Although optimism is a late cycle phenomenon, history tells us the best returns often come at the end. It has taken eight long years to get here, but Wall and Main Street are finally starting to feel a bit better about the future.
The cyclical upturn that began a year ago has less to do with President Trump and more to do with the global business cycle that bottomed in 1Q2016. Trump simply “turbocharged” the cycle and stoked animal spirits on Wall and Main Street, with tangible effects on the real economy and markets.
The title of our year-ahead outlook as CIO for Morgan Stanley Wealth Management on January 1st (see excerpt at end) was “Are You Ready for Euphoria?”– based on Sir John Templeton’s four stages of the investment cycle: "Bull markets are born in pessimism, grow in skepticism, mature in optimism and die in euphoria." The end of the cycle is often the best. Think 1999 or 2006-07. In a low-return world, investors cannot afford to miss it.
Equity valuation remains undemanding in a low interest rate world. Equity risk premiums (ERPs) have been exceptionally elevated in the post-crisis era of lower growth and inflation, but we may be leaving that era, which means ERPs can and should normalize. Our 12-month base case S&P 500 target is 2700.
Secular Stagnation may be over, further supporting our expectation for falling equity risk premiums. Productivity may have bottomed, fueled by the end of trends that caused the slower growth in the first place: consumer over-indebtedness (housing), the oil bubble's tax on consumers, war on terror, demographics, and bad policy (regulation, lack of fiscal/monetary coordination).
Exceptionally loose financial conditions encourage the shift toward investor euphoria. Meanwhile, our proprietary institutional and retail data suggest US equity positioning is not extreme, and market technicals are in very good shape.
Our sector/style preferences reflect our pro-risk, late-cycle thesis. Financials, Industrials, Energy, and Technology are all overweight. We are underweight Real Estate, Telecom, and Staples. We are neutral Health Care, Materials, Consumer Discretionary, and Utilities. We have a preference for small/mid caps.
Risks: 1) We are late cycle and the Fed is further along than appreciated. This tightening cycle began in 2014 with the tapering of QE, which means there may be less headroom for actual rate hikes this cycle than assumed; 2) Commercial Real Estate and Autos are canaries in the coal mine that could spill over into broader credit markets; 3) Oil prices fall further and/or take longer than expected to recover—the Energy sector is the single largest incremental driver of S&P 500 earnings growth this year; 4) ECB tapering is not expected but it could happen this summer when political risks diminish in Europe.
Gapping down
In reaction to disappointing earnings/guidance: N/A.
M&A news:
In reaction to disappointing earnings/guidance: N/A.
M&A news:
- SNOW -7.1% (to be acquired by a newly-formed entity controlled by affiliates of the Aspen Skiing Company and KSL Capital Partners for $23.75/share in cash)
Other news:
- TXMD -27.4% (provides TX-004HR regulatory update, received letter from the FDA that it identified deficiencies that preclude discussion of labeling and postmarketing requirements/commitments at this time)
- IPCI -23.2% (announces Purdue Pharma, Rhodes Technologies, and Grünenthal GmbH have commenced patent infringement proceedings against the co in respect of its NDA filing for its Rexista product candidate)
- OPTT -20% (files for approx 4 mln share common stock offering )
- CBR -19.4% (files Chapter 11 Protection; secures $45 mln in DIP Financing to fund ongoing operation; agrees to asset purchase agreement with Capgemini)
- HTGM -7.7% (modestly pulling back following last week's strength)
- DRYS -7.1% (discloses common stock purchase agreement update)
- AEHR -5.4% (intends to offer and sell approx. $15.0 mln of shares of its common stock in an underwritten registered public offering)
Gapping up
In reaction to strong earnings/guidance:
In reaction to strong earnings/guidance:
- EVRI +5%, (guides Q1 revs above consensus; alos - seeking to refinance its outstanding $335 mln aggregate principal amount of Senior Secured Notes due 2021)
- ENDP +2.3%, (preannounces Q1 results with revenue in-line with estimates)
M&A news:
- ENRJ +97.4% (pursuing possible strategic transactions involving opportunities both in and outside the oil and gas industry)
- XCO +19.3% (to divest its oil and natural gas properties in South Texas for $300 mln)
- SWFT +15.1% (Swift Transportation and Knight (KNX) announce all stock merger), KNX +2.6%
- XCRA +11.1% (to be acquired by Unic Capital Management for $10.25/share in cash; deal includes go-shop period)
- AKRX +10.8% (confirms discussions with Fresenius SE's (FSNUY) Fresenius Kabi concerning a potential acquisition of Akorn)
Select oil/gas related names showing strength: CHK +2.1%, WLL+2.1%, WFT +2%, MRO +1.8%, PBR +0.9%, CVX +0.9%
Other news:
Other news:
- CYTX +37.2% (FDA has approved an Investigational Device Exemption for a pilot clinical trial to evaluate Cytori Cell Therapy)
- GERN +15.8% (announces that Janssen, Johnson & Johnson (JNJ) subsidiary, has completed the second internal data reviews of IMerge and IMbark)
- RCII +11.7% (announces a new strategic plan focused on its Core US biz)
- SDRL +5.2% (modestly rebounding following last week's 58% decline)
- MNKD +4.5% (entered into a Change of Control Agreement with each of its executive officers)
- BBL +3.8% (in sympathy with BHP shares)
- IGC +3.2% (filed patent applications for IGC-501 in Canada, Israel, and Europe in support of its global cannabis-based combination therapy development initiatives)
- BHP +2.9% (Elliott funds sends letter to BHP's Board that outlines plans to unlock shareholder value)
- BLDP +2.3% (continued strength)
- HTBX +1.2% (Heat Biologics sent Pelican Therapeutics a funding commitment for $910,231 pursuant to Stock Purchase Agreement
Analyst comments:
- CLSN +13% (resumed with a Buy at Rodman & Renshaw; tgt $1.50)
- TSLA +2.3% (upgraded to Overweight from Neutral at Piper Jaffray)
- CY +1.6% (upgraded to Buy from Neutral at SunTrust)
- HRI +1.3% (upgraded to Overweight from Sector Weight at KeyBanc Capital Mkts)
- SKX +1.2% (upgraded to Neutral from Negative at Susquehanna)
- PF +0.8% (upgraded to Overweight from Equal-Weight at Morgan Stanley)
- ULTA +0.7% (upgraded to Buy from Hold at Loop Capital)
Straight Path Comms to be acquired by AT&T (T) for $95.63/share in an all-stock merger intended to qualify as a tax-free reorganization (shares halted)
The transaction, which was approved by the Board of Directors of both companies, brings Straight Path's previously announced strategic alternatives process to a conclusion and maximizes Straight Path shareholder value. AT&T will acquire 735 mmWave licenses in the 39 GHz band and 133 licenses in the 28 GHz band. These licenses cover the entire United States, including all of the top 40 markets.
- The transaction has a total value of $1.6 billion which includes liabilities and amounts to be remitted to the FCC per the terms of Straight Path's January 2017 consent decree. Straight Path shareholders will receive $1.25 billion, or $95.63 per share, which will be paid using AT&T stock.
On STRP US / ATT Deal
Del Monte Pacific considering American arm listing after turnaround – exec
Del Monte Pacific [PSE:DMPL, SGX:D03], the Philippines-based food and beverage company, is considering a US listing of its North American subsidiary Del Monte Foods Inc (DMFI) after it turns around, Executive Director Edgardo M Cruz, Jr said on the sidelines of a press briefing on 7 April in Manila.
He declined to give the timetable and deal size if the company pursues this since, "it is difficult to conduct an IPO if your house is not yet in order."
A source familiar with the situation said DMFI may be able to turn around its finances within two years.
This news service reported in September 2015, citing sources, that Del Monte Pacific was eyeing a New York Stock Exchange listing once it has completed the consolidation of its US arm. A US listing would give the company prominence and would change the perception that Del Monte Pacific is an "Asia-only" company, as reported.
Del Monte Pacific will be embarking on a 12-month streamlining program to bring DMFI back to profitability, as disclosed to investors.
Once the parent company improves its balance sheet and DMFI's profitability, it is also considering brand acquisitions in the US and Asia Pacific as long as these are within Del Monte Pacific's health and wellness platform, Chief Operating Officer Luis Alejandro said, without elaborating on the deal size.
While Del Monte Pacific is rationalizing its US operations, it is not keen on selling any of its American brands -- Del Monte, Contadina, S&W and College Inn – despite approaches from possible suitors, Treasury Head Augusto Garcia told this news service. He said potential buyers think the company may want to carve out some of its brands for disposal, similar to what the former owner of DMFI did before exiting the business.
Private equity fund KKR & Co, the previous owner of Del Monte US operations, only wanted the pet food business. It carved the pet food unit out and sold the rest of what was then called Del Monte Foods Co to Del Monte Pacific for USD 1.675bn in 2013, he said.
The Del Monte Pacific owner, Jose Campos, Chairman and CEO of NutriAsia Pacific, is not known to let go of brands, especially since none of its US brands are underperforming to a level that would warrant a spin-off, Garcia noted.
The parent may, however, dispose some manufacturing plants and equipment to make DMFI asset-light and improve its margins, he added.
DMFI has 12 manufacturing plants in the US and according to the parent's COO, they have already shut down their plants in Wisconsin and North Carolina after discovering that these were inefficient.
Some supply chain and back office operations were sent offshore, mostly to the Philippines, to save on costs, Alejandro continued. It is also reviewing its low margin toll manufacturing business, which makes white label food products for retailers like Walmart, Costco, Target and Safeway.
Meanwhile it is tapping e-commerce opportunities and is now in talks with Amazon for online distribution of its products, Alejandro added.
For nine months of FY2017 ending January 2017, DMFI's sales decreased by 6%, dragging the entire Del Monte Group's sales down by 2% to USD 1.7bn, according to the company's presentation to investors on 22 March. The North America operations contribute about 80% of total group sales.
It raised USD 200m from the sale of preferred shares in the Philippine Stock Exchange last month to help the group deleverage post-acquisition of DMFI.