Veritable Wasteland Awaits Dip Buyers Anonymous: Taking Stock

(Bloomberg) -- This is what it looks like when a done deal becomes gone zeal.

There were no safe spaces for equity investors Tuesday, with the exception of a handful of unlikely heroes as the tariff threat and trade deal failure risks became a bit more real. There was AIG, higher after its results, a still-recovering insurance giant from the financial crisis (still ~75% below its market value heights in the early part of the century, according to data compiled by Bloomberg). And Fluor, an oil and gas infrastructure servicer that appears to have found a “floor” of its own, hovering near 2005 levels, but up slightly following earnings earlier this month. Newmont Mining also welcomed some buying, given its exposure to the safe-haven yellow metal (peer Barrick just reported EPS above expectations and announced it intends to raise $1.5 billion worth of asset sales through 2020).

There were also a handful of energy and staples names that ended higher, but the key figure is ~90% -- the number of securities in the S&P 500 that ended lower. That figure even includes the 20-handle bounce that occurred in the last 20 minutes of trading -- one of the few consolations in a day that was a slow, drifting decline.

There weren’t many places to hide, but mid-caps, which led large caps Monday, were hit the hardest, with small caps following closely behind. As today unfolds, with futures down another 12 handles, it might be worth looking for other opportunities.

Those same smaller players were the subject of positive Suntrust strategist commentary earlier in the session, with analysts writing that small-caps "have catch-up potential" after their underperformance over the past year. It’s tough to discuss earnings potential when the macro overhang lays waste to the recent highs partially assisted by the better then expected results, but at some point stocks will run up against their fundamentals, and in many cases, that comes down to earnings power, as indicated with some of the "heroes" above. Suntrust cited improving earnings in the group of smaller names, and valuations on par with large caps -- distinctly cheaper than its average premium of 15% since 2004, the analysts wrote. Food for thought when dip buyers were nowhere to be found Tuesday.

Rites of Passage

The bloodletting is also poor timing ahead of some of the more interesting "cult-ish" names names due to report results later today.

• HEAR (the second-best performer in the Nasdaq since the beginning of 2018 (+490% since then) is due to report, and if its results are anything like Electronic Arts last night, we could expect a reversal of the trend in shares recently, down 70% from its August peak. The maker of audio peripherals for video game consoles, investors got behind the name as a key sympathy play for the “Fortnite craze” that unfolded last year. EA’s results sent the video game maker shares up by more than 8% in the pre-market, with game-making peers ATVI and TTWO also higher.
• ETSY is another high flier, up more than 110% over the past 12 months, with many crediting the vision of CEO Josh Silverman for threading the needle of growth and profits while appeasing more socially-conscious supporters. An analyst at DA Davidson once referenced the company as having the best business model in e-commerce. The options implied move around earnings is above its historical average for this quarter, with a move around 13.6% expected, according to data compiled by Bloomberg.
• Of course there is Roku, the device maker facilitating the “cord-cutting” shift in media consumption, which is expected to be even more volatile than ETSY above, with an expected 16% move around earnings (though that is down from its average, believe it or not, of around 24%). How’s that for your stress levels when a company averages the gain/loss of a quarter of its value every 3 months? Hedge funds own about 10% of the company, according to data compiled by Bloomberg. Analysts just yesterday wrote that shares could grow another five fold. Shares more than quadrupled from its IPO in late 2017 through last October, and are 15% off the highs.
• SVMK Inc., the parent co. of SurveyMonkey, boasts no bears on the Street, and just recently regained a close above its record. It had the misfortune of going public in some of the worst market conditions, as the market encountered a steep sell-off in the fourth quarter of last year. The survey and feedback platform boasts a few interesting shareholders, including Tiger Global, with 14% of shares outstanding and Facebook COO Sheryl Sandberg as the number 3 holder, with nearly 8% of shares outstanding, according to data compiled by Bloomberg.
• And don’t forget Lyft shares, which appear to have settled down nearly 2% after a volatile post-market session. Sales exceeded expectations and made “convincing” progress toward profitability, Jefferies wrote. Analysts had been looking for read-through to the upcoming IPO in Uber, and at first glance, a tragedy was averted in its first earnings report. The timing is awkward as Uber drivers begin their strike today to protest low wages and working conditions. But as Eric Newcomer put it last night on Lyft, both sides of the stock bet were validated.

Sectors in Focus Today

• Recent IPOs remain in focus (LYFT, ZM, PINS, SILK, SWAV, BYND) as the macro picture stays fluid. BYND maintained its gains in the face of turmoil, as others, like ZM, failed to keep pace
• 3-D printing names (VJET, SSYS) after DDD results disappointed, with shares dropping more than 15% in the pre-market on a sales miss. This comes just a week after peer SSYS topped expectations
• Travel platforms as TripAdvisor fell after the revenue missed expectations (BKNG already reported, but watch EXPE, SABR, LTRPA)
• Video games makers (TTWO, ZNGA, ATVI) after EA’s results surprised to the upside. Morgan Stanley wrote that the upside in guidance could be attributed to sales of “non-core” titles and raised estimates on expense discipline at the firm
• Asia ETFs, FXI, EWJ, EWY after trade concerns still weigh on sentiment early, with futures still weak
• Apple supply chain (SWKS, AVGO, CRUS, MXIM) after QRVO’s results beat on the top and bottom line. Canaccord is already out with an upgrade on the semiconductor name on newfound China risks given its heavy reliance on Asia

Notes From the Sell Side

U.S. Steel was lowered to sell at UBS, which wrote that near-term capital investments would not reverse the company’s market-share losses in coming years. While the company “is investing significantly in its asset base to remain competitive,” the firm wrote, the result “is negative free cash flow over three years.” The investments “may only modestly reduce costs, and markets for new products may not be proven.” UBS set its price target to $10, the lowest on the Street.

Separately, Goldman Sachs cut its U.S. Steel target to $17 from $22, saying that while the investment plan was a “bold (and cash-absorbing) step,” near-term market concerns would continue to dominate. Goldman has a neutral rating on the stock.

Shares of U.S. Steel are down 4.7% before the bell.

Mosaic Co was lifted to overweight at JPMorgan, which wrote that the stock had a favorable risk profile after being “a poor equity performer over a one, three, five, and ten year period.” Following a myriad of issues – ranging from a weak agricultural cycle to “acquisition missteps” – the company’s “approach to value creation is now simpler,” the firm wrote, with a focus on improving its cost position in the U.S. and Brazil. Analyst Jeffrey Zekauskas, who lowered his target to $27 from $33, said Mosaic’s 2020 results should show improvement. The stock gained 1.8% in pre-market trading.

Tick-By-Tick to Today’s Actionable Events

• Intel investor meeting
• SALT conference in Las Vegas (day 1 of 3); notable speakers include Canyon’s Josh Friedman, Mark Cuban
• MCHP earnings
• 8am-3:15pm -- NEPC conference in Boston
• 8:00am -- MCK earnings call
• 8:30am -- TRIP, MCHP earnings call
• 9:30am -- MTCH earnings call
• 10:30am -- House Energy & Commerce Committee hearing on Oversight of the FTC
• 11:00am -- ABX CN earnings call
• 1:00pm -- MJCO, USAK investor day
• 4:03pm -- ETSY, ROKU earnings
• 4:05pm -- DIS, FOXA, SVMK earnings
• 4:07pm -- HEAR earnings
• 4:20pm -- IAC earnings
• 4:30pm -- DIS earnings call
• 5:00pm -- HEAR, ETSY, SVMK, ROKU earnings calls

--With assistance from Ryan Vlastelica.

To contact the reporter on this story: Brad Olesen in New York at bolesen3@bloomberg.net

To contact the editors responsible for this story: Courtney Dentch at cdentch1@bloomberg.net, Steven Fromm

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