Hedge Funds’ $6 Billion Endgame Starts Today: Taking Stock

(Bloomberg) -- A lot of money was on the line on “Macro Wednesday,” as the two most important central banks unveiled their views on the world order. But with that out of the way, and the events largely devoid of wave-making (growth panic was arguably put to bed), the “Happiest Place on Earth” will put its $210 billion in market capitalization under the microscope later today (and >$6 billion worth of hedge fund ownership).

The Walt Disney Company, owner of the Marvel superhero franchise that crashed ticket sales websites recently when its effectively guaranteed blockbuster, “Avengers: Endgame” became eligible for purchase, is due to put on its first investor day in 5 years later today. That same movie enthusiasm has leaked on to Wall Street too, with some of the strongest bullish sentiment in the name going back to late 2015.

Hedge Funds’ $6 Billion Endgame Starts Today: Taking Stock

Nearly 70% of the ~30 analysts boast a buy a rating in the theme park operator (a side of its business that is oft-overlooked, despite accounting for 44% of its revenue and nearly 60% of operating income in its latest quarter, according to data compiled by Bloomberg). Some recent upgrades in the name describe the upcoming catalyst as a “deck-clearing event.”

BMO in its upgrade wrote that the stock has downside protection and highlighted a potential restart of a buyback program, launches of new themed lands and the launch of Disney+ by the end of the year. The streaming service will truly be the focus of the event, as the media conglomerate seeks to push back against competitors in the content space (you also can’t forget the details concerning the Fox acquisition, which Cowen wrote was still a concern). Loop Capital estimates that the Disney+ offering may reach 9 million subscribers by the end of the first year, but is skeptical the company will provide guidance at the event today. Read a full preview here and an options-focused preview can be found here.

A smaller analyst day that may have flown under the radar but that attracted some attention from the Street was productivity software provider Atlassian. Shares are up nearly 50% since November (it now boasts a $27 billion market value), and, despite being a “unique asset,” as Morgan Stanley analysts described in a note after the event earlier, “perfection looks priced in.” No surprise from the underweight-rated analysts there, but slightly less bearish Raymond James highlighted the “positive” feedback from resellers, who described the company pricing as “low” with room to raise prices. They too, raise issues with valuation and competitive risks from companies like ServiceNow. Buy-rated Mizuho analysts wrote that they came away from the event “even more confident” that growth will continue to be strong, highlighting the firm’s approach that is “almost impossible to replicate.”

It’s a Small World After All

When you’re not paying attention to the mega-conglomerates, you’ll notice small cap names have again leapt out in front in performance despite the stumble in March.

Hedge Funds’ $6 Billion Endgame Starts Today: Taking Stock

Breadth in Wednesday’s session lent some credibility to this, with more than 5 advancers to every 1 decliner in the Russell 2000. The S&P 500 saw much narrower disparity, with 2 advancers for every decliner, but given the small gain on the day (less than 0.4%), you can see most of the heavy lifting was conducted by the small names in the market capitalization weighted index. And it was not only the small caps, but growth names within the small caps space did well Wednesday, as the RUO Index and the S&P 600 were among the top performing sub-sectors.

Hedge Funds’ $6 Billion Endgame Starts Today: Taking Stock

It will be interesting to see how sentiment forms up here, given where the IWM ETF (Russell 2000) is trading. Baird analysts in a note last week identified $157 as the level where, if exceeded, would “signal the all clear” for the market in their views.

Sectors in Focus Today

  • Casinos (WYNN, PENN, BYD, RRR) as the NY Post post reported the Caesars Entertainment board approved a sales process
  • Large banking names ahead of key reports from Wells Fargo and JPMorgan Friday, as Credit Suisse provided insight into first quarter trading conditions earlier when it discussed that its Asia-Pacific trading business will break even in 1Q after prior years of losses
  • Ride-hailing related firms (LYFT, MFIN), again, after LYFT’s 11% decline Wednesday. The decline was largely attributed to rival Uber’s suspected IPO filing which could come as early as today, according to people familiar
  • Industrial distributor names (FAST, MSM, GWW) as FAST’s results follow MSC Industrial from Wednesday. MSM disappointed analysts on a key measure: gross margin outlook, while FAST thus far has exceeded analyst estimates with flat gross margin y/y
  • Hardline retail and household goods names (WSM, PIR) as BBBY’s earnings report was volatile, first spiking and then ending lower by 11% in the post market. It was a mixed report with beats on the top and bottom line, portions of the 1Q forecast and miss on comp. sales and a decline in gross margins y/y

Notes From the Sell Side

Chipotle Mexican Grill shares have surged nearly 90% off a December low, with the stock closing at its highest since October 2015 on Wednesday. The rally reflects “improved visibility for powerful [same-store sales] and margin drivers,” according to Jefferies, which added that the restaurant chain’s valuation was now “full,” downgrading the stock to hold from buy. Analyst Andy Barish still sees “strong fundamental drivers” supporting the company – though “beef and marketing headwinds are likely” and there is near-term risk to sentiment “related to avocado prices” – and he raised his price target by $100 to $700. While the risk-reward is now balanced, he wrote, “drivers related to digital/delivery, loyalty, marketing, improved operations/people metrics, and new product news could spur some of the best SSS in the industry.”

U.S. Steel received a double downgrade in the latest sign of worsening sentiment surrounding the industry bellwether. BofAML cut its view to underperform from buy, warning of “worse near-term U.S. market conditions than we anticipated.” Not only have recent price increases “not stuck,” the firm wrote, citing channel checks, but hot rolled coil has “retreated to its lows of the year.” Without a “more confident” view on prices in 2019, there are limited catalysts for the stock. BofAML affirmed its thesis that a “Steelmageddon” would materialize in 2020 and 2021, just two days after Credit Suisse issued its own downgrade and warned of a “Sheet Tsunami,” or a flood of supply hitting the market and weighing on prices. Shares of U.S. Steel are down 4.6% before the bell, putting them on track for their sixth straight negative session.

Tick-By-Tick to Today’s Actionable Events

  • Masters Tournament starts at Augusta National (Patrick Reed defends his title, Tiger Woods tees off at 11:04am)
  • 8:00am -- CECO analyst meeting
  • 8:10am -- Trump’s Federal Reserve board nominee Stephen Moore on Bloomberg TV
  • 8:30am -- March Producer Price Index
  • 8:30am -- Weekly Initial Jobless Claims, Continuing Claims
  • 9:00am -- APOG earnings call
  • 9:30am -- Fed’s Clarida speaks at Annual IIF Meeting in Washington
  • 9:40am -- Fed’s Bullard speaks on Economy and Monetary Policy
  • 9:45am -- Bloomberg April U.S. Economic Survey; Weekly Bloomberg Consumer Comfort
  • 10:00am -- FAST earnings call
  • 11:45am -- ICPT Investor meeting
  • 5:00pm -- Disney Investor day

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