One of the Best Sell-Side Calls in History Is Over: Taking Stock
(Bloomberg) -- It was just two and a half years ago when a 41-year-old industrials research analyst at a bulge bracket bank resumed coverage of a near $300 billion market cap conglomerate that has been a staple of American corporate history for over a hundred years.
Steve Tusa, of JPMorgan, slapped an underweight rating on General Electric, a rarity when you consider the swaths of buys and holds that the sell side usually dishes out, especially for behemoth companies of such stature as GE. In fact, he was the only analyst at the time with an equivalent sell on the stock out of 19, of which 11 had a buy rating.
His initial call focused on fundamental risks, free cash flow that appeared "structurally low," and expensive valuation. And he never wavered, holding that bearish call for years, pounding the table on a plethora of mounting concerns and incrementally weak data points (worries over the Power and Capital units, management changes, dividend cuts, liquidity, etc.) and consistently being at the low end of the Street when it came to estimates and price targets.
Ever since that first bearish call in May of 2016, the stock has spiraled lower by 78 percent, giving up ~$217 billion of market value and crushing many long-only and hedge fund holders along the way.
It all comes to a close this morning as Tusa finally upgraded the stock, and just as it was getting precariously close to breaking its 2009 closing low of $6.66; it actually hit that exact mark on Tuesday only to immediately bounce back to ~$7.00.
He has moved the stock to a neutral in a note titled "Gonna Walk Before They Make Me Run," citing a more balanced risk/reward outlook and removed the stock from JPMorgan’s analyst focus list as a short idea.
"Key to the story, in our view, is the outcome of the ‘known unknowns’ in near term, which are better understood and around which the debate is more balanced, as opposed to being overlooked by most Bulls in the past," Tusa writes. "We now believe a more negative outcome on these liabilities (equity dilution for one) is at least partially discounted, and it’s possible that the company can execute its way through an elongated workout that limits near-term downside."
The stock is acting as it should when an axe in the space removes their huge call, with shares currently ripping almost 10 percent in the pre-market. Though I wouldn’t get too excited just yet, especially since the stock is only looking to open at levels seen since last Friday.
And it’s not like this is some majorly bullish "all clear" buy call. Tusa is still keeping his price target of $6, which remains the lowest on the Street. But while he is still "increasingly assuming" that a material equity raise may be necessary, he does give a scenario analysis where he sees potential for the stock to recoil back to $8.
None of this means Tusa won’t revert back to his underweight rating at some point in the near future (he is also underweight Johnson Control, 3M, John Bean Technologies and Watsco, for what it’s worth). But for now, there’s no doubt in my mind that this call will go down in sell-side research history as one of the best of all time.
Selling the Rip, Again and Again
It happened again, though on a smaller scale than the previous three days. I talked about it in yesterday morning’s Taking Stock, titled "What Makes Anyone Think This Rally Won’t Get Sold?" and like clockwork, the rip gave way and the market faded throughout the afternoon.
The S&P 500 ended up going out at lows after a 35-handle peak-to-trough decline (which compares to reversals of 53, 55, and 88 points in the past three days), and something tells me it would have finished the day in the red if the market had been open for another 10-15 minutes.
Conviction remains absent from the buyers of this tape despite all of the recent positive signals on the trade front, from the Huawei CFO making bail and Trump’s comments about intervening for trade war de-escalating purposes to yesterday’s reports about a revised or delayed "Made in China 2025" plan and word that China made its first sizable purchase of U.S. soybeans since the tariff spat started.
Seemingly good news on the Europe front related to the Italian budget and a "fix" for Deutsche Bank may have also kept U.S. stocks afloat in the A.M., but it didn’t matter once the fade took hold shortly after 1 p.m.
Was there even a catalyst for the pullback? Maybe equities were just following the dip in crude, or perhaps it was jitters ahead of Theresa May’s vote of confidence, or maybe you could chalk it up to the troubling outlooks from trucker XPO Logistics and athletic apparel/footwear maker Under Armour (both stocks tanked ~10%) -- see the chart below for how the latter has really come back down to Earth when compared to bellwether Nike.
Honestly it doesn’t matter, because whether its one reason or twenty, the key point is that the stock market is having a tough time holding on to any sort of gain in its current state. Case in point is the action in the futures just this morning, where the e-minis were up ~20 points at around 3am only to give it all back just a few hours later.
Going by the action and volatility we’ve seen since the early October meltdown, you’d have to assume that there are two scenarios in the near term: 1) we drift lower towards 2,600 on the S&P 500 until that level breaks, at which point finding true support gets extremely hairy, or 2) the market finds its footings and a melt-up ensues towards 2,800 level, which would be its fourth test of that ceiling in about two months.
Sectors in Focus Today
- Apparel names after brutal earnings reactions from Tailored Brands and Oxford Industries, down 27% and down 11%, respectively
- Content delivery companies, like the much larger peer Akamai, after Limelight Networks sinks 24% on weak EPS forecasts
- Pot and CBD-related stocks (New Age Beverages shot up 10% post-market) after the House passed the Farm bill, which removes hemp from the federal list of controlled substances and allows hemp farmers to apply for crop insurance
- Optical networking sector may outperform after Ciena climbs 6% post-earnings
- Airlines and coffee-related names ahead of investor days for Delta and Starbucks
- Software and mass merchants with $100 billion market cappers Adobe and Costco reporting after the bell
Notes From the Sell Side
Besides the massive call on GE, there were several other notes that are worth mentioning.
Citi says a bottom is forming in the semiconductor stocks, "which could be a good entry point into high quality companies where Street estimates have already been cut sharply." They upgrade Marvell Technology to a buy and add Nvidia to the bank’s "Semis Christmas Shopping List."
Baird boosts their price target on outperform-rated Tesla from $411 to $465, which is well above the Street average of $333: "We think TSLA may be in the first positive estimate revision cycle in 3-4 years, and believe estimate revisions, upcoming catalysts, and improving sentiment driven by a shifting narrative could drive shares higher."
And there’s movement in the consumer staples space, where BofAML upgraded Procter & Gamble to a buy on "increased confidence that early momentum in FQ119 can be sustained" and UBS downgraded Coca-Cola to a neutral on the potential for management to back away from long-held global growth targets. The latter bank separately initiated coverage on the entire beverage space, where the buys are Molson Coors and Keurig Dr Pepper and the sells are Monster Beverage, Boston Beer, and National Beverage Corp.
Tick-by-Tick Guide to Today’s Actionable Events
- 7:00am -- CIEN earnings
- 7:00am -- DISCA CEO David Zaslav on Bloomberg TV
- 7:45am -- ECB rate decision
- 8:00am -- EZPW investor day
- 8:30am -- Import price index, initial jobless claims
- 8:30am -- DAL, FLS investor day
- 9:30am -- DHR investor meeting
- 9:45am -- Bloomberg consumer comfort
- 10:00am -- BECN investor day
- 10:30am -- EIA natgas storage
- 11:30am -- HIIQ analyst day
- 11:40am -- UAA CEO Kevin Plank on Bloomberg TV
- 12:00pm -- SBUX investor day
- 1:00pm -- Trump interviewed on Fox News
- 1:00pm -- Oil trader Andy Hall on Bloomberg TV
- 1:00pm -- CSTM analyst day
- 4:05pm -- ADBE earnings
- 4:15pm -- COST earnings
- 5:00pm -- ADBE, COST earnings call
- 9:00pm -- China industrial production, retail sales
©2018 Bloomberg L.P.