Market Overview

Market Wrap For February 19: Stocks Close Lower, Nasdaq Ends Winning Streak

Market Wrap For February 19: Stocks Close Lower, Nasdaq Ends Winning Streak

U.S. stocks finished the day near session lows as investors found little reason to be bullish. Housing data came in poor and failed to rally the bulls.

Several Fed members raised the idea of a rate hike but “participants agreed that, with the unemployment rate approaching 6.5 percent, it would soon be appropriate for the committee to change its forward guidance.”

In a rather volatile day the Dow gave up a 100 point gain to close the day near the lows. The Nasdaq snapped an eight day winning streak.

  • The Dow lost 0.56 percent, closing at 16,040.56
  • The S&P 500 lost 0.65 percent, closing at 1,828.75
  • The Nasdaq lost 0.82 percent, closing at 4,237.95.
  • Gold lost 0.98 percent, trading at $1,311.40 an ounce.
  • Oil gained 0.97 percent, trading at $103.42 a barrel.
  • Silver lost 1.79 percent, trading at $21.50 an ounce.

News of Note

MBA Mortgage Applications declined 4.1 percent versus a decline of 2.0 percent last week.

ICSC Retail Store Sales rose 2.5 percent week over week, compared to a decline of 0.3 percent last week.

January Producer Price Index rose 0.02 percent, in-line with expectations. Core PPI rose 0.4 percent, higher than the 0.2 percent expected.

January Housing Starts totaled 880,000, lower than the 950,000 expected. Permits totaled 937,000, lower than the 980,000 expected.

Redbook Chain Store Sales rose 3.2 percent year over year compared to a 2.8 percent gain last week.

Household debt rose by $241 billion, or 2.1 percent in the fourth quarter to $11.52 trillion according to the a NY Fed report document released yesterday.

The Congressional Budget Office claimed that President Obama's proposal to raise the minimum wage to $10.10 an hour by 2016 would result in the loss of 500,000 jobs but will increase pay for over 16.5 million people and lift 900,000 people out of poverty.

The Wall Street Journal reported that 46 percent of fund managers surveyed view a sharp slowdown in China as their number one fear, up from 37 percent last month and 26 percent in December.

Equities-Specific News of Note

Analysts at Bernstein commented on Tuesday's merger of Actavis (NYSE: ACT) and Forest Laboratories (NYSE: FRX) and said "After the merger, Actavis will be a $15B revenue company with a ~30% net income margin. Much of the value created will come from lower OpEx ratio. The company expects to have (after the cost cuts) R&D and SG&A of 7% and 21% of revenue, respectively. This stands in sharp contrast to the ~40% of the drug industry. The result would be $4-$4.5B in FCF (~30% FCF/revenue!!!). In short, a fantastic cash generation machine, with potential future growth coming from acquisitions." Separately, Carl Icahn, who holds a stake in Forest Laboratories (and waged an activist war against Forest's prior management) said “we believe that our activism did much to help bring about the great result.” Shares of Actavis hit new 52 week highs of $213.11 before closing the day at $210.56, up 4.51 percent. Forest Laboratories also hit new 52 week highs of $94.68 before closing the day at $93.98, up 3.23 percent.

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Analysts at ISRG reiterated an Underperform rating on Intuitive Surgical (NASDAQ: ISRG) with an unchanged price target of $320. The analysts noted “We recently surveyed 50 surgeons to explore the current and potential penetration of robotic surgery in a variety of indications, as well as the penetration of more traditional open and laparoscopic surgery” and concluded that “our findings support our concerns that system sales and procedure volumes will remain constrained and that the current install base can absorb future procedure growth.” Shares lost 0.93 percent, closing at $439.96.

Related: JMP Securities: Survey With Surgeons Highlight Challenges For Intuitive Surgical

Analysts at Citigroup initiated coverage of Macy's (NYSE: M) with a Buy rating and a $63 price target. The analyst noted “we would characterize our stock call as conviction on a continuation of solid comp execution on a combination of cont. momentum in product assortment & a helpful macroeconomic background. Our view is that we like revenue steadiness, shareholder returns, better scale, and valuation with good defensive characteristics somewhat comparable to names like The TJX Companies and L Brands. Shares gained 0.39 percent, closing at $53.34.

Analysts at FBR initiated coverage of Tesla (NASDAQ: TSLA) with a Market Perform rating and $150 price target. The analysts noted “although we are strong believers in management's ability to execute and launch differentiated products in today's competitive auto landscape, we believe that the current stock price fully reflects Tesla's evolution into what we believe will be one of the most profitable premium auto manufacturers by the end of this decade. Execution risk going forward is meaningfully higher as Tesla manages multiple product launches and expands into new geographies, and the risk/reward profile at current levels does not appear very attractive. We believe that sustained upside in the stock from current levels will be dependent on rapid success of the Gen 3 model and sizable expansion in China, and we expect limited clarity on these items until at least 2016.” Shares lost 4.94 percent, closing at $193.64 (Note: the company released earnings after 4:00 pm).

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Mondelez International (NASDAQ: MDLZ) has hired Accenture to help the company make $3 billion in gross productivity savings over the next three years. Shares gained 0.20 percent, closing at $34.26.

Jos. A. Bank (NASDAQ: JOSB) launched a tender offer to buy back as much as $300 million in shares at $65 per share, an approximate 20 percent premium over the previous day's closing price. Shares lost 0.31 percent, closing at $54.03.

Mead Johnson (NYSE: MJN) disclosed last night that an investigation has revealed the company has violated its own policies and may have broken U.S. and/or Chinese laws. Analysts at Goldman Sachs said that the company's clean balance sheet has the ability to absorb any one-time penalty. Shares gained 1.79 percent, closing at $78.63.

Novartis (NYSE: NVS) announced that its skin-cancer drug, Sonidegib, has met its primary goal of achieving a “clinically significant tumor response” in a Phase II trial of patients with Basal cell carcinoma, a common form of skin cancer. Shares lost 1.17 percent, closing at $81.75.

3D Systems (NYSE: DDD) has acquired Digital PlaySpace, a digital play platform that connects brands, retailers and consumers to 3D printable play activities through its leading digital play properties, and Dreamouse Designer Facebook app. Users of can design a custom made dollhouse and have their creation printed on a 3D printer to be used immediately. Shares lost 1.27 percent, closing at $76.16.

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Eli Lilly (NYSE: LLY) announced that its lung-cancer drug, Ramucirumab, has met the main goal of a Phase III study of patients with second-line non-small cell lunch cancer by improving survival rates compared with a placebo. Shares gained 5.07 percent, closing at $58.09.

Furiex Pharma (NASDAQ: FURX) has hired Bank of America to help the company seek a strategic buyer. Two weeks ago, the company said that its Eluxadoline irritable bowel syndrome drug had successfully met the company's main objectives in a late-stage study. Shares gained 1.13 percent, closing at $98.50.

Foot Locker (NYSE: FL) announced that it has added Steven Oakland to the company's board of director. Oakland is currently a president at J.M. Smucker (NYSE: SJM) with “particular strength in marketing and brand-building.” Shares of Foot Locker gained 1.42 percent, closing at $39.40.

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CNBC's Carl Quintanilla tweeted that Credit Suisse wrote a note suggesting that Wal-Mart (NYSE: WMT) should buy Family Dollar. (NYSE: FDO) Shares of Wal-Mart lost 0.64 percent, closing at $74.85 while Family Dollar gained 1.70 percent, closing at $65.67.

Google (NASDAQ: GOOG) said that it has invited nearly three dozen major cities to “explore what it would take to bring them Google Fiber.” Shares lost 0.71 percent, closing at $1,202.34.

Executives at Kellogg (NYSE: K) spoke at the Consumer Analyst Group of New York Conference. The company said that one of its biggest areas of focus will be supply chain efficiency and cost savings. The company will look at acquisitions in emerging markets. Shares lost 0.65 percent, closing at $59.73.

Related: Kellogg's To Trace Its Palm Oil Suppliers, While General Mills Looks Internationally For More Opportunities

Winners of Note

This morning, Garmin (NASDAQ: GRMN) reported its fourth quarter results. The company announced an EPS of $0.76, beating the consensus estimate of $0.62. Revenue of $760 million beat the consensus estimate of $712.78 million. Net income for the quarter rose to $163.59 million compared to $129.3 million in the same quarter last year. The company noted that new product releases such as watches and a successful penetration of new markets has been positive for the company. Gross margin rose 300 bps year over year in the quarter to 52 percent. The company expects its full year 2014 revenue to be $2.6 billion to $2.7 billion, ahead of the consensus estimate of $2.58 billion. Additionally, the company sees its 2014 EPS to be $2.50 to $2.60 versus a consensus estimate of $2.54. Shares hit new 52 week highs of $52.72 before closing the day at $51.68, up 9.56 percent.

Sinopec (NYSE: SNP) said that it will allow some outside ownership of its gasoline station business as part of the Chinese government's ambitions to reform its state-owned companies. Shares gained 8.43 percent, closing at $83.51.

Signet (NYSE: SIG) has agreed to acquire Zale (NYSE: ZLC) for $21 a share, valuing the transaction at around $1.4 billion. Shares of Zale closed at $14.94 in Tuesday's trading session . "This transformational acquisition further diversifies our businesses and extends our international footprint, opening the door to greater growth and innovation across the enterprise," stated Mike Barnes, Signet's Chief Executive Officer. "The addition of Zale to the Signet family is consistent with our long-term growth strategy and leverages our combined operating expertise to create better choices for our customers, new opportunities for our employees, and makes us a more attractive partner to our vendors. In addition, it allows us to better optimize our balance sheet, creating long-term value for our shareholders. Shares of Signet hit new 52 week highs of $94.16 before closing the day at $93.65, up 18.14 percent. Zale surged 40.31 percent, closing the day near the buyout price at $20.92.

Decliners of Note

After the markets closed yesterday, SM Energy Company (NYSE: SM) reported its fourth quarter results. The company announced an EPS of $1.26, missing the consensus estimate of $1.44. Revenue of $636.7 million beat the consensus estimate of $612.45 million. Analysts at KeyBanc noted that SM Energy's Tatonka 1H well in the Permian Basin had a 375 boe/day 30-day rate which was below expectation. Additionally, the company's first East Texas Eagle Ford had a seven-day IP rate of 8.9 million cfe/day with just six percent oil, making it gassier than expected. Shares lost 17.06 percent, closing at $74.30.

The U.S. has decided not to impose anti-dumping tariffs on oil and natural gas pipe products from South Korea. U.S. Steel (NYSE: X) would have benefited from a tariff decision but instead margins on U.S. Steel's tubular products will be pressured as a result of the government's decision. The company stated it is disappointed by the Commerce Department's “failure to deal with important issues.” Analysts at JPMorgan noted “In our opinion, this outcome is a material negative surprise to Street expectations. Specifically, the DOC found no OCTG dumping by Korea, the largest exporter to the U.S. by far at 17% of 2013 consumption” and that “Although the process is not yet finalized and the DOC determined some OCTG goods were dumped in the U.S., we believe the negative surprise of zero dumping margins for Korea will negatively impact shares of X, concurrent with continued weakness in flat steel prices to begin 2014.” Shares lost 7.03 percent, closing the day at $24.86.

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Analysts at Baird downgraded SolarCity (NASDAQ: SCTY) to Neutral from Outperform with an unchanged price target of $81. The analysts noted “SolarCity is a long-term cash flow story, not a near-term profitability story. SCTY's goal in the near term is to take advantage of the current tax equity environment to install as many MWs as possible before incentive schemes in the U.S. change, such as when the ITC is reduced in 2017. We do not expect to see profit any time in the next few years, as SCTY will be spending aggressively on sales and marketing to build out its MW portfolio. Where the value for SCTY lies is how the company will look after 2017. Assuming the tax equity environment becomes less favorable, SCTY could ramp down its sales & marketing operations and instead focus on collecting the recurring revenues and cash flows from its leased systems under their 20-year contracts. As such, we believe it makes sense to value the company in the near term on the volume of MWs it installs, which will position it for the sizable cash flows expected in the future. Shares lost 7.43 percent, closing at $74.01.

Earnings of Note

This morning, MGM Resorts (NYSE: MGM) reported its fourth quarter results. The company announced an EPS of -$0.08, missing the consensus of -$0.01. Revenue of $2.5 billion beat the consensus estimate of $2.46 million. Casino revenue growth rose 26.6 percent to $925 million in Macau while the company saw declines in Bellago, MGM Grand Vegas, MGM Grand Detroit of 2.8 percent, 3.4 percent and 4.6 percent respectively. Shares lost 0.39 percent, closing at $25.75.

After the market closed, Tesla (NASDAQ: TSLA) reported its fourth quarter results. The company announced an EPS of $0.33, beating the consensus estimate of $0.21. Revenue of $615.29 million missed the consensus estimate of $657.15. The company sold 6,892 Model S vehicles in the quarter and expects to sell a total of 35,000 Model S vehicles in 2014. Gross margin of 25.2 percent was in-line with expectation but the company said that it could see its gross margin rate improve to 28 percent in the year. Shares were surging 13.5 percent at $220.78 following the results.

After the market closed, Safeway (NYSE: SWY) reported its fourth quarter results. The company announced an EPS of $0.53, beating the consensus estimate of $0.58. Revenue of $11.3 billion missed the consensus estimate of $11.48 billion. The company announced that it is "in discussions concerning a possible transaction involving the sale of the company." Shares were higher by 4.25 percent at $36.08 following the results.

Quote of the Day

“The economy is much closer than normal than what we're used to thinking about over the last five years ... Further declines in inflation would put pressure on Fed to take some sort of policy action." – St. Louis Fed chief James Bullard in an interview with the Wall Street Journal's Jon Hilsenrath.


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