Gapping down
In reaction to disappointing earnings/guidance:
- TUFN -26.8% (lowers revenue and operating profit guidance for Q4), BBBY -11.1% (also suspends full year guidance), GMED -6% (guides Q4 revs slightly above but FY20 guidance below), KSS -5.8%, SMPL -4.8%, LB -4.6%, JCP -3.3%, HUM -0.5%
Select metals/mining stocks trading lower:
- BBL -1.2%, SLV -1%, BHP -0.6%, RIO -0.6%, GDX -0.5%
Other news:
- IPHA -7.6% (provided update from regulatory agencies on Lacutamab TELLOMAK trial)
- MRTX -5.5% (files for $250 mln share common stock offering)
- AMAG -5.2% (CEO William Heiden plans to step down, announces results of strategic review, provides downside FY 20 revs guidance)
- TPVG -5% (priced offering of 5 mln shares of common stock)
- OSMT -3.7% (prices 6 mln shares at $5.00/share)
Analyst comments:
- FATE -3.1% (downgraded to Market Perform from Outperform at BMO Capital Markets)
- DXC -1.5% (downgraded to Underweight from Equal Weight at Wells Fargo)
- ADM -1.4% (downgraded to Sell at Monness Crespi & Hardt)
- EXLS -1.2% (downgraded to Underweight from Equal Weight at Wells Fargo)
- EBAY -1.1% (downgraded to Underperform from Hold at Jefferies)
- MANT -0.9% (downgraded to Underweight from Equal Weight at Wells Fargo)
- LITE -0.6% (downgraded to Neutral from Buy at UBS)
Gapping up
In reaction to strong earnings/guidance/SSS:
- CHS +17% (raises Q4 outlook; CFO has resigned), AZZ +11.3%, ADMA +8.9%, FOLD +5.7%, HELE +5%, AXNX +4%, BKE +3.2%, JEF +2.5%, LNN +2.4%, PCRX +2%, COST +0.9% (reports comps of +9%), T +0.6%
Select financial China related names showing strength:
- BIDU +2.2%, BABA +1.7%, WB +1.4%, JD +1.2%, ASHR +0.5%
Other news:
- AGTC +65.6% (reported positive interim six-month data from its ongoing Phase 1/2 clinical program in X-linked retinitis pigmentosa)
- DBVT +21.4% (reports positive top-line results for Phase 3 PEPITES trial)
- NBRV +8.1% (FDA acknowledges receipt of NDA resubmission for CONTEPO)
- MIRM +4.8% (prices offering of 2.4 mln shares of common stock at $20.00 per share)
- APLS +2.5% (prices offering of 9.5 mln shares of its common stock at $37.00/share)
- RGNX +1.1% (corporate update)
- MRK +0.5% (gets FDA approval of KEYTRUDA for certain patients)
- MDB +0.5% (files for $750 mln in convertible notes offering), .
Analyst comments:
- AMD +2.3% (upgraded to Buy from Neutral at Mizuho)
- MDGL +2% (upgraded to Buy from Neutral at UBS)
- BDSI +1.8% (initiated with an Overweight at Piper Sandler)
- APTO +1.5% (initiated with an Overweight at Piper Sandler)
- GS +1.4% (upgraded to Buy from Neutral at BofA/Merrill)
- CTSH +1.3% (upgraded to Overweight from Equal Weight at Wells Fargo)
- NATI +1.3% (upgraded to Outperform from Neutral at Robert W. Baird)
- CDK +1.2% (upgraded to Overweight from Equal Weight at Wells Fargo)
- K +1.1% (upgraded to Outperform from Market Perform at BMO Capital Markets)
- C +1.1% (initiated with a Buy at DA Davidson)
- KO +0.9% (upgraded to Outperform from Neutral at Credit Suisse)
Early premarket gappers
- Gapping up:
- CHS +24.5%, DBVT +22%, NBRV +11.4%, HELE +6.2%, MIRM +6%, AZZ +3.9%, BIDU +2.6%, JEF +2.5%, BABA +1.9%, LNN +1.9%, WB +1.3%, JD +1.2%, ASHR +0.8%, COST +0.8%, MRK +0.7%, OSMT +0.6%, T +0.5%
- Gapping down:
- TUFN -29.7%, BBBY -8.3%, MRTX -6.4%, GMED -6.4%, KL -2.3%, APLS -2%, GOLD -1.1%, BBL -1.1%, SLV -0.9%, GDX -0.8%, GLD -0.7%, BHP -0.6%
SEC drops insider trading allegations over Anadarko deal
US regulator had frozen assets of unknown traders who bought shares in oil group
The US Securities and Exchange Commission has quietly dismissed allegations of insider trading linked to the takeover of Anadarko Petroleum last year.
The securities regulator had obtained an asset freeze in April on $2.5m of alleged illicit profits made by unknown traders of Anadarko call options.
At the time, Anadarko was the target of a bidding war between Chevron and Occidental, which ultimately succeeded in acquiring the oil and gas exploration company.
Last month, SEC lawyers told a federal court in Manhattan the SEC was dismissing the case without prejudice, meaning it could file similar claims again in the future, according to previously unreported court records.
The dismissal came after the commission discovered the identities of “persons in the UK and Russia” who were responsible for the trades, according to a November court filing that said the SEC needed a few more weeks to decide whether to name defendants or dismiss.
“My guess is they didn’t have enough facts or evidence connecting the traders to a tip so they decided they needed to dismiss the case,” said Kyle DeYoung, a partner at Cadwalader who was previously an SEC enforcement and litigation counsel.
A SEC spokeswoman declined to comment beyond the filings.
The case came in the midst of a high-profile battle for Anadarko, with Chevron first agreeing a $50bn takeover of the company and then Occidental gatecrashing the sale with a $55bn offer.
The trades at issue involved the purchase of 1,650 out-of-the-money Anadarko call options ahead of Chevron’s April 12 announcement it had agreed to buy the company. The SEC announced the asset freeze on April 29, the day Anadarko suggested it would accept Occidental’s bid. The $2.5m targeted by the SEC was released on December 5.
SEC lawyers told the court in April that the trades were “highly suspicious” because of the “timing, size, nature, and profitability of the defendants’ trades, as well as the lack of prior history of significant Anadarko options trading in the subject accounts”.
In the following months, the SEC investigated the circumstances of the trades, repeatedly asking the court to extend the asset freeze while it conducted the probe.
Investigators obtained trading records, interviewed witnesses and received information from Chevron, Occidental and Anadarko in the course of the probe, according to the November filing.
The trades were made through UK-based accounts at Cowen, the financial services group, and a Cyprus account at Renaissance Securities (Cyprus) Limited, the SEC had announced in April.
The Cowen trades were “placed on behalf of a foreign hedge fund” that is a client of Sun Global Investments, a UK brokerage firm, while the Renaissance trades were “requested” by a Cyprus subsidiary of Russia’s Veles Capital “on behalf of a Cyprus-based client”, the November filing said, noting that both Sun Global and Veles had provided documents to the SEC.
New ETFs Fight to Escape Shadow of BlackRock, Vanguard
Less than half of ETFs experience asset growth; a ranking tool raises managers’ ire
It is becoming increasingly hard to break into the $4.3 trillion market for exchange-traded funds.
A rising number of fund closures has deterred financial advisers from backing new entrants, reinforcing a cycle that has allowed bigger funds managed by established players to keep growing. Many other ETFs are shrinking—and potentially on a trajectory to eventual closure—if they can’t accrue enough assets to stay in business.
Of 1,662 ETFs tracked by investment-research firm CFRA LLC over a five-year period through August, 24% shut down and an additional 30% experienced a decline in assets. Most of the fastest-growing ETFs were broad, low-cost products managed by industry juggernauts BlackRock Inc., Vanguard Group and State Street Corp., which together control 81% of all ETF assets.
ETFs generally are easy to trade. They change hands on exchanges like a stock and tend to track various stock and bond indexes.
But the raft of closures has sent a chill through the money-management community. Financial advisers worry that if they pick a small fund it might close. Recommendations that don’t pan out are awkward to explain to clients, who might also face an unexpected tax hit when a fund closes and returns their money.
Analysts say those concerns have contributed to the money imbalance. Data providers such as FactSet Research Systems Inc. have added fuel to the fire, scoring individual funds based on their risk of closure. That has rankled some money managers who argue such lists perpetuate the industry’s bifurcation.
“You need to have deep pockets to keep these funds going,” said Scott Sacknoff. In 2017, Mr. Sacknoff launched a fund, the SerenityShares Impact ETF. It closed last year.
Mr. Sacknoff’s fund was an early entrant into the field of socially responsible investing. When backtested, it beat the broader stock market in three of the previous five years. Electric-car maker Tesla Inc., health-care company DaVita Inc. and Google parent Alphabet Inc. were some of the constituents.
It gathered roughly $6 million in assets at its peak and charged a 0.5% fee, drawing money mostly from small wealth-management firms and other individual investors. But after two years pitching the fund, it remained unprofitable, and Mr. Sacknoff shut it down in March 2019.
The problem wasn’t the strategy, he said. Instead, investors largely avoided the fund because it was too small.
“Everyone who looked at our materials and methodology loved it, saying we were solving a problem,” Mr. Sacknoff said. “But financial advisers said, ‘We can’t invest in you.’ At the end of the day it came down to our market cap.”
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Prior to 2008, new funds had an easier time getting off the ground. Many of the offerings launched then were strategies that gave investors an opportunity to match the returns of indexes like the S&P 500, rather than beat them.
There is now a debate within the ETF industry as to whether the market has become oversaturated. More than 2,100 ETFs compete for a slice of the pie, ranging from broad funds such as the iShares Core S&P 500 ETF, which has $201 billion in assets, to more nuanced offerings that hedge currencies, bet on low volatility or focus on investment themes like pets.
Analysts say investors have a preference for the established players. Just 20 ETFs of the 1,662 tracked by CFRA accounted for 44% of the industry’s asset growth over the five-year stretch, and 18 of them were low-cost funds managed by BlackRock and Vanguard.
Part of the driving force: Financial advisers use brands as a proxy for quality, Cerulli Associates said in a report on the ETF industry published this week. But that puts money managers at risk of missing out on other opportunities, Cerulli added.
Michael Cornacchioli admits assets under management are his first consideration when choosing ETFs.
Mr. Cornacchioli, a vice president of investment strategy at the $6.7 billion wealth-management firm Clarfeld Citizens Private Wealth, said he screens out funds with less $1 billion in assets if he is considering a new large-cap investment.
“Assets in a fund is probably the most important element in determining its viability,” he said, adding he gives a greater preference to firms like BlackRock and Vanguard.
Data providers have tried to help money managers better decipher which funds are headed for an early death. FactSet’s ETF Closure Risk tool, which is available on ETF.com’s fund database, assigns a closing probability rating, from high to low, based on factors including whether a firm has closed other funds, fund flows and assets.
A year before Mr. Sacknoff closed his fund, FactSet’s ETF tool had assigned a high closure risk to the fund, in part because of its low asset level.
Noah Hamman, chief executive of AdvisorShares Investments, has faced a similar threat. His actively managed AdvisorShares Dorsey Wright Micro-Cap ETF has collected $2.4 million in assets since its 2018 launch and charges a relatively hefty fee of more than 1%. That is partly why FactSet’s methodology assigned a high closure risk for the fund.
Mr. Hamman said the fund has beaten its index, the Russell Microcap benchmark, by 9 percentage points over the past 12 months, proving the strategy works even if inflows have fallen below expectations.
“It doesn’t help to have those types of services out there,” said Mr. Hamman, referring to tools like FactSet’s. “I have no intention of closing that fund.”
Elisabeth Kashner, director of ETF research at FactSet, said the tool is conservative in nature because clients have said they would rather avoid a fund that appears likely to close, even if doesn’t, than invest in one that shuts down.
“We chose to flag closure risk aggressively, in keeping with a duty to warn, because we believe investors dislike surprises,” said Ms. Kashner. “Asset managers aren’t always super happy with that decision. They feel there’s an undeserved shadow hanging over their fund.”
Grubhub: empty stomach
Grubhub, the $5bn food delivery company, has put itself up for sale, the Wall Street Journal reported Wednesday. Its shares rocketed on the news, closing the day at $54.75 — up 12.58 per cent.
The news isn’t that surprising as Grubhub had a difficult 2019. During the year, its market value almost halved due to pressures from aggressive competition in the form of Uber and DoorDash, slowing market growth and what management described as “promiscuous customers”. Very Victorian.
The question is though, what price might a perspective buyer pay for the company?
Fortunately, we have some sort of a benchmark. In August, Square — Jack Dorsey’s payments company — announced it was selling its much smaller food delivery business, Caviar, to DoorDash for $410m.
The revenue multiple DoorDash paid for the money-losing Caviar, including Square’s revenue guidance for 2019’s fourth quarter, came in at 2.58 times:
So that might give us some clue as to what Grubhub might sell for, if there’s a willing buyer.
Before we run the numbers for Grubhub, a few caveats: we don’t know whether DoorDash assumed any debt from Caviar (which would make the equity value, and the revenue multiple, lower) and Grubhub, unlike Caviar, is also profitable. Even if those profits, which totalled $9.2m on $971m of revenue in the first nine months of 2019, are diminutive.
Now that’s out the way, let’s figure out the equity value. A revenue multiple of 2.58, on Grubhub’s estimated 2019 revenues of $1.3bn (including the middle of guidance for the fourth quarter), would bring the total deal value to $3.3bn.
However, a potential acquirer will factor in Grubhub’s $186m of net debt (including lease liabilities, thanks IFRS 16), which marks the equity value down to $3.15bn.
On a fully diluted basis, that’s only $33.98 per share — 38 per cent below where Grubhub’s stock closed yesterday. If you’re wondering how a private equity buyer might look at this price, the enterprise value to ebitda multiple (again, including fourth-quarter guidance) is also pretty high for a slowing, low margin business: 33.6x.
We wonder who will bite? Uber has been mentioned, but by all accounts its Eats division is facing similar pressures to Grubhub. Regardless, it seems there’s a good chance the price will be far below investors’ current expectations.
China says pneumonia outbreak linked to coronavirus
State media says Sars-type virus likely cause as concern grows ahead of lunar new year holidays
A pneumonia outbreak that has infected more than 50 people in the Chinese city of Wuhan was caused by a coronavirus, which is the same kind of pathogen involved in the deadly Sars outbreak in 2003, Chinese state media said on Thursday.
The outbreak, which comes ahead of the lunar new year holidays in late January when millions of Chinese will be travelling to see their families, has caused alarm in the region. The virus has prompted widespread concern on Chinese social media and triggered memories of the 2003 outbreak of severe acute respiratory syndrome, or Sars, that infected more than 8,000 people worldwide and killed more than 700, including almost 300 in Hong Kong.
The World Health Organization said, in a statement issued on Thursday, the Chinese authorities believed the disease “does not transmit readily between people”, but noted that it could cause severe illness in some patients.
Chinese health officials said on Sunday that they had identified 59 cases, with seven patients in critical condition. There has been no further statement on the possible spread of the disease in China, nor on the health of those who were severely affected. However, state television said on Thursday that eight of those who had been hospitalised had been treated in Wuhan, “cured and discharged”.
Hong Kong, activated its “serious” response mechanism to the disease last week and like other parts of the region has ramped up screening at airports. Hong Kong legislators have called for more transparency from mainland Chinese health authorities about the outbreak.
Officials in China covered up the Sars outbreak for weeks before the growing death toll forced them to reveal the epidemic. International criticism of Beijing’s handling of the outbreak led to wide-ranging reforms to disease control methods in the country.
Sophia Chan, Hong Kong’s food and health secretary said on Wednesday that there had been 38 suspected cases in the territory. However, she said none had been confirmed as related to the Wuhan outbreak, adding that 21 patients had already been discharged from hospital.
The virus broke out between December 12 and 29. Some of those infected were employed at a market selling seafood and live animals in Wuhan that has since been closed for disinfection, according to Chinese disease control officials.
“The reported link to a wholesale fish and live animal market could indicate an exposure link to animals,” the WHO said earlier this week.
Coronaviruses in humans usually cause relatively harmless respiratory infections. However, two are deadly — Sars and Middle East respiratory syndrome (Mers), which have each caused hundreds of deaths.
Grubhub Considers Strategic Options Including Possible Sale
The move comes amid increased competition and a recent decline in the food-delivery provider’s shares
Grubhub GRUB 12.58% Inc. is considering strategic options including a possible sale amid increased competition and a recent decline in its shares, according to people familiar with the matter.
The Chicago food-delivery provider has tapped financial advisers for help with a review of potential moves that could include a sale of the company or an acquisition, the people said. Also on the menu is what to do in case an activist shows up in the stock, they said.
The review is at an early stage and it is possible nothing will come of it.
Grubhub, which went public nearly six years ago, has a market value of roughly $5 billion. That is down from its peak of more than $13 billion just over a year ago, before competition from other delivery startups heated up and eroded the company’s market-share lead and results.
Grubhub shares rose as much as 19% on Wednesday after The Wall Street Journal reported on the review. They closed at $54.75, up nearly 13%.
Competition in the nascent food-delivery industry, which ferries takeout orders from restaurants to homes and businesses, has intensified as newcomers try to lure customers and grab market share with discounts and promotions. At the same time, restaurants are pushing back against the fees delivery companies charge, squeezing Grubhub and its competitors. Investors and analysts have said the industry needs consolidation, with many seeing room for little more than two major players.
Grubhub on Oct. 28 cut its revenue and profit forecasts amid slowing customer growth, sending the shares down 43% the following day and helping prompt the review. Its third-quarter adjusted per-share earnings dropped 40% from the year-earlier period. The stock had gained back most of that ground after Wednesday’s rise.
Should Grubhub pursue a merger, the industry pioneer has several rivals it could join forces with. They include DoorDash Inc., Postmates Inc. and Uber Technologies Inc.’s Uber Eats division. DoorDash and Postmates have each explored stock-market listings and merging with a company that is already public could serve as an alternative to an initial public offering.
In a sign Uber investors welcome the possibility of consolidation, the ride-hailing company’s shares rose more than 3% Wednesday. Uber Eats has been losing money and its parent company’s Chief Executive Dara Khosrowshahi has said its delivery business plans to leave markets where it isn’t the No. 1 or 2 player.
The arrival of a slew of venture-backed companies has created stiff competition in the delivery industry. Those companies and others expanded rapidly across the U.S., amassing fleets of gig-economy drivers, offering discounts and adding scores of restaurants to their platforms. Restaurants sometimes were added before striking deals, a controversial move Grubhub is now seeking to emulate after its market share slipped.
DoorDash has expanded quickly and had an industry-leading 37% of U.S. food-delivery sales in November, according to credit-card data from research firm Second Measure. Grubhub, with 30% market share in the survey, had been the top provider early last year.
“Promiscuous” diners have become accustomed to using more than one delivery app, which Grubhub Chief Executive Matt Maloney has called out as a challenge for his company. The percentage of Grubhub users only on that platform dropped to 24% in October from 84% in January 2017, according to Cowen & Co. surveys.
Mr. Maloney told the Journal in October that the industry is “in a weird bubble that is about to burst.” He also said private investors have become more skeptical in the wake of the abortive IPO of WeWork parent We Co. That has dented the valuations of Grubhub’s private peers and may make them more primed for deals.
Uber and DoorDash are both backed by SoftBank Group Corp. The Japanese conglomerate is known for flooding pre-IPO companies including WeWork with cash and spurring them to focus on expansion over profits.
Should there be a transaction, it would add to recent deal-making in the industry. British food-delivery company Just Eat Plc recently attracted competing takeover bids from Dutch companies Takeaway.com NV and Prosus NV, with Takeaway.com’s bid currently looking likely to prevail.
Grubhub was founded in 2004 and went public in early 2014 after merging with New York-based Seamless Inc. The company operates in the U.S. and London. In recent years it has been an active acquirer of smaller businesses as it builds out freight and software capabilities.
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