Closing Recap

Friday, January 15, 2021

Equity Market Recap

·     Stocks in the U.S. finish the week lower, with major averages dropping on Friday amid weakness in financials (on mixed bank earnings Citi, JPM, WFC EPS beats but revs miss) and profit taking in cyclical and reflation related stocks, but the Smallcap Russell 2000 ended the week with a gain, coming off record highs the day prior. Dow Transports end the week higher despite sliding Friday from record highs Thursday, while Energy was among the top sectors on the week but fell sharply today. Retailers decline after economic data showed December retail sales fell for a third-straight month and by much more than expected (fell -0.7% vs. est. 0%). Markets brace for a catalyst filled week coming up with earnings kicking into full gear, as well as a busy economic calendar and the Presidential inauguration for Joe Biden on Wednesday.

·     Overnight, incoming President Joe Biden revealed his new $1.9 trillion stimulus relief plan, while markets await what aspects of the bill will be agreed upon, as it also sparked fears of an increase in taxes. The anticipation into the stimulus relief plans helped boost stocks the early part of the week. Treasury yields end slightly lower (off best levels since last March) while oil and gold prices declined, and the dollar edged higher. The Russell 2000 SmallCap index pulls back from its all-time best levels but it still up 30% over the last 3-months alone heading into the 3-day holiday weekend and Biden inauguration next week where stocks slid into the bell.

Biden Stimulus plan details:

·     The new relief proposal from Biden, known as the American Rescue Plan, includes direct payments of $1,400 to most Americans; increasing the federal unemployment benefit to $400 per week and extending it through the end of September; boosting the federal minimum wage to $15 per hour; extending the eviction and foreclosure moratoriums until the end of September; $350B in state and local government assistance, $170B for K-12 schools and higher education institutions; $50B towards COVID-19 testing; $20B towards a national vaccine program in partnership with states, localities, and tribes; making the Child Tax Credit fully refundable for the year and increase the credit to $3,000 per child.

Economic Data

·     Retail sales fell (-0.7%) for Dec vs. estimate of an unchanged reading (Nov was downwardly revised to -1.4% from -1.1%); Dec retail sales ex-autos fell -1.4% vs. est. -0.1% and Dec retail sales ex-autos/gasoline dropped -2.1% vs. Nov -1.3% (worse than prior -0.8%).

·     New York Empire state current business conditions index rises +3.5 in January, missing the estimate for a reading of up 6.0 (index at lowest since June), as new orders index +6.6 in January vs +3.4 in December, prices paid index +45.5 vs +37.1 in December, employment index at +11.2 vs. +14.2 in December and six-month business conditions index +31.9 vs +36.3 in December.

·     Producer Price Index (PPI) rises 0.3% MoM in Dec, below the 0.4% estimate (vs. Nov +0.1% reading), while core PPI prices (ex food & energy) rise 0.1% vs. est. 0.2%. PPI headline YoY for December rises 0.8% (in-line with ests) while core prices YoY rose 1.2% vs. est. 1.3%.

·     Industrial output for December rose +1.6% vs. est. +0.5% vs. Nov +0.5 pct while capacity utilization rate at 74.5% vs. est. 73.6% and vs. Nov 73.4%; Dec manufacturing output +0.9%

·     University of Michigan consumers sentiment prelim Jan 79.2 (vs. est. 80.0) and vs. Final Dec reading of 80.7; the expectations index prelim Jan 73.8 vs final dec 74.6 and current conditions index prelim Jan 87.7 vs final dec 90.0.

·     U.S. business inventories were up 0.5% in November and sales ticked down -01%, as forecast. Inventories had increased 0.8% in September and October. And it’s a fifth straight monthly gain. This is the first decline in business sales since the -14.4% plunge in April.

Commodities, Commodities and Treasuries

·     Oil prices declined from a 10-month high, as WTI crude finished the session down -$1.21 or 2.26% to settle at $52.36 per barrel as the dollar strengthened, taking the steam out of a recent rally, while investors assessed what impact a potential U.S. stimulus package will have on driving fuel demand higher. Brent crude fell -$1.32 or 2.34% to settle at $55.10 per barrel. U.S. drillers add oil and natural gas rigs for eighth week in a row according to Baker Hughes (BKR) which said the U.S. rig count is up 13 from last week to 373 with oil rigs up 12 to 287, gas rigs up 1 to 85.

·     Gold prices dropped on the day, as Feb gold lost -$21.50 or 1.2% to settle at $1,829.90 an ounce, slipping a modest -0.3% on the week as the dollar index (DXY) traded at its best levels in over 4-weeks. It was a choppy week for precious metals as the dollar recovered off 3-year lows vs. some rival currencies, but overall, the buck remains weak on flight to riskier assets and weaker data. Treasury yields touched a near 1-year high late last week above 1.18%, but following dovish comments from Fed Chairman Powell, along with other Fed speakers this week, yields edged lower the last few days with the 10-year around 1.10%. Bitcoin closed out the week falling over 8% to under $36,000 but still remains up over 23% to start the year.

Sector News Breakdown

Consumer

·     Retailers; as a whole, group slips after economic data showing that December retail sales fell for a third-straight month and by much more than expected; RL upgraded to Outperform from Sector Perform at RBC Capital and raises price target to $138 from $77 saying with shares among biggest laggards in 2020 (PE expanding 4 turns since January 2020 vs group expanding 13 turns), sees RL as poised for outperformance into 2021; YETI downgraded to Neutral from Buy at Citigroup but raise tgt to $85 from $69 noting since its March 23, 2020 low of $15.58, the stock is up >400%, and for all of 2020, YETI was up nearly 100%; gun related stocks/sporting goods (AOBC, RGR, SWBI, VSTO) active after the FBI said it processed a record 39.7 million firearm background checks in 2020, beating previous highs by more than 10 million/roughly 8.5 million people across the US purchased their first firearm in 2020; FL upgraded to buy from neutral at FBR on Stimulus checks, and very easy 1st, 2nd qtr comps; GME slips after recent surge after details of insider sales (Director Wolf sold over 800K in shares last few days) as per filing

·     Auto sector; JPMorgan downgrade AN to Neutral with a $75 pt from Overweight and upgraded SAH to OW, while remaining OW on GPI, LAD and neutral on ABG, PAG; Truist raised their pt on PAG to $75 from $65 as it remains their favorite stock in the group, and also raised their pt on Neutral-rated ABG to $180 from $130 and AN to $73 from $66 as these two are currently trading in-line with their historical ranges; Wedbush raised its TSLA price target to a street-high $950 with a $1,250 bull case (from $715, $1,000) on robust demand in China, which can add at least $100 per share in a bull case and may account for 40% of sales by 2022, in addition to overall EV market share growth of which Tesla is the undisputed leader despite increasing competition; SOLO announced it has expanded with 2 new DTC locations in CA and 1 in AZ

·     Restaurants and Consumer Staples; MNST CFO Hilton Schlosberg as co-CEO (will serve as Co-CEO together with Rodney C. Sacks). Sacks will continue as Chairman of the board and Schlosberg will continue as Vice Chairman of the board. Thomas Kelly elected as CFO, succeeding Schlosberg; CHUY was upgraded to Buy at Stifel and raised tgt to $40 as expects Chuy’s to see elevated demand from higher-income customers later this year.

·     Leisure and Gaming; MTN said season-to-date total skier visits were down (-16.6%) compared to the prior year season-to-date period, as season-to-date total lift ticket revenue, including an allocated portion of season pass revenue for each applicable period, was down (-20.9%) compared to the prior year season-to-date period; in leisure, PII announced new products in the ORV segment including the RZR Trail editions, Rangers and Sportsman ATV

Energy

·     Energy stock movers; XOM slips after the WSJ reported the SEC has launched an investigation into XOM after an employee filed a whistleblower complaint alleging the company overvalued its Permian Basin assets; CVI said late yesterday it is not interested in buying DK and proposes to replace three Delek board nominees with its own; CVI remains the largest holder at 15% stake and says it plans to focus instead on devoting capital to internal higher-return projects; Stifel resumed coverage on OAS at Buy with a $58 target as the company has the right strategy (return of capital) and cost structure (low leverage) to thrive in the current environment and offers one of the most compelling investment opportunities in our mid-cap oil universe; Citi raises its price target on APA to $21 from $16 and on PXD to $154 from $130, keeping both stocks rated as a Buy; JPMorgan initiated CNX at OW with a $16 pt as a strong FCF generator with an advantaged cost structure who is currently trading at one of the highest FCF yields under coverage, and whose valuation gap can be narrowed through buybacks and debt reduction

·     Utilities & Solar; Goldman downgraded AEP to Sell with an $83 pt as their estimates on lower than consensus and DUK to Sell with a $93 pt given they expect the stock to continue trading at a discount versus other large cap regulated utilities as it has historically done, and they upgraded CNP to Buy with a $27 pt after its recent underperformance means the stock is currently trading at a discount versus peers and PEG to Buy with a $66 pt on its upside driven by favorable gas prices, higher regulated rate base growth, and its current discount; JPMorgan views NEE and AES as the utilities best positioned to capitalize under the incoming Biden administration; Heikkinen Energy cut SEDG to bottom tier

·     Alternative energy; solar stocks with a bout of profit taking today as SEDG, SPWR, FSLR pull back after strong gains recently; REGI to $102 from $76 and reiterated its OW rating after virtual meetings with management as they expect demand momentum to accelerate, which should continue driving share prices upward even after surging in late 2020 and YTD in 2021; BTIG raised its price target on Buy-rated NFE to $60 from $45 and GTLS to $160 from $125 as the best ways to play long-term opportunities for LNG-leveraged companies as the world energy transition continues

Financials

·     Bank movers; big bank earnings get underway with mixed results – more coming next week: 1) JPM falls from record highs the day prior as qtrly investment banking revenue was $2.5 billion, up 37%, FICC sales & trading rev $3.95b, est. $3.92b; Q4 revs $29.2Bn vs. est. $30.2B; Q4 net income of $9.9B excluding credit reserve releases of $2.9B ($3.07 per share net interest income was $13.4B, down 7% and provision for credit losses was a net benefit of $1.9B, compared to an expense of $1.4B prior; 2) WFC shares fall on mixed results as missed on the top line, with Q4 revenue of $17.93B vs. consensus of $18.0B and $18.9B in Q3 with slightly better EPS of 64c beating by a penny while stabilizing credit costs helped offset the hit from low-interest rates; bank’s efficiency ratio for Q4 stood at 83%, higher than the 81% and 79% in Q3 20 and Q4 of 2019; authorizes $500Mm repurchase program; 3) Citigroup (C) Q4 EPS $2.08 vs. est. $1.34; revs miss at $16.5B vs. est. $16.71B; drew down $1.5 billion of the reserves the bank had put aside for future loan losses, a big reason the bank’s profit was better than expected; said plans to resume stock buybacks during Q1; profit in the inst’l clients group (trading and investment banking), rose 27% to $3.65B, while revenue fell slightly to $9.28B; trading revenue rose 14%, while investment banking revenue fell 5%; 4) PNC Q4 EPS $3.26 vs. est. $2.62; Q4 revs $4.2B vs. est. $4.14B; net charge off rose $74M to $229M, NII $2.4B -2% qtr/qtr; NIM 2.32% -7bps qtr/qtr

·     Brokers, Exchanges and Investment advisors; RJF upgraded to Overweight from Underweight and SF to Equal Weight from Underweight at Wells Fargo as reflect the much better macro backdrop that is developing for financials including higher interest rates, benign credit losses and a broader rotation into value stocks; Oppenheimer said while believe CME has strong network effects, deep liquidity pools and an attractive dividend policy, it appears that too much rate-hike optimism has been baked in; therefore, tactically downgrade CME from Outperform to Perform.

·     Consumer Finance; PYPL tgt raised to $350 at Mizuho saying PayPal’s Bitcoin volumes are surging. But what is the long-term upside to PayPal’s revenue from Bitcoin? They see nearly $2bn, or about 10%, potential upside to our previous 2023 adj. net revenue estimate; Bloomberg reported that GS signed a deal to take over GM’s credit-card portfolio; BAC said credit card charge-off rate was 1.74% in December 2020 vs 1.48% in November 2020 and credit card delinquency rate was 1.50% at Dec 2020 end vs 1.46% at Nov 2020 end; AXP December U.S. consumer credit card net charge-off rate falls to 1.6% from 1.9% in November.

·     Insurance and Financial services; GS is considering acquisitions to bulk up its consumer banking unit Marcus, after the Wall Street firm slowed loan and deposit growth at its fledgling business last year in the wake of the coronavirus pandemic, Reuters reported; LMND shares tumbled after Citron reveals details of short call announced initially yesterday.

Healthcare

·     Pharma movers; DBVT shares jumped after receiving written responses from the FDA to questions provided in the Type A meeting request the company submitted in October; LCI said it decided to discontinue 23 lower gross margin product lines, which contributed ~$31M and ~$4M of net sales in FY 2020 and in Q1 2021, respectively; cannabis sector extend gains (ACB, CGC, CRON), led by TLRY after Cantor raised tgt to $24 from $11 (group up this week after better APHA results); TEVA announced the U.S. launch of its generic of NuvaRing (Piper noted viewed competition for AMRXs generic, known as EluRyng, as an inevitability)

·     Biotech movers; BNTX shares slid after many European nations report receiving lower-than-expected supplies of COVID-19 vaccines as partner PFE slows shipments; NCNA reports promising interim data at 2021 ASCO Gastrointestinal Cancers Symposium from ongoing three-part study of its experimental drug, NUC-3373, in patients with colorectal cancer; PBYI said its neratinib shows encouraging effect in biliary tract cancers; Bank America with several rating changes as they downgraded ICPT to underperform, YMAB cut to neutral, ESPR to neutral, NXTC cut to underperform and upgraded SGEN to buy; VBIV said it saw positive results from a Phase 4 study of its hepatitis B virus vaccine in younger adults

·     Healthcare services and providers; PINC and TVTY both downgraded to Underperform from Neutral at Credit Suisse as they see both the shares underperforming the rest of our HCIT coverage over the next 12 months; ACCD announced that it has signed a deal to acquire Innovation Specialists (2nd MD) for $460M, which consists of $230M in cash, $130M in stock and $100M in stock payable upon the achievement of certain milestones; AMWL 11.281M share Secondary priced at $27.50.

·     Managed care sector, ANTM was upgraded to Buy on Commercial exposure at Jefferies, and downgraded CNC and MGLN to Hold following a strong rally. Firm shifts preference toward MCOs with more Commercial exposure and highlight CI, ANTM and HUM in managed care as see Commercial Group enrollment pressure reversing over the course of ’21. Additional stimulus under the Biden Administration and COVID vaccinations support a broader economic recovery, business re-openings, a stronger labor market and more Commercial insured lives. Meanwhile, Democratic control pulls forward and de-risks SCOTUS’ decision on the ACA and increases the possibility of coverage expansion.

·     MedTech and Equipment; TMO bought Henogen SA, Groupe Novasep SAS’ viral vector manufacturing business in Belgium, for about 725 million euros ($879.7 million) in cash; TRHC downgraded from Buy to Hold at Stifel reflects the following factors. TRHC is up 25% the past 3 days (S&P flat) and now trades at a 7% premium to our $52 12-month price target, believe 2021 will be more challenging and recently lowered our 2021 revenue estimate below.

Industrials & Materials

·     Industrial & Machinery; IR upgraded to Buy at UBS and increase the price target to $58 from $37 as expect EBITDA margins to improve at a significantly higher rate than consensus expects which in turn should lead to a re-rating of ~2x; EMR upgraded to Buy at UBS & increase our PT to $100 from $69 as we see order momentum inflecting strongly, driven by recovering capex & industrial production; Jefferies said for industrials, following the December stimulus package, and now Democratic control of Congress which increases the likelihood of additional stimulus, they see additional tailwinds for growth in industrials preferred names remain DE, CARR, PCAR, KMT, TEX

·     Transports; industry pulling back after touching all-time record highs the day prior (above the 13,200 level for Dow Transports) with broad gains over the last few weeks for airlines, rails, truckers and package delivery – not much in way of specific news, more so aftereffects of some profit taking after weaker retail sales data

Technology, Media & Telecom

·     Media & Internet; SNAP upgraded to Buy from Neutral at Moffett with $57 tgt and DISCA raised to Buy with $45 tgt saying despite their recent runs think both have opportunities to accelerate their revenues and profits that are still underappreciated by the Street; SPOT downgraded to Sell from Neutral at Citigroup saying among four subscription based stocks (SPOT, ROKU, NFLX, SIRI), Spotify is the only firm where the Street’s long-terms forecasts (through 2023) do not comport to the prevailing valuation; KeyBanc recommend buying CABO, CHTR, and WOW, and are raising tgts on CABO to $2,671 and CHTR to $771 saying they expect Pay-tv subscriber losses to worsen in 2021 and broadband subscriber growth to slow, though Cable should end the year more profitable than ever; FB’s WhatsApp is delaying the roll out of new business features following user backlash over the company’s data sharing practices, Reuters reported.

·     Semiconductors; a day after the Philly semiconductor index touched record highs (3,089), the index dropped over 2% today, now nearly 100 point of its yesterday best in a bout of profit taking; group led this week on INTC new CEO announcement (comes from VMW), and beat and capex raise from TSM yesterday which sent equipment stocks surging (AMAT, KLAC, LRCX)

·     Software movers; PLTR outperformed in a generally weaker software sector on the day despite several price tgt hikes at credit Suisse today (CRWD to $225, SNOW to $315, DDOG to $95, Unity (U) to $170, PANW to $385); TUFN tgt raised to $22 from $15 at Opco following the company’s 1/14 positive pre-announcement of preliminary 4Q20 revenue. TUFN’s updated outlook calls for 4Q revenue of $30.5M to $31.1M, above guidance issued on 11/12/20 calling for revenue of $24M to $29M; PLTK opened at $33.40 after IPO priced overnight at $27; NPD reported US hardware and software sales in December increased 23.0% YoY (38.7% for hardware and 4.4% for software) vs. (5.5)%E for GME comp sales according to Bank America.

·     Hardware & Component news; DM agrees to buy provider of volume production photopolymer 3d printing solutions for $30; JPMorgan downgraded 3D makers DDD and SSYS based on valuation after run-up in shares; HPE upgraded to overweight from neutral saying HPE is trading at 7.7 times our CY21 PF EPS estimate, a 10% discount to the three-year mean forward P/E multiple, which we view as unjustified given the firm’s swift rebound to pre-pandemic run-rate; BB shares massive winner this week on no particular news – possibly tied into electric vehicle space along with its QNX operating system