt on ZG to $165 from $155 as their tracking shows them exceeding their Q4 guidance

·     Restaurants; FRGI said Q4 Pollo Tropical comparable sales -8.2% compared to -11.1% in Q3, with November (-8.2%) at Pollo Tropical negatively impacted by Tropical Storm Eta; TACO preliminary system-wide comparable sales for Q4 was +3.8% and initiates quarterly dividend; SHAK reported a preliminary 17.4% decline in comparable sales for the quarter, an improvement versus the 31.7% and 49% drops for the third and second quarters, respectively; KRUS upgraded to buy at Hallum citing better than expected earnings results

·     Leisure and Gaming; IGT upgraded to Buy from Hold and setting a target of $21 at Argus saying following the sale of its Italian gaming business, IGT will focus on its core business-to-business division and right size its operations; in lodging, DRH and XHR both upgraded at Raymond James while downgraded HST and RHP while adj. estimates as expect business transient and group travel to come back later and slower than we had previously hoped; FUBO rises after saying it plans to launch free-to-play gaming experience this summer; LVS announced Chairman and CEO Sheldon G. Adelson passed away last night at the age of 87; DKNG and PENN jump on reports online sports betting legislation might be on the table in Texas this year

Energy

·     Energy stock movers; Mizuho initiated Neutral ratings on BP and TOT and RDSat Buy in European energy while upgrading COP and OXY to Buy and assuming CVX at Buy and XOM at Neutral in US companies as oil and gas is still in the early stages of a secular bull market driven by improving demand and sustained by structural underinvestment in supply due to the fear of peak demand, and they expect Brent to average $60/bbl in 2022 with $70 upside by that year-end; Mizuho also upgraded CLR to Neutral with a $24 target and MRO to Buy as their current oil price forecasts would be beneficial to these companies; RBC says PXD remains a favorite idea given their strong balance sheet, core assets that generate visible FCF, and acreage that is mostly on fee lands, and ESTE provides an attractive balance of small-cap oil beta coupled with a peer-leading balance sheet and strong margins; TPH upgraded SWN, RRCand AR to Buy

·     Utilities: KeyBanc upgraded D (Dominion), POR to OW and downgraded AEP, WEC to Sector Weight on valuation; Mizuho predicts utilities will outperform the S&P 500 in 2021 and list CNP and DTE as stocks that fit into their pure-play regulated theme of companies spinning off their non-regulated businesses, AEP, ETR, NEE, NEP, and BKH as stocks that offer strong rate base growth with the potential for even higher P/E premiums if management couples the growth with renewable/green projects, and EIX and PCG as their top special situation picks as shares are undervalued after California passed AB-1054 which greatly reduces their wildfire liability exposure

·     Solar & Alternative Energy: SPI gave guidance for an "even better" 2021, with an annual top line of between $200m and $240m, based on projections as 2020 results reflects a 326% surge in battery storage sales to 33.4 MWh, a 50% jump in solar panel sales to 150 MW and an increase in inverter sales to 251 MW; PLUG announced plans with Renault to launch a 50-50 joint venture based in France for the research and development, manufacturing and sale of fuel cell-powered vehicles and hydrogen turn-key solutions; Truist has a positive outlook on the sector given accelerating global policy initiatives, ESG growth, relative costs and tech improvements driving demand, and growth in residential solar installations, initiating ENPH ($254 tgt), SEDG ($435 tgt) RUN ($116 pt), and PLUG ($60 tgt) at Buy and SPWR ($31 tgt) at Hold on valuation; SPAC ACTC announced it will take Proterra, which makes electric buses and batteries, public

Financials

·     Bank movers; S&P 500 banks index at highest since Feb. 24, last up 2%; UBS sees some holes in the narrative that has driven large cap banks’ 9% rally in the first week of 2021 and names WFC as their top pick, still likes C (Citi) and raised its target to $88 from $54 given its discounted valuation, and downgraded CFG to Neutral on valuation and revenue pressures, leaving RF as their only Buy-rated regional bank; Piper initiated PACW at OW with a $40 pt on its above-average pre-provision profitability and credit leverage and on its valuation that is currently at a discount versus peers but could regain its historical premium; NTRS was downgraded to Underperform on muted growth and elevated valuation at Bank of America, who also upgraded SCHW to Buy and raised their target to $68 from $52 on strong business trends, synergies from the recent AMTD acquisition, and eventual rate raises

·     Asset managers/Investment co’s: in private equity, OpCo lifted their estimates and price targets on CG (pt to $47 from $41), BX ($72 from $58), and KKR ($50 from $42); RBC said BAM was their 2^nd best idea for 2021 as they see shares currently trading at a 27% discount to NAV as it implies a bearish scenario for their BPY acquisition; CME and INFO announced they have agreed to combine their post-trade services into a new JV for OTC markets; CNS announced preliminary assets under management of $79.9B as of December 31, 2020, a $3.2B increase from November due to net inflows of $1.4B and market appreciation of $2.2B

·     Insurance; Morgan Stanley upgraded AFL to OW from EW with a $53 tgt and would pair against GL as they see the stock as the leading undervalued cash flow return story in the industry; LMND filed for an offering of 3M shares by the company and 1.5M shares by selling shareholders

·     Consumer Finance; MA and Visa (V) shares were notable decliners early; GDOT, MGI shares slipped after WMT said it entered a strategic partnership with investment firm Ribbit Capital to create a new fintech startup; TREE sees Q4 revs $220M-$222M vs. est. $210.3M and sees Q4 adj Ebitda $24M-$26M;

·     REITs: O (Realty Income) 10.5M share Spot Secondary priced at $57.05; PSTL 3.25M share Spot Secondary priced at $15.25; SPG announced it will sell $800M of 1.75% senior notes due 2028 and $700 million of 2.2% senior notes due 2031; Evercore upgraded VNO to In-Line and downgraded ESRT to Underperform; Raymond James now expects business transient and group travel to come back later and slower than they previously hoped as the recent increase in cases may result in a delay in bringing office workers back, and they remain underweight on office REITs, downgrading DEI to Market Perform, though they upgrade DEA to Outperform and add OFC to their REIT Top Picks list;

Healthcare

·     Biotech & Pharma movers; MRK says the FDA grants priority review of a Biologics License Application (BLA) for V114 – Merck’s pneumococcal vaccine; AMRX enters definitive agreement with Kashiv BioSciences LLC to acquire 98% interest in its unit Kashiv Specialty Pharmaceuticals LLC; PFE sees FY21 EPS around $3.00-$3.10 vs. est. $3.07

·     Healthcare services and providers; THC said that 4Q EBITDA ex-grant income would meet or exceed the current FactSet consensus estimate of $773M. Additionally, the company noted that $400M of grant income is expected to be recognized in the quarter vs $100M previously expected; HUM yesterday raised guidance for Medicare Advantage adds for FY21 to 425-475K up from its previous range of 350-400K

·     MedTech and Equipment; STE agreed to buy CMD for about $3.6 billion in cash and stock in a deal that would combine two big providers of sterilization products/transaction is valued at $84.66 per Cantel share, based on Steris’s closing price of $200.46 a share Monday https://on.mktw.net/3oF41dc ; ATEC guided 20201 revs about $178M, below the $183M estimate; BDX rises as provided an upbeat outlook for Q1 as it sees revs up 26% YoY to $5.3B vs. est. $4.7B; BSX sees Q4 prelim sales about $2.71B vs. est. $2.86B, which represents a decline of about 6.8% on a reported basis and down 8% on organic basis; Agilent (A) updated its F1Q core growth revenue expectations to high-single digits growth, from the 3.5% to 4.5% prior

Industrials & Materials

·     Industrial & Machinery; in research, GTES downgraded to neutral from outperform at Credit Suisse noting Gates has been one of the best performers across broader industrials up over 125% since the lows in March; ITW upgraded to Outperform and raising our TP to $235 at Credit Suisse and also upgraded OSK to Outperform from Neutral and increasing our TP to $117 from $83 as screens attractive on valuation trading at a ~2.5 multiple discount to the group; DE shares advanced following the bullish crop report as the U.S.D.A lowered its estimates of U.S. 2020 corn production and ending stocks more than most analysts expected due to a reduced estimate of last fall’s harvest – USDA pegged the 2020/21 domestic soybean ending stocks outlook at 140 million bushels, down from its December forecast for 175 million, and corn ending stocks at 1.552 billion bushels, down from 1.702 billion in December

·     Transports; MATX said it expects Q4 net income and diluted eps to be $76.1M-$81.6M and $1.74 to $1.87 (est. $1.08), respectively; as pandemic subsides with widespread vaccination, expect some of supply & demand factors co is currently benefitting from to remain; U.S. airlines carried 61% fewer passengers in November over the same month in 2019 – the decline was down slightly from the 62% decline in October; Dow Transports traded above the 13,000 level earlier, before slightly paring gains (all-time closing high stands at 12,995 on Jan 8)

·     Metals & Materials; Steel industry and union groups on Monday urged President-elect Joe Biden to keep in place the 25% national security tariffs on steel imports imposed in 2018 by his predecessor, arguing they are essential to ensure the viability of domestic steel production (X, NUE, STLD)

·     Chemicals; BASFY upgraded to Outperform at Bernstein saying with its broad portfolio selling ~60,000 products to 100,000 customers across 90 countries it is best positioned in our coverage to benefit from a cyclical recovery and is in-line with our preference to add beta to our portfolio; CF was upgraded to buy at Cleveland Research; ALB CEO said today at a conference that global supplies of lithium used to make electric vehicle (EV)batteries will fall short of an expected four-fold jump in demand by 2025 if prices do not rebound to fund expansions

Technology, Media & Telecom

·     Internet; Cowen raised its global and US Digital ad forecast by 6% and 4% annually from ’22-’25 based on further shift to Digital and ad buyers expecting normalized spending starting in 2H21 – and we are now above 3rd party forecasts; TWTR tgt raised to $58 from $46 at Argus saying Twitter could lose users (DAUs) in response to this ban, but could also pick up users from a newly formulating political center

·     Semiconductors; TSM was upgraded to outperform at Bernstein despite shares gaining 70% in the past 12 months, as firm says still sees another ~40% upside; Citi notes TSM reports earnings on 1/13 before the market open and on its October earnings call, TSMC raised 2020 capex by 3% to $17B and spent $14.05B or 83% of it at the end of 3Q; Susquehanna said shares of ON, LSCC, CRUS, SYNA and LITE are the top five M&A candidates for this year among semiconductor companies; AMD announces new laptop and data-center chips at CES

·     Software movers; ZM announces offering of $1.5B of Class A common stock; CVLT upgraded to Overweight at Piper and raising tgt to $68 from $45 based on 3 key pillars ahead of the Jan 27th Analyst Day (which we view as a positive catalyst); CYBR and FTNT both upgraded to Buy at DA Davidson and raise tgt to $180 and $170 respectively; FVRR tgt raised to $270 at Citigroup and raised UPWK to Buy saying given COVID-19, freelancer marketplaces have seen an increase in traffic that continued to persist into year-end and into 2021; PI rises after Canaccord raised ests and tgt to $55 after Impinj announced Q4/20 preliminary revenue of greater than $36M, or well above guidance and our $27.5M estimate

·     Media & Telecom movers; ANGI reported December Metrics Total ANGI HomeServices Revenue +12% y/y , 2% above the Street, and accelerating. Marketplace SPs +11% y/y vs. +9% in 3Q, with implied Advertising SPs +6% y/y vs. +5% y/y in 3Q. Implied 4Q Service Requests +18% y/y vs. 3Q’s +30% with 4Q monetized transactions +4% y/y vs. 3Q’s +8%; IAC said Vimeo revenue 4% above the Street with subscribers 3% ahead à positive for post-spin multiple; DotDash revenue 13% ahead of the Street; AAPL sold 18M iPhone 12 units in the China market in Q4, exceeding expectations and achieving over 20% market share, Digitimes reported