Closing Recap

Wednesday, March 17, 2021

Equity Market Recap

·     Major U.S. averages surged after the Fed kept interest rates steady at its monetary policy meeting (as expected) and said it would continue to keep its rate close to zero (dot plots show no change in rates until 2023), despite a revamping of numbers for GDP growth higher this year, unemployment rate (lower) and inflation topping its 2% market this year. Despite the improving outlook, stock markets at all-time highs and a third round of stimulus checks, the Fed continues to appease markets with its dovish rate forecast and continued buying of MBS and Treasuries, with Powell saying its not time to start talking about taper. The headlines and press conference from Powell helped boost sentiment about easy money policy for at least another year or more, sending Treasury yields lower (more than 6 bps pullback off 1.69% highs). The comments from the Fed meeting overshadowed all else. The path of least resistance again remains higher as the S&P 500 and the Dow on Monday reached all-time closing highs while the Nasdaq has recovered more than half of its losses following a selloff in late February and early March.

·     FOMC Statement showed: The Federal Reserve projected a rapid jump in U.S. economic growth and inflation this year as the COVID-19 crisis winds down and repeated its pledge to keep its target interest rate near zero for years to come. The Fed now sees the economy growing 6.5% this year, and the unemployment rate falling to 4.5% by year’s end, compared to growth of 4.5% and unemployment of 5% projected at its December policy meeting. The pace of price increases is now expected to exceed the Fed’s 2% target for the year, hitting 2.4% by years before falling back in 2022. The improvement in the Fed’s economic outlook did not immediately alter policymakers’ expectations for interest rates, though the weight of opinion did shift. Seven of 18 officials now expect to raise rates in 2023, compared to five in December. Four officials now feel rates may need to rise as soon as next year, a change from zero as of the last projections in December. The Fed said it will continue to increase bond purchases by at least $80 bln/month of treasuries and $40 bln/month of MBS until ‘substantial further progress’ made on maximum employment and price stability goals.

·     The tech heavy Nasdaq Composite dropped more than 1.25% this morning before rebounding late day (rising as much as 0.5% to highs around 13,590 – off lows this morning of 13,272) post the FOMC meeting and headlines amid higher Treasury yields, with the 10-year rising as high as 1.69% before sliding to 1.64% post FOMC (though still higher on the day). Housing data disappointed today with sharp declines in February Housing Starts and Building Permits.

·     The Dow Jones Industrial Average outperformed other indexes after several positive comments on components; MCD was upgraded to buy at Deutsche bank, NKE tgt raised to $173 at Cowen ahead of earnings tomorrow, INTC jumps after announcing a business update and webcast address on the new era of innovation and leadership on 3/23, DIS rises after announcing it will reopen Disneyland on April 30,, banks JPM, GS rising with Treasury yields at new 1-year highs, DOW extends gains after upbeat guidance the day prior and continued rotation into industrial names (BA, CAT, DOW)

·     In vaccine news, the World Health Organization (WHO) recommended the member states to continue using the COVID-19 vaccine developed by AstraZeneca (AZN)…comes after several countries in Europe have paused the administration of the vaccine citing blood clot concerns following the inoculation. U.S. CDC director says agency reviewing emerging information on maintaining six feet of distance versus three feet and working to update its guidance. The IRS pushed back the tax deadline to May 15 from April 15^th to implement the latest rescue plan, citing the impact on Americans dealing with hardships.

Economic Data

·     Housing permits for February fell -10.8% MoM to 1.682M, below the 1.750M estimate and down from January reading of 1.886M unit rate; housing Starts for Feb -10.3% to 1.421M unit rate, below the 1.56M estimate and January 1.584M rate; February single-family starts fell -8.5% to 1.040Mm unit rate and multifamily down -15.0% to 381,000-unit rate – housing data weak – weather likely playing a factor again.

Commodities, Currencies & Treasury’s

·     Oil prices end lower after mixed inventory data, as WTI crude fell 20c or 0.31% to settle at $64.60 per barrel, in a day dominated by the Fed. Gold prices slipped -$3.80 or 0.2% to settle at $1,727.10 an ounce, ahead of the FOMC rate decision meeting and Fed Chairman Powell press conference at 2:30 today. Gold recently touched 9-month highs with investors rotating into Bitcoin and as Treasury yields and the dollar have been inching higher.

·     Benchmark U.S. Treasury yields scaled a new 13-month high, as the 10-year yield rose to 1.687% prior to the FOMC meeting comments, its highest level since January 2020, while the U.S. 30-year yield hits highest level since August 2019 at 2.447% – however, the gains were erased in minutes after the dovish Fed policy statement – as the 10-yr dropped back below 1.62%. The dollar as well plunged on the dovish outlook, erasing earlier gains, pushing gold higher.

Sector News Breakdown

Consumer

·     Retailers; DKS initiated with a Buy and $100 tgt at Williams Trading saying many investors do not appreciate that the success of DKS in 2020 was driven by the evolution of the Dick’s Sporting Goods brand, and the evolution of its digital omni-channel platform; LE reports Q4 EPS $0.60 vs guidance $0.54-$0.58 and revenue $538.4M vs guidance $528M-$533M; EBITDA $46.1M vs guidance $43M-$45M; guides Q1 EPS ($0.32)-($0.25) vs consensus ($0.47); CAL Q4 EPS $0.03 vs consensus ($0.01) and revenue $571.0M vs consensus $557.4M; GM slightly below consensus; Famous Footwear comps (1.8%) vs year-ago +5.1%; NKE earnings expected Thursday afternoon (3/18) as Cowen ups tgt to $173 and hiking EPS estimates for Q3, Q4 and into FY22 as believe fears over Europe lockdowns and Port issues in North America can be offset by underlying digital strength globally and in China; FNKO was upgraded to market perform at BMO Capital as appreciate the direction the company is headed, but remain concerned on the valuation

·     Auto sector; LYFT added to the Wedbush Best Ideas List and raising price target from $72 to $85 reflecting a stronger reopening trajectory into 2H21/2022, improved profitability, and long-term opportunities for stronger revenue per rider; UBER drivers in Britain to be paid minimum wage, as part of co’s agreement to grant workers’ rights after it lost a case last month to reclassify its more than 70,0000 drivers there as workers – UBER faces pressure of paying drivers in Britain minimum wage for the full duration they are logged into the app; auto retailer price tgts raised at Wells Fargo as ups tgts to $1,500/$535/$185 for AZO and reiterate bullish stance as see an onslaught of potential 2021 upside catalysts that are not reflected in valuation today; in February, new passenger car registrations in the European Union dropped by 19.3%, as COVID containment measures and uncertainty continue to weigh heavily on demand, reported the European Automobile Manufacturers Association.

·     Housing & Building Products; homebuilder pressured after Housing permits for February fell -10.8% MoM to 1.682M, below the 1.750M estimate and down from January reading of 1.886M unit rate; housing Starts for Feb -10.3% to 1.421M unit rate, below the 1.56M estimate and January 1.584M rate; in earnings, LEN reported F1Q21 operating EPS of $2.04 topping the $1.70 forecast while revenue rose 18% to $5.3 billion (above views) and pricing power and a tight rein on input costs pushed F1Q21’s gross margin 450bp higher Y/ Y to 25%; LEN extended gains after announcing spin off of startup investments

·     Consumer Staples; HSY upgraded to overweight from neutral at Piper as expect 2-3% organic sales growth and 5-6% average EPS growth in 2021 and 2022 saying the recent surge in commodity input costs broadly has spared cocoa, which leaves Hershey relatively well-positioned; MKC downgraded to Hold from Buy at Argus after the company posted weaker-than expected fiscal 4Q sales and earnings and will face tough comparisons in FY21; Goldman Sachs said they believe that the recent sell-off in growth stocks has created an opportunity for investors to capitalize on several key beverage growth stocks where we see an increasingly favorable risk-reward – specifically STZ, SAM ; in restaurants; MCD upgraded to Buy from Hold at Deutsche Bank and raise tgt to $244 from $232 at Deutsche Bank; SHAK partners with Uber Eats to launch a delivery service for in-app orders

·     Casinos and Gaming; SKLZ files to offer 32 million shares, 17 million for the company and 15 million for selling shareholders; DKNG, PENN shares active as Oppenheimer noted the three critical digital gaming states, MI/NJ/PA, all released February digital OSB/iGaming revenue yesterday with key takeaway being that FanDuel is maintaining leading OSB share that the firm attributes to the strength in its Same Game Parlay offering. Notes DKNG ceded some OSB share in MI, where BetMGM was number – however, it’s still early in MI and we note that three of the four players DKNG/FanDuel/Barstool had negative net revenue in February; IGT got an afternoon boost after CNBC’s Najarian talks about call buying in shares

Energy

·     Energy stocks fell sharply yesterday as the quarter’s best performing sector has given up ~4% this week, trimming its Q1 gain to nearly 35%. Crude oil prices posted their third straight decline, as traders bet that U.S. crude supplies gained for a fourth week in a row following last month’s Texas deep freeze and worries over risks to the global demand recovery set in after countries including Germany and France stopped AstraZeneca COVID-19 vaccinations.

·     Inventory data; the API showed a weekly draw of 1.05M barrels of oil for the latest week; gasoline inventories showed a draw of 926K barrels, distillate inventories show a build of 904K barrels and Cushing inventories show a draw of 246K barrels; the EIA reported this morning that Crude stockpiles rose +2.4M barrels vs. +3.0M consensus (vs. +13.8M last week), with surprise build in gasoline stockpiles (+0.5M vs. -3.0M consensus)

·     Energy movers; FANG completed its acquisition of QEP; Citi maintained PSX as a long-term Buy and upped their price target to $99 from $81 as they see concerns about post-pandemic earnings power as overblown and see upside to 2H21 and 2022 EPS; PARR priced its 5M share public offering at $16.00 per share; OIS fell for the 5^th straight session after pricing $135M 4.75% 5-yr convertible senior notes/conversion price of $10.49 represents 25% premium to stock’s last sale

·     Utilities & Solar; NRG said Winter Storm Uri would have a more significant impact on its annual results as it now projects a $750M hit from the storm vs a previous estimate of $100M, and withdrew its full-year guidance for adj EBITDA, cash from operations, and FCF, and Wolfe downgraded the stock to Peer-perform with a $47 target; Wolfe also downgraded VST to Peer-perform; PLUG issued an 8-k after hours yesterday that disclosed accounting errors in its previous financial statements going back to 2018, which prompted a downgrade at Truist to Hold given their view of limited near-term upside until the accounting issues are resolved, though Cowen said the double-digit selloff presents a unique buying opportunity as the cause of the error does not affect future growth markets and did not have a cash impact and Roth similarly said this represents a buying opportunity and kept their Buy rating and $65 price target; FE announced it has agreed to appoint two Icahn Capital representatives to its board; SJI said it plans to offer up to $225M in shares and 6M equity units to raise funds for debt repayment and capital expenditures

Financials

·     Bitcoin news; Coinbase (COIN) said it had registered about 114.9 million shares for its direct listing on the Nasdaq, setting the U.S. cryptocurrency exchange up for the highest-profile listing from a firm primarily focused on digital currency; Bank America with a note today on bitcoin saying “Bitcoin supply is artificially scarce, demand drives prices Just like in other commodities, supply and demand drive Bitcoin prices. But there are twists. Bitcoin output is capped at 21mn coins and supply growth halves every 4 years. It is designed to become increasingly constrained. So demand swings are key to price moves. Indeed, we show major institutional announcements and miner reward cuts have been followed by upward Bitcoin moves. Similarly, flows into the Grayscale Bitcoin Trust (GBTC) appear to lead weekly Bitcoin returns”.

·     Consumer Finance and Services; LC tgt raised to $20.50 from $14 at Wedbush, shifting valuation perspective to 2025 estimated earnings, but sticking to valuation ratios that are, relative to the P/ Es accorded the likes of its more immediate peers, UPST and SoFi (pending SPAC merger with IPOE), overtly conservative

Healthcare

·     Industry news: the sector remains volatile as the FTC on Tuesday warned that it intends to "take an aggressive approach" to "anticompetitive pharmaceutical mergers," setting off a round of warnings from analysts that biopharma deals could prove harder to accomplish in the coming years. Citi said they expect the governments to initiate measures to block cross-border mergers in a post-pandemic setup given the importance of securing supplies of vaccines and therapeutics in the event of a future pandemic

·     Pharma sector; TNXP says early results from a study in non-human primates showed its COVID-19 vaccine candidate, TNX-1800, protected both upper and lower airways of the animals on being challenged with the coronavirus; VRCA announces exclusive licensing agreement with Torii Pharmaceutical co. to develop and commercialize vp-102 for molluscum and common warts in Japan; GTBP reports updated interim data from ongoing early-to-mid stage study of its lead experimental treatment, GTB-3550, in patients with certain types of bone marrow-related cancer; ABBV slips after received an information request from the FDA for an updated assessment of the benefit-risk profile for Upadacitinib in psoriatic arthritis; YI announced it has entered into a strategic cooperation agreement with BGNE, a commercial-stage biotechnology company focused on developing and commercializing innovative medicines worldwide.

·     Healthcare services and providers; AMZN to launch across U.S. this summer, offering millions of individuals and families immediate access to high-quality medical care and advice—24 hours a day, 365 days a year (shares of TDOC, AMWL, ONEM slipped on headlines); CVS was downgraded to Neutral from Buy at Guggenheim and removing their price tgt after the shares have had a substantial run since the week of Nov 2, the week the PFE Covid-vaccine efficacy data was first released to the market, significantly outperforming the S&P since that time (34% vs. 21%); OTRK was upgraded to Buy with $46 tgt at Canaccord on news Jonathan Mayhew will be taking over as CEO on April 12 saying the addition could enable them to regain its Aetna Behavioral Health contract for substance use disorder and potentially also add anxiety and depression conditions

Industrials & Materials

·     Industrial & Machinery; DE, CAT, AGCO and other industrial names outperform in further rotation into sector and out of tech with Treasury yields weighing on high growth companies; Stifel lifted their price target on PWR to $98 and remains positive on the multi-year outlook for its utility as they see 1Q21 as the bottom in profitability for this business; MMM CFO said sees higher materials, labor and logistics inflation, which hit shares midday

·     Aerospace & Defense; PAE was downgraded to hold from buy at Deutsche Bank and tgt cut to $10.50 from $12 due to the abrupt leadership transition and the potential for business disruptions and execution risks; BA shares remain active – last week shares rose last week after the company reported a backlog increase in February, had news reports indicating potential additional orders (e.g. Southwest), was reported to be indicating 787 deliveries would resume by the end of March, and saw positive trends in the US airline markets

·     Metals & Materials; AA upgraded to Buy from Hold and raise tgt to $36 from $22 at Deutsche Bank citing attractive cash flow, an improved outlook for aluminum, and the potential for returning to a dividend/buyback position within a year; UES enters into agreements with institutional investors for purchase of 10 mln shares at $3.05 a piece in a registered direct offering

Technology, Media & Telecom

·     Internet; PDD reported a Q4 loss that narrowed more than expected, as revenue more than doubled to beat forecasts thanks to online shoppers buying everything from groceries to luxury products, but shares slip as Colin Huang steps down as the chairman of board; Reuters reported that South Korea’s SK Telecom and private equity firm MBK Partners were among those that entered non-binding, preliminary bids for the sale of EBAY’s South Korean business; shares of TKAT, ZKIN spiked as digital art names been moving lately on latest NFT digital art craze

·     Semiconductors; LITE has presented a revised offer to acquire COHR, now up to $6.9B, about $220 per share in cash and 0.6100 shares of LITE stock for each Coherent share they own; counters a recently revised bid from IIVI for COHR was upgraded to Outperform at Cowen and raise tgt from $66 to $95 as gross margins improve and the company’s transition from secular declines moves to a multi-year period of secular growth; VLDR slides after having identified material weaknesses in our internal control over financial reporting as per 10K

·     Software movers; COUP surprised analysts with a profitable Q4 as adj EPS 17c beat vs. est. loss (11c) on revenue $164M vs. est. $145.66M, and they see Q1 adj EPS loss (21c)-(18c) vs. est. loss (1c) and Q1 revenue $151.5M-$152.5M vs. est. $148.82M, and FY revs $675M-$678M; CRWD reported another strong quarter with Q4 EPS 13c and revenue $264.9M besting estimates of 8c on $250.4M, led by record ARR growth of $143M (+75% YoY vs +68% estimate), and sees Q1 EPS 5-6c (est. 3c) on revs $287.8-292.1M (est. $267.85M) and FY revs $1.31-132B (est. $1.22B); SMAR reported strong 4Q results as (4c) loss was narrower than est. (13c) loss and revs $109.9M beat est. $102.7M as demand returned in force with 49% billings growth in the quarter crushing estimate of 31% growth driven by large deals, strong sales execution, and an improving macro backdrop, and JPMorgan upgraded the stock to OW with an $83 target as a complement to ZM going forward and given its valuation and underperformance vs peers last year (+54% vs +146% for growth software); Canaccord raised its price target on WDAY to $300 from $265 after management displayed a confident tone in their management meetings last week; MOMO downgraded at Morgan Stanley to Underweight, from Equal Weight.

·     Media & Telecom movers; profit taking in media names after massive run, with shares of VIAC, DISCA, FOXA dropping sharply (note VIAC and DISCA came into the day rising 12 of the last 13 trading sessions); ANGI said ANGI HomeServices and Angie’s List will now be known as Angi in a branding shift that comes with a redesigned logo, app, and web experience; in cable, Wells Fargo initiates CABO (outperform) favorite is CABO, ATUS (equal weight) CMCSA (underweight) saying cable has favorable financial characteristics stemming from broadband, with revenues visible, capital intensity declining and cash returns growing; SIRI and TMUS are teaming up to offer wireless customers a free, enhanced Pandora personalized music experience; DIS spikes intraday after announcing it will reopen Disneyland on April 30

·     Hardware, IT Services and Consulting news; KC shares tumble after its outlook for Q1 rev between 1.83 bln yuan-1.93 bln yuan misses Refinitiv est. of 2.07 bln which reflects the relative late timing of Chinese Lunar New Year holiday in Q1 compared with 2020 and other business operations; KODK shares slide following earnings results and files $500M mixed securities shelf; SHSP reported Q4 EPS (9c) on revs $7.7M and guided FY revs $34-36M, each of which topped estimates, though Craig Hallum downgraded the name to Hold