Closing Recap

Wednesday, November 11, 2020

Equity Market Recap

·     Stocks were mixed on Wednesday as the Nasdaq paced Wall Street’s advance with investors rotating back into technology stocks after being out of favor the last two sessions, and away from economically sensitive/reopening related sectors after outperformance following COVID-19 vaccine progress this week. Small caps fell (Russell) for the first time in 3-days after massive gains the last few sessions on economic reopen hopes, while oil prices climb a third day though slipped late. Large cap tech led the advance (AAPL, AMZN, FB), while mall names and department store stocks drop as the rising rate of COVID-19 hospitalizations across many U.S. states threatens store traffic again. Monday’s encouraging data from a late-stage vaccine out of PFE/BNTX had prompted a two-day rotation into sectors that typically outperform coming out of a recession such as industrials, materials, and energy which have lagged broader market during the crisis, but unwound a bit today. Uncertainty still remains as some investors note the hurdles facing making a vaccine widely available, as well as questions about the size of the next fiscal stimulus package along with political uncertainty as President Trump continues to fight the election results last week. U.S. bond markets were closed Wednesday for Veterans Day, a day after the yield on 10-year struck its best levels since March above 0.970%. The Dow Jones Industrials (though still early in the month) remain on pace for best monthly return since 1987 (up around 11% currently), as per CNBC. In election news, Georgia Republican Secretary of State Brad Raffensperger ordered all the state’s 159 counties to conduct a hand recount and audit of all votes cast in the presidential race. As of Wednesday morning, Democratic nominee Joe Biden led President Donald Trump by a little over 14,000 votes out of almost 5 million cast. If Mr. Biden is declared the winner, it will be the first time a Democratic candidate carried the state since 1992.

Covid-19 updates:

·     Italy reports 32,961 new Covid cases vs 35,098 yesterday and Italy reports 623 coronavirus-related deaths in last 24 hours; U.K. new virus cases rise by 22,950, vs 7-day average of 22,842 – U.K. new virus deaths rise by 595, vs 7-day average of 360; France reported 35,879 new confirmed COVID-19 cases on Wednesday, up from the 22,180 reported on Tuesday but well below the record high of 86,852 reported on Saturday. In the U.S., New York Covid-19 cases rise 0.9% vs. 7-day avg. 0.6%, as 4,820 were positive (highest since April).

Commodities

·     Oil prices finish slightly higher, pulling back late session as WTI crude edged higher by 9c to $41.45 per barrel (off earlier highs $43.06), while Brent gained 19c to $43.80 per barrel. Prices got a small boost after futures closed after headlines that OPEC+ talks focus on delay to oil-output hike of 3-6 months. Prices have risen in recent days on hopes for increased demand given news of a potential Covid-19 vaccine earlier this week.

·     Gold prices fell -$14.80 or 0.8% to settle at $1,861.60 an ounce, falling on a stronger dollar, but finished off its worst levels as investors remain optimistic about a potential COVID-19 vaccine, which could drive and economic rebound. Overall, the flight to safety in the precious metals that we had last week after the U.S. elections is gone given the vaccine news this week. Federal Reserve policymakers also recently highlighted the need for more targeted fiscal support.

·     The U.S. dollar edged higher, rising vs. the euro and British pound, while mixed against emerging market currencies in what was a quiet day of no economic data, and bond markets closed due to the veteran’s Day holiday. The dollar index (DXY) moved above the 93 level, rising 0.35%. Brazil’s real dipped after retail sales came in weaker than expected, while most other Latin American currencies retreated as investors focused on prospects for a COVID-19 vaccine.

Sector News Breakdown

Consumer

·     Retailers; TPR upgraded to outperform at Cowen based on robust EPS growth outlook for FY21 and FY22, Coach Outlet marketing strategy ripe for new customer acquisition and further upside on e-comm and China penetration ahead; PRPL Q3 sales beat ($187m v high end of $182m), EBITDA beat ($30M v high end $26m), and Rev growth in Q4 should be similar to Q3; FOXF Q3 Revenue of $260.7M (+23.4% Y/Y) beats by $8.22M on better margins at 34.3% while guided Q4 revenue to range between $240-$250M compared to consensus of $230.92M.

·     Auto & Leisure sector; LYFT reported better than expected 3Q revenue, driven by active riders with a more favorable loss margin while guidance for 4Q was a bit below consensus (Q3 active riders 12.44M (down 44%) vs. est. 12.8M and 3q revenue per active rider $39.94 (down 7%); HLT was upgraded to buy at Argus in lodging space as believe that the development of an effective coronavirus vaccine, will boost room demand by allowing consumers to travel more freely; MCFT rises after better earnings and raises outlook – lifting shares of boating stocks (MBUU, BC); NKLA jumped as a hydrogen partnership between Cummins and Navistar announced earlier today has turned a spotlight back on hydrogen Class 8 trucks

·     Consumer Staples & Restaurants; GO 3Q20 adj. EPS of $0.50 (including a 22c options-related tax benefit) & adj. EBITDA of $55.3mn topped Bofa forecasts for $0.24 & $50.8mn, respectively. Comps of 9.1% (vs. our 8.0% est.) reflected continued benefits from elevated food at home spending; in restaurants; PLAY downgraded to neutral from buy at Longbow citing valuation as sees the 35% surge in share price as overdone given the long road to recovery; REV shares jumped after the company said more bondholders are supporting its debt-restructuring offer – the co had previously warned that it may be forced to file for chapter 11 bankruptcy protection if a certain amount of the bonds are still outstanding by mid-Nov; Piper said they are most confident on CMG, WEN, SYY, GIS, MDLZ, and BYND in food space into year-end while being cautious on PLAY, RUTH, STKS, and HSY shares on a relative basis

Energy

·     Energy stock movers; OXY was downgraded to Underweight from Neutral at JPM, which is a reversal of prior upgrade following 2Q earnings (on 8/13) as 2021 guidance provided on the 3Q CC of a high-$30s WTI-based FCF breakeven to cover $2.9B in sustaining capex was worse than our model and would imply low-$40s WTI (mid-$40s Brent) to cover preferred dividends and capex; CLR priced its offering of 5.75% senior notes due 2031 and upsized the offering to $1.5B from $1B; Eni (E) established a JV with Norwegian PE firm HitecVision to develop and operate Norwegian and Nordic renewable energy projects; BAK Q3 net loss ($258M) on revs $2.97B, both falling YoY; EPD filed a registration statement for a possible sale of up to $2.5M;

·     Inventory data: the API showed a bigger than expected draw of 5.15M barrels of oil for the week ending Nov. 7; gasoline inventories show a draw of 3.3M barrels, distillate inventories show a draw of 5.62M barrels and Cushing inventories show a draw of 1.17M barrels; the EIA data pushed out a day due to veteran’s Day holiday

·     Utilities & Solar; DUK price target was raised to $100 from $91 at DA Davidson who maintained their Buy rating; AZRE reported Q2 EPS and revenue that beat estimates and guided Q3 revenue above estimates; Sidoti downgraded SR to Neutral with a $65 pt from Buy

Financials

·     Bank movers; banks in general were weaker after solid run the last week amid risk on appetite for investors and surging treasury yields as the 10-year moves back near the 1% level (best since March); in research, SCHW upgraded to buy from hold and raise tgt to $53 from $43 at Deutsche bank and also raised BK to buy with $46 tgt and STT to buy from hold and raise tgt to $80 from $67 as taking a more bullish view on equity markets and long-term interest rates post the U.S. election results and greater optimism around development of an effective Covid-19 vaccine

·     Insurance; AIG downgraded to neutral from buy at Goldman Sachs saying with shares, up 36% quarter-to-date, is pricing in considerable portion of the upside expected; LMND Q3 EPS loss (57c) on revs $17.8M vs. est. loss (64c) and $14.6M; raises FY20 revenue view to $91M-$93M from $86M-$88M and ups FY20 adjusted EBITDA view to ($103M)-($100M); RGA downgraded to Neutral at JPMorgan as concerned about reductions in EPS estimates due to ongoing high COVID-related deaths, especially in the U.S.

·     Asset managers; LAZ AUM slips 1.5% in October to ~$224.2B which included market depreciation of $3.9B, minimal foreign exchange depreciation and net inflows of $0.3B; WDR reports October AUM of $66.2B vs. $67.9B on September 30, 2020; APAM Oct AUM totaled $131.5 billion; BEN preliminary month-end assets under management of $1,391.6B vs. $1,418.9B last month; VRTS preliminary long-term and total assets under management as of October 31, 2020 of $115.2 billion and $116.6 billion; IVZ preliminary month-end assets under management of $1,206.5 billion, a decrease of 1.0% versus previous month-end. Total net outflows were $2.3 billion

·     REITs; after massive outperformance the last few days on hopes of a Covid-19 vaccine increasing foot traffic to malls and businesses reopening fully, the REIT sector seeing selling pressure today with declines in HST, FRT, SPG, SLG, REG among S&P drags; ABR 7M share Secondary priced at $13.50; DRE was upgraded to Outperform with a $47 target price at BMO as estimate 8.1% FFOps CAGR over the next three years; RBC Capital a few changes as upgraded CTRE to outperform saying its well positioned to drive accelerating earnings growth over the next few years, while downgraded DEA and DOC to sector perform as prefer to have a slightly more offensive stance in the current environment given the positive COVID vaccine news and our expectation that fundamentals will begin to stabilize in other REIT sectors

Healthcare

·     Pharma movers; PFE and BNTX reach an agreement to supply the EU with 200 million doses of their bnt162b2 MRNA-based vaccine candidate against covid-19; expect to produce up to 1.3 billion doses globally in 2021; PFE announces positive results from fifth phase 3 trial of Abrocitinib, evaluating safety and efficacy across different dosing regimens; PACB 7.4M share Spot Secondary priced at $14.25; in the cannabis sectors; Stifel downgraded shares of TLRY ($4.75 tgt) and ACB to sell from hold saying with excitement around potential U.S. federal reform driving broad undifferentiated enthusiasm, the group has outperformed

·     Biotech movers; FPRX shares jumped over 300% on positive FIGHT data for bemarituzumab (bema) in 1L FGFR2b+ gastric cancer patients as Bema was statistically significant benefit on PFS, OS, and ORR in the study; IVA said the FDA has indicated that a single late-stage trial may be sufficient to support a marketing application for IVA’s experimental drug lanifibranor for NASH; SURF said its liver cancer treatment, SRF388, receives "fast track" status from FDA – the co is currently enrolling patients with advanced solid tumors in an early-stage trial for SRF388; SRNE rises after saying it is filing an Investigational New Drug application with the U.S. FDA to start an early-stage clinical trial of its intranasal antibody candidate COVI-DROPS in healthy volunteers and patients with mild COVID-19; ESPR falls after $200M convertible debt offering

·     Healthcare services and providers; ONEM 3Q results well ahead of expectations as revs of $101.7M grew 16.2% y/y and 30% q/q, and came in 14% above the top-end of guidance for $84-$89M as strength included the combination of pent-up demand from 2Q, increased flu vaccine activity, and COVID testing – driven by better-than-expected membership growth (511K); HCAT results were better-than-expected driven by strength in higher-margin Technology revenue and deferment of some non-headcount costs and raised its ’20 guidance more than the 3Q beat; MDRX upgraded to buy with $14 tgt at Argus noting the company has topped consensus estimates for two consecutive quarters, and management is forecasting top-line growth in 4Q

Industrials & Materials

·     Industrial & Machinery; Bank America upgraded shares of ETN, ALLE to buy and downgraded TT (to underperform from buy) and PNR also to underperform after the PFRE/BNTX COVID-19 vaccine is reported to have prevented 90%+ of infections out of ~44,000 participants. Says believe multi-industrials investors will shift capital from COVID beneficiaries to stocks with the potential to benefit from a return to normal; FLR files for non-timely 10Q; CMI and NAV said they will work together on the development of a hydrogen-powered Class 8 truck.

·     Aerospace & Defense; HXL shares popped following a report from Street Insider that Belgian chemical company Solvay (SOLVY) is in talks to acquire the company – said the parties are in discussions which may lead to a deal https://bit.ly/35mzkSQ (Solvay later came out and denied the report); BA gives back some if its strong gains on Tuesday when it was the top point gainer in the Dow; HWM was upgraded to outperform at Cowen saying it has survived a peak aero/truck destock period with respectable margin and positive FCF (free cash flow)

·     Metals & Materials; in chemicals, APD shares slumped after Q4 profit fell below expectations ($2.19 vs. $2.21) while revenue topped estimates ($2.32B vs. $2.26B); ASH reports Q4 adj EPS $1.25 vs. est. 75c & revs $609M vs. est. $586.92M; LIN was started at Buy with a $301 target at DA Davidson

Technology, Media & Telecom

·     Internet; China Internet stocks remain pressured (BIDU, BABA, JD) as China issues tighter regulations on Internet industry as unveiled regulations to root out monopolistic practices in the internet industry; YELP was upgraded to outperform at Evercore/ISI as expects co’s revenue to recover with the growth in COVID-19 vaccines noting with shares down only ~15% in Q3, believes YELP can recover faster than the broader travel industry

·     Software movers; DDOG reported a good 3Q, with healthy upside to revenue, margins, and FCF but billings growth of 39% Y/Y surprisingly was only in line, while invoice timing issues impacted growth as Q4 guidance disappoints; PANW announced an agreement to buy attack surface management company Expanse Inc. in a deal valued at up to $800 million ($670 million to be paid in cash and Palo Alto stock and about $130 million in replacement equity awards); EGAN drops after saying it sees Q2 revs between $18.1M-$18.7M below est. $19.3M after in-line Q1; MODN falls as weaker year end guidance (sees year EPS 27c-35c on revs $40.2M-$40.6M vs. est. 43c and $174.6M) overshadowed beats on top/bottom line for Q4; CRWD outperforms after Baird raised its rating to outperform from neutral; MPLN shares plunged late day following a short call report from Muddy Waters

·     Video game sector; ATVI, EA, TTWO active as NPD Group said Q3 was the best third quarter ever for videogame spending, which shattered previous highs – overall spending hit $11.2B from July through September, up 24% from the same period last year; it was down only slightly from Q2’s $11.6B (which was a Q2 record), and up from Q1’s $10.9B (a Q1 record). Hardware sales rose 16% and accessories were up 35%

·     Media & Telecom movers; FUBO guides Q4 revs $80M-$85M above est. $77.2M after a Q3 beat on EPS/revs and subscribers of 455,000, were up 58% y/y and Ad revenue grew 152% to $7.5mm; DISH signed up QCOM as its latest partner in efforts to build its 5G network using open and cloud-based platforms by 2023; TME posted better music net adds + ad revenue helps offset continued drag from social

·     Hardware & Component news; KRNT posted stronger-than-expected Q3 results after the close yesterday. Revenues increased 21% y/o/y, above Street expectations of 17% growth. Non-GAAP operating margin came in above prior guidance and 120 bps above consensus; BRKS upgrade at Stephens after reported strong Q4 results, with adj. EPS rising 100% y/y to $0.47 and revenues grew 24% y/y to $246M; a system update from ROKU is adding support for AAPL’s AirPlay 2 and HomeKit – and along the way offering a new route to users to see HBO Max on its devices