Closing Recap

Tuesday, November 10, 2020

Equity Market Recap

·     U.S. stocks finished mixed as Smallcaps continued its recent outperformance vs. large caps with the Russell 2000 trading YTD highs, paced by gains in energy, financials, travel, and healthcare, while the tech heavy Nasdaq underperforms for a second straight day in a bout of profit taking. Investors rotated into reopen related trades (travel, leisure, consumer, and energy) yesterday which partially carried over today, and out of the pandemic stay at home tech related winners following news yesterday of a potential vaccine treatment from Pfizer yesterday. Following up on the PFE/BNTX news yesterday, Health Secretary Alex Azar said today if Pfizer submits the positive initial data from its COVID-19 vaccine trial to health regulators as quickly as expected, the U.S. government plans to begin vaccinating Americans in December. U.S. regulators also authorized emergency use of the first experimental antibody drug for COVID-19 developed by LLY. Strong gains in Dow components BA, WBA and CVX helped the index outperform.

·     Major averages all touched fresh intraday record highs on Monday (Dow, S&P, Nasdaq, and Transports), but failed to hold, seeing mixed action today. Gold regained some lost ground after a sharp fall of nearly 5% in the previous session as concerns over global economic recovery and expectations of further fiscal and monetary stimulus offered support. The dollar was steady, and the yen stayed low, while Treasury prices are held steady after sliding yesterday, pushing yields to their highest levels in several months. In stimulus bill news, Senate Majority Leader Mitch McConnell said he did not see a need for a giant coronavirus relief bill and there was bipartisan interest in passing an omnibus appropriations bill before the end of year. At the same time, today several Fed members noted again the need for additional fiscal stimulus (George, Daly, Rosengren). Note as of yesterday, the S&P 500 had closed at least +1% higher in the last 5 out of last 6 trading sessions (little changed today).

Covid-19 update

·     In Europe; Italy has 35,098 new coronavirus cases vs 25,271 day before while reports 580 coronavirus-related deaths in last 24 hours, first daily toll above 500 since April 21; Sweden registered new 15,779 coronavirus cases since its previous update on Friday, which compares with 10,177 cases for the corresponding period last week; Spain records 7,552 virus cases in 24 hours vs. 4,441 on Monday; U.K. reports 20,412 more covid-19 cases on Nov. 10 and reports 532 more covid-19 deaths on Nov. 10

Commodities

·     Oil prices extended gains, with WTI crude rising $1.07 or 2.66% to settle at $41.36 per barrel as hopes that a COVID-19 vaccine is on the horizon outweighed worries about a drop in fuel demand from new lockdowns to contain the virus. Oil prices surged on Monday with WTI and Brent both rising over 8%, adding to those gains today on virus vaccine hopes. But, renewed lockdowns in Europe and rising coronavirus cases in the U.S. are still hurting fuel demand. Prices were also boosted by comments from Saudi Arabia’s energy minister, who on Monday said that OPEC+ could tweak their supply pact if demand slumps before the vaccine is available.

·     Gold prices advanced $22, or 1.2% to settle at $1,876.40 an ounce, gaining some lost ground after a near 5% fall in the previous session when investors flocked to risky assets and out of safe havens on positive vaccine news. Concerns over a global economic recovery and expectations of further fiscal and monetary stimulus offered support to the safe-haven metal. Gold lost more than 4.5% on Monday, its biggest daily fall since Aug. 11, after U Pfizer Inc said its COVID-19 vaccine was more than 90% effective based on initial trial results. Silver prices rose 3.2% to $24.44 an ounce while copper was down slightly at $3.1505 per pound.

Currencies & Treasuries

·     Both Treasury prices and the U.S. dollar were little changed on the day after a volatile session the day prior, as the 10-year yield held around 0.95% most of the day after jumping over 13 bps yesterday in the sharp bond sell-off. The dollar index (DXY) barely budged after rising yesterday, holding steady vs. the euro while the Japanese yen remained pressured in the recent “risk-on” trade in stocks as investors remained optimistic about progress towards a COVID-19 vaccine. The U.S. Treasury sold $41B in 10-year notes at a yield of 0.96% vs. 0.962% when issued prior, with a bid-t-cover (demand) at 2.32 and indirect bidders awarded 54.84% and directs 13.13%.

Sector News Breakdown

Consumer

·     Retailers; NLS posted Q3 EPS 87c on revs $155M, both topping ests. (32c on $115.7M) and guides FY20 revs $540-565M, also topping estimate ($448.6M); REAL Q3 adj EPS loss (41c), wider than est. (38c) loss, on revs $78.1M, beating est. $76.7M; Bank of America reiterates TJX as a Buy saying that channel checks points to the store being well positioned for a 2H recovery, downgrades RL to Neutral from Buy as its sales recovery is being slowed by strategic actions, and upgrades LEVI to Buy with a higher $20 pt (from $18), and also names LEVI as a brand that is relevant to younger consumers along with LULU, TPR; ULTA announced a partnership with TGT to provide shop-in-shop experiences starting next year at more than 100 Target locations; CSPR announced a partnership with JWN to sell their mattresses and accessories online and at select locations; PTON announces a multi-year partnership with Beyonce to provide music and content for classes; ADDYY said they now expect Q4 revenue to fall low-mid single digits given worsening pandemic and more lockdowns/store closings, and Q4 operating profit to be between EUR 100-200M (EUR 235M 4Q19) if there are additional major lockdowns, more than 90% of its stores remain open, and global store traffic does not experience a material slowdown

·     Auto sector; WMT announced a pilot program in Scottsdale, AZ with self-driving EV company Cruise to deliver groceries contact-free starting next year; AAP reported Q3 EPS $2.81 on revs $2.5B (ests. $2.66 and $2.48B) and comp sales +10.2%, the strongest in 15 years (est. +7%); Ford (F) says it is investing another $100M in its Kansas City Assembly Plant and adding approximately 150 full-time jobs to begin producing the all-new E-Transit; MNRO units entered into a supply agreement with Valvoline

·     Housing & Building Products; homebuilder DHI reported Q4 profit and revenue that rose well above expectations, amid an 81% jump in net sales orders and upped its dividend but said it remains cautions given the ongoing effects of the COVID-19 pandemic; HDS shares were active after Bloomberg initially reported last night LOW was is in preliminary discussions to the company – but LOW refuted the report saying in a company statement “Lowe’s is not in discussions with HD Supply and we have no plans to pursue a transaction with them”

·     Consumer Staples; BYND shares tumble after posting an unexpected Q3 loss on weaker sales of $94.4M, missing the $132.8M estimate and said due to covid-19 pandemic, company continues to experience a meaningful slowdown in its foodservice business; KHC 29.2M share Block Trade priced at $30.38; HAIN reported better than expected F1Q results with both sales and EBITDA above consensus and reaffirmed gross and adjusted EBITDA margin expansion view for 2021; in the food sector, BMO Capital upgraded shares of SYY, PFGC, CHEF, USFD to outperform as positive vaccine news makes the path to upside scenarios much more clear as it enables investors to look beyond what could still be a challenging next few months

·     Restaurants; group surged on Monday on vaccine news, prompts some positive analyst calls as CAKE upgraded to buy at Argus citing the company’s sequential improvement in earnings, estimating a return to full-year growth in 2021; PZZA upgraded to buy at Deutsche Bank with $91 tgt saying potentially negative comps for at least a few quarters next year as tough COVID compares are lapped is priced in with the stock down 24% since August

·     Leisure and Gaming; a day after cruise lines surged following upbeat PFE Covid-19 vaccine news, NCLH reminded how dire the industry is after reporting Q3 adj. EPS loss ($2.35) on revs $6.52M below the consensus est. loss ($2.24) and $10.61M; in auto space; CCL filed to sell $1.5B worth of shares after rally yesterday on vaccine hopes

Energy

·     Energy stock movers; In the oilfield space, Morgan Stanley downgraded NOV and RES to UW and WHD to EW and upgraded CLB to OW, saying industry-wide outperformance in the near-term is unlikely given uncertain demand outlook; In refiners, HFC was downgraded to Hold from Buy at Argus on concerns about the pace of margin recovery in the company’s Refining segment, its largest operating business; OXY reported Q3 adj EPS loss (84c) on revs $4.09B, both missing ests. (72c) loss on $4.28B as plunging crude prices negatively impacted the company’s earnings, and they see Q4 production falling about 5% from Q3 to ~1.160MBoed; BP announced a green Hydrogen project with Danish energy company Orsted

·     Utilities & Solar; Raymond James downgraded FSLR to underperform from outperform and upgraded MAXN to outperform, both of which are directly related to the likely prospect of reduction or even repeal of the existing U.S. import tariffs on PV modules; EVRG has rejected a takeover bid from NEE worth roughly $15B from May, and it is unclear whether there have been further talks or if there will be additional offers

Financials

·     Bank movers; MS and BK were both downgraded to neutral from buy at Citigroup based on valuation following the dramatic upward more and stay buy on GS and STT as believe the market continues to underestimate the ROTCE improvement for these stocks; CIT was downgraded to hold at UBS; in insurance; CB upgraded to buy from sell at Goldman Sachs and raise tgt to $163 from $143 as underlying premise behind our upgrade is that the company’s broad platform and strong balance sheet with adequate reserves and excess capital position together the company well to capitalize on continued rate momentum

·     Consumer Finance; SQ was upgraded to buy and $220 tgt at BTIG saying the company’s Q3 demonstrated that the recovery of its Seller segment has occurred faster than had expected, and the growth in customers, transactions and gross profit defied predictions of a slowdown; AXP was upgraded to neutral from sell at UBS saying the company’s outlook may be improving; GSKY shares slipped after Q3 EPS and revs miss (3c/$142M vs. 10c/$150M est.)

·     REITs; the industry jumped yesterday on reopen hopes following upbeat vaccine news with more follow through today for UDR, EXR, AVB, KIM among top gainers in the S&P; SPG Q3 FFO $2.05 below consensus views $2.28 as portfolio net operating income -22.4% and comparable property NOI -24.4%; TCO reported Q3 adj FFO 60c on revs $130.99M vs ests. 58c on $120.52M and said all properties are now open and nearly 94% of US tenants have reopened as traffic and sales have shown consistent improvements since May; UNIT reported Q3 adj FFO 42c, missing est. 51c, on revs $258.8M (est. $259.2M), and guidance $1.055-1.063B comes in above est. $1.053B

·     Research REITs; CSFB upgraded NNI to outperform and raised their target price to $75 from $55; Mizuho upgraded coastal-focused ESS to Buy while downgrading Sunbelt-focused CPT to Neutral as they continue to shift our preference within the Apartment REIT sector (EQR UDR are other Buy-rated names within Apartments, no Buys among Sunbelt Apartment REITs) as their projected coastal REITs outperformance is supported by a handful of catalysts, including vaccine tailwinds, stabilizing new and renewal lease rate growth within a number of key coastal markets, and easier comps into 2021 (implying second-derivative improvement), expected stimulus and policy initiatives in a Biden Administration to help urban coastal cities / states hit hard by the pandemic, and far lower relative valuations; Jefferies upgraded VTR (pt raised to $50 from $30) and WELL (pt to $60 from $42) to Hold as senior housing occupancy drops moderated in Q3 vs Q2, and occupancy rates have shown evidence of stabilizing recently and are projected to rebound to normal levels in 1H23 with a vaccine on the horizon

Healthcare

·     Pharma movers; LLY said the FDA authorized emergency use of its experimental COVID-19 antibody treatment based on clinical trials showing that the treatment, bamlanivimab, reduced the need for hospitalization or emergency room visits in COVID-19 patients at high risk of disease; SUPN received a Refusal to File letter from the FDA regarding its NDA for SPN-830 for the continuous treatment of motor fluctuations in Parkinson’s disease; ARNA slides as its study failed to achieve the primary endpoint of percent change in Eczema Area and Severity Index (EASI) at week 12 versus placebo; MRK Keytruda plus Lenvima met key secondary endpoints of overall survival and objective response rate; ALT entered into an agreement with Switzerland-based Lonza Group for the manufacturing of its potential COVID-19 vaccine, AdCOVID; in cannabis, TLRY Q3 sales came in 5% below FactSet consensus, but profit margins were better, and guidance for break-even EBITDA for the Dec qtr was reaffirmed; VYGR declines after saying it had decided to delay the planned resumption of patient screening for its mid-stage trial for Parkinson’s Disease after a data safety monitoring body’s recommendation

·     Biotech movers; AMGN and AZN announce positive topline results from the Phase 3 NAVIGATOR trial evaluating investigational medicine Tezepelumab compared to placebo in patients with severe asthma; the NAVIGATOR trial met the primary endpoint; NBIX slides as Q3 revenue of $258M missed the $283M estimate; NVAX enters $500M common stock sales agreement; BIIB tgt raised to $443 at Truist given increased conviction for approval of aducanumab (adu) for Alzheimer’s saying risk reward into approval is favorable at these levels (see 88% upside to our PT; if aduc is rejected, see stock trading at $178 and downside ~25%); RVNC slides on revenue miss and as disclosed that the FDA has not yet scheduled a site inspection for its Daxi manufacturing facility in Newark, CA which will be required prior to approval

·     Healthcare services and providers; PDCO downgraded to Neutral from Buy at Guggenheim as we believe the operational turnaround taking place at the company is now better understood and vaccine enthusiasm is now the baseline; MEDS rises after the online platform for pharmaceutical purchases announced a market program agreement with Amazon.com Services; pharmacy retail standout to the upside with gains in CVS and WBA on Covid vaccine administration

·     MedTech and Equipment; FLGT 3Q20 results blew through consensus as per Oppenheimer, including revenue of $101.7M that exceeded our estimate of $53.5M driven by COVID-19 testing; PLSE rises after saying its aiming to receive regulatory clearance in the U.S., Canada and Europe for its CellFX bioelectric platform as early as the first quarter

Industrials & Materials

·     Industrial & Machinery; building materials and product names outperformed (VMC, MLM) after recent underperformance due to divided government and expectations of a smaller stimulus package; ROK reported weaker sales in its latest quarter ($1.57B vs. est. $1.59B), but demand was better than earlier this year, when the Covid-19 pandemic forced many industrial firms to pull back on operations; MWA Q4 sales of $265.3M (-0.6% Y/Y); and Adj. operating income was $41.8M vs. $42.6M in the prior year quarter.

·     Transports; transports outperformed behind strength in rails (CSX, NSC, UNP); KSU announces updated capital allocation policy; increases dividend and announces new $3B share repurchase program/intends to increase its debt-to-Ebitda ratio to mid-2x range; AAL 38.5M share Spot Secondary priced at $13.00; overall index outperformed the entire day, back above the 12K level; UAL announced that it will be returning service to New York City’s John F. Kennedy Airport on February 1, 2021 with nonstop service to the west coast after a 5-year hiatus

·     Aerospace & Defense; BA rises as FAA says it could soon unground the Boeing 737 MAX. Administrator Steve Dickson says that the review of proposed design changes could be "finished in the coming days; JPMorgan upgraded RTX to overweight and SPR in the aerospace sector (also raised tgts on BA, HWM and TDG) saying the stocks seem more poised to price in potential goodness before it fully arrives while looking through near-term badness; AER said it had cancelled nine more orders for the grounded BA 737 MAX aircraft, but gave an upbeat assessment of the "steady recovery" in air travel that it believes will provide opportunities; Boeing suppliers SPR, GE, TGI, ATI all strong after the earlier reports the FAA is set to lift its grounding order on 737 MAX plane as early as Nov 18

Technology, Media & Telecom

·     Internet; AMZN slips as the EU files formal charges against amazon for alleged anticompetitive business practices based on vendor data as EU could impose fine of up to 10% of amazon global revenue in decision next year; JMIA Q3 rev EUR 33.7M misses est. EUR37.6M and Q3 GMV fell -28% YoY to EUR 187.3M, though its quarterly operating loss (EUR 28M) was -49% YoY and the lowest in three years; large cap tech names AMZN, PINS, TWTR, SNAP, ETSY – the names that flourished during the pandemic/stay-at-home Covid period seeing selling pressure again today

·     Semiconductors; Philly semi index (SOX) underperforms broader tech space, with the SOX moving back to the 2,440 level (before paring losses) after settling just under 2,500 the day prior; AMD among top decliners along with MRVL, QRVO, NVDA (follows strong run for semi’s); DIOD delivered a beat and raise benefiting from a robust recovery in distribution demand and share gains; STM extended its leadership in sensor technologies by developing innovative software solutions using technology from QCOM

·     Software movers; ADBE agreed to acquire Workfront for $1.5B; ZI Q3 beats and an upside full-year forecast as Q3 revenue rose 56% Y/Y to $123.4M beating estimates and guided Q4 revenue of $465-467M above prior $451-455M vs. est. $454.09M; TTWO confirmed it’s made a proposal to acquire UK-based Codemasters Group Holdings at 485 pence/share in cash and stock; RNG reported strong Q3 results and higher 2020 financial targets as Q3 showed business acceleration, very solid bookings growth, and record profit margins for a 3Q; CYBR slides as mixed Q3 and guide as the shift to bookings mix shift toward high-value recurring subscriptions created a headwind with billings weaker in the Quarter

·     Media & Telecom movers; XPER shares rose after its Q3 earnings were in conjunction with news of a new 15-year patent license deal between its TiVo unit and CMCSA; WIFI reported solid 3Q20 results, as revenue and cash EBITDA grew sequentially after bottoming last quarter; DIS said it was furloughing additional workers from its Disneyland theme park in Southern California, as it still does not know when the state would allow it to reopen due to the COVID-19 pandemic;

·     Hardware movers; AAPL introduced its first microprocessor for Mac computers, called the M1, a move that will tie its Macs and iPhones closer together technologically Pricing still starts at $999 or $899 for education (change of chips will mark a move away from INTC); DDD upgraded to Market perform from underperform at William Blair saying the business is recovering from the recent downturn and has good momentum with major customer ALGN