‘Black’ Monday in S&P Had a Different Ring to It: Taking Stock

NEW YORK (Capital Markets in Africa) – Using the word “black” for anything associated with the stock market usually denotes a certain panic. But days ahead of retailers’ Black Friday and the usual frenzied consumer hysteria, it appeared stocks were seeing that same type of buyer’s excitation.

Caution was in the wind nearly at the outset Monday after one of the few elements holding a larger rally at bay — reports the “Phase Two” trade deal odds were receding — was upended by China’s state-run newspaper, the Global Times, which proclaimed instead that a Phase One deal was near and that China remained committed to Phase Two, and even Three. That came after overtures were made to boost penalties on intellectual property theft — among the sticking points in trade deal discussions.

High-beta names were off to the races, and in fact, marked the 8th largest spread of out-performance to their low-beta counterparts in the second half of 2019 — there were only four instances of a larger spread in the first half of the year.

In particular, it was small-cap stocks which finally saw their time in the sun, and notably, the Russell 2000 broke out firmly above 1,600 to break above May’s 2019 high — a heavy contrast to the seemingly unending highs we see the S&P 500. My colleague Andy Cinko pointed out ahead of the final hour of trading that the small caps had the potential to outperform larger caps by just the third-largest margin since President Trump’s election in 2016. They fell just slightly short of that distinction, but the performance was noteworthy nevertheless, as 87% of the constituents were in the green and no sectors fell in the red — something the SPX couldn’t claim.

Tech was a clear leader amid the risk-on, helping to boost two major stocks ahead of their results after the close. Palo Alto Networks and Hewlett Packard Enterprise instead disappointed the Street despite the optimism heading into the print. RBC analysts nailed the quarter for PANW, expecting “strong” results after partner conversations and survey work, but it was the forecast that ultimately did the stock in, now down more than 8%. Competitor Fortinet is down a touch, as is Check Point Software. One could argue they could be a victim of their own success to a point, running up more than 20% since their last earnings. Another rather high-flier in tech recently, Autodesk, reports later tonight. This comes after attracting a series of bullish takes from the Street last week.

Another outperforming sector with ramifications today is retail. The sector was still reeling to be sure after a select few disaster earnings reports, but the segment participated broadly in what the bulls can call their own Black Monday. Some of the best performers were, in fact, some of the names expected to disclose results today, like Best Buy and Dollar Tree. Yet atop the leaderboard, believe it or not, was embattled L Brands, and not Tiffany — the now betrothed luxury brand — a sign some of the long-suffering and now discounted stocks were attracting capital (LB had been the third-worst performer in S5RETL through Friday’s close).

As indicated above, a lot of that unabated optimism was, as usual, trade deal related. However, what could normally be assumed to be a furtherance of those same goals has failed to carry through overnight. A phone call with top negotiators for the two countries was purported to have reached a degree of consensus about resolving the issues that may have prevented a Phase One deal. Futures popped, as to be expected, only to be unchanged as of writing in sign equity may need a slight break and/or more substantive developments beyond a telecommunications milestone before continuing their upward climb.

Notes From the Sell Side
Chipotle Mexican Grill was upgraded to outperform at Cowen, which forecasts upside to both comparable sales and earnings from growth in digital sales. These sales have the room “to nearly double from 18% of sales today to 34% in the next 5 years,” analyst Andrew M. Charles wrote to clients, and this will result in “positive side benefits,” including higher restaurant margins, improved customer data, and “more efficient labor deployment.”

Cowen also sees upside from “Chipotlanes,” the company’s drive-thru format, which “permissions the brand to grow faster in 2021 and beyond, and provides greater certainty to double the store count.”

McDonald’s was started with a hold rating and $193 price target at Deutsche Bank, which wrote that the fast-food giant was “trading pretty close to fair value” after a recent decline in the stock, especially given uncertainty over its 2020 growth prospects.

The firm noted “understandable investor consternation” that expectations for domestic same-store sales “are currently set too ambitiously” going into 2020, and that McDonald’s “might struggle to achieve its long-term high-single-digit EPS growth for the year.” However, while “there is merit to these concerns,” they are a “a reason to be patient rather than downright negative.”

Shares of the Dow component are down about 13% from an August peak, with much of the losses coming after it fired its chief executive officer due to a consensual relationship with an employee. Analyst Brian Mullan wrote that he “would look for a better entry point before becoming more constructive.”

Kennametal has upgraded two notches at UBS, to buy from sell, with the firm seeing a “positive inflection” in earnings growth. Analyst Steven Fisher expects earnings to bottom in KMT’s fiscal 2020 and then surge more than 60% in FY21. The stock “is not pricing in the sharp rebound” in 2021 earnings, he wrote.

UBS added that historical interest rate patterns “suggest a positive inflection to short cycle fundamentals and KMT’s organic growth in the next 12 months,” and it expects a headwind from raw material costs should “begin to abate” in the second half of the year. It raised its price target to $42, matching the Street-high view, from $27.

Sectors in Focus

• Storage names (WDC, PSTG STX, NTAP) after Nutanix stunned onlookers, soaring more than 20%. This comes after storage name Pure Storage dropped 20% with its results just last week. Competitor NTAP rose marginally. NTNX’s most relevant metric, Software & Support revenue, beat by more than $10 million, Keybanc analysts led by Alex Kurtz wrote, citing larger deals executed during the quarter. Americas bookings also appear to be trending positively for the third straight quarter, he added
• Life science stocks after Agilent results and its subsequent 1Q forecast missed expectations. Piper called the guidance “conservative”, while UBS responded by raising their PT (A beat on both the top and bottom line for 4Q); TMO, PKI, MTD
• Marijuana names will continue to be in focus as MedMen reports. The so-called “Apple store” of cannabis dropped 8% yesterday as its lockup expired and Organigram’s results failed to impress, adding to woes in Canada cannabis stocks (CGC, CRON, HEXO, ACB, TLRY).
  • An evening communication from the FDA may also pressure stocks after noting that “CBD has the potential to harm you” and “can cause liver injury.” The FDA also said it cannot conclude that CBD is safe for use in human or animal foods. MKM analysts expect the publicly traded firms to now downplay the importance of CBD in food or beverages to their strategy
• Chinese ADRs after the Alibaba Hong Kong listing jumped nearly 8% in its debut there, raising $11 billion (JD, BABA, IQ, HUYA, BIDU)
• Dollar and discount stores as Dollar Tree reports results (DG, FIVE, DOL CN)
• Shoe retailers after Caleres dumped overnight when its full year forecast missed Street estimates (SCVL, DBI, GCO, FL)
• Cyber security stocks after PANW cratered (FTNT, SPLK, PFPT) with its own quarterly print. Cloud subscriptions were “strong,” Citi analysts wrote, but product was weaker, falling 4% y/y (vs Citi’s est. of +3%). There are “plenty of reasons” to seek the sidelines, Piper Jaffray analysts wrote after free cash flow also “misses the mark.” Difficult market conditions in the firewall cycle could have contributed to the issues, they added

Source: Bloomberg Business News