Barron’s Weekend Summary: Not long ago oil companies appeared to be heading toward insignificance. But that’s no longer the case: Exxon is now a stock market star
Cover Story:
-Not long ago oil companies appeared to be heading toward insignificance. But that’s no longer the case: Exxon is now a stock market star, with a gain of more than 60% in the turmoil of the past 12 months. Chevron is up nearly 50%. Instead of being destroyed by the energy transition, Big Oil has emerged in a remarkably strong position to profit from it. Because of deals signed in just the past year, companies like BP, Shell, Exxon, and Chevron are building enough offshore wind farms to supply millions of homes on the East Coast with electricity and are preparing to produce hundreds of millions of gallons of fuel made from plants, garbage, and kitchen grease. They’re increasingly confident that they can get greener without sacrificing profits.
Interview:
-Barron’s interviews David Herro. Herro oversees $26B as chief investment officer for international equities at Harris Associates. He is known for digging for quality stocks in sectors and countries that others shun. His diligence has helped the $17B Oakmark International fund, which he co-manages, beat 98% of its peers over the past 15 years, with an average annual return of 2.2%. But Herro is getting pushback from clients about investing in Europe. That isn’t surprising, given a looming energy crisis triggered by the war in Ukraine, plus fiscal strains in Italy and financial trouble in the United Kingdom. Their reluctance makes this longtime value investor only more positive on the region.
Tech Trader:
-The tech sector continues to face fierce headwinds from the strong dollar, softening consumer spending, rising interest rates, stubbornly high inflation, and a potential recession. The market is yearning for some hint that the worst is over, but don’t hold your breath. This coming week, the world’s largest tech companies all report their September-quarter financial results. Alphabet, Microsoft, Meta Platforms, Apple, Amazon.com, and Intel, with special guest appearances from SAP, Shopify , Spotify , Seagate , ServiceNow, and Corning . Every one of these companies reports results in a three-day span, from Tuesday to Thursday. At least 25% of the S&P 500’s market value will be reporting during the stretch. The wave of reports could determine the next swing in stock prices. Paul Meeks, portfolio manager with Independent Solutions Wealth Management, has a long list of tech stocks he’d like to buy, but he’s waiting for lower lows. Meeks sees downward revisions ahead and worries that conditions in the March and June quarters could be even worse than the last two quarters of 2022.
The Trader:
-When in doubt, buy quality stocks—and there’s certainly a lot of doubt in the market right now. It might not feel that way after this past week’s rally. The DJIA rose 4.9%, its largest weekly gain since June, after The Wall Street Journal reported that Fed members are discussing when to slow down the pace of interest rate hikes. Needless to say, such a shift, if it were to occur, would likely be good for stocks. Still, those slowdown hopes remain hopes, not a likelihood. The consumer price index, after all, rose in September and is up more than 8% year over year, and the federal-funds futures market is predicting a peak rate in the ballpark of 5%. The 10-year Treasury yield is trading at just under a multiyear high, and rate hikes are already having an effect on earnings. It remains to be seen whether they will cause a recession. So is the recent rise the start of a new bull market or just another bear-market rally? If you can’t make up your mind, consider quality stocks. Barron’s suggests five quality stocks to consider based on relatively large weightings in some of the best ETFs now. Companies that made the list include Target, Exxon Mobil, Johnson & Johnson, Mastercard and Coca Cola.
-Faced with dwindling cash on its balance sheet, a tough environment for raising capital, and a falling stock price, home-internet start-up Starry Group Holdings is battening down the hatches. That means laying off half its staff, slowing its network expansion, cutting discretionary spending, and withdrawing 2022 guidance. Starry also released third-quarter operating metrics on Thursday showing that the business works—it just can’t grow without raising additional capital.
Features:
-Before Tesla reported third-quarter earnings this past week, investors had been hoping they would allay concerns that had been growing since the company released second-quarter numbers three months earlier. They did not. While earnings topped expectations, third-quarter deliveries, sales, and profit margins all fell short of Street projections. Tesla shares slumped 6.7% following the release, putting them down 22% since the end of September, their second-worst start to a quarter since the first few weeks of 2016. But for all the bad news, Tesla sees massive growth in 2023, as new plants in Germany and Texas continue ramping up. Tesla’s long-term bets on batteries and new vehicles should also help it lower costs and boost sales, though it remains to be seen whether growth comes at the expense of profits.
-Robert Half International’s quarterly results disappointed investors, but the staffing firm had more concerning news than its earnings—new hiring is cooling. The accounting and finance talent provider reported $1.53/share in earnings for the third quarter after markets closed on Thursday. That is lower than the consensus call of $1.62/share among analysts tracked by FactSet and indicates no growth in profit from a year ago. Revenue of $1.8B was below expectations of $1.92B.
European Trader:
-It’s easy to tar all semiconductor makers with the same brush. It also creates potential buying opportunities. That’s where German chip maker Infineon Technologies comes in. The Munich-based semiconductor giant designs, manufactures, and supplies chips used in autos, industrial machines, and consumer electronics. What sets the company apart is its exposure to autos, accounting for close to 50% of revenue, and especially electric vehicles. By the same token, Infineon is less exposed to the falling demand for consumer electronics, which has hit other sector heavyweights such as Advanced Micro Devices.
Emerging Markets:
-While press coverage has focused on the Belt and Road Initiative (BRI) debacles in Sri Lanka and Pakistan, the three top borrowers are oil powers Russia, Venezuela, and Angola, says Bradley Parks, executive director of the AidData project at The College of William & Mary. Implementation was haphazard at best, though. About 330 official sector lenders have some slice of the BRI pie, he reckons. Twenty are involved just in Zambia, the minerals-rich African nation now struggling to restructure debt. This open lending season produced a few winners. The Greek port of Piraeus has increased traffic more than six fold under Chinese management. A Beijing-financed Nairobi airport expressway, opened this summer, looks like a boon for Kenya. But these are overwhelmed by black holes like the $85B in BRI funds dumped into Venezuela. The $125B extended to Russia may also be jangling bankers’ nerves at the moment. Further down the income chain, Chinese lending has contributed to a “clear and present danger of default” in 10 countries, from Ecuador to Ghana and Laos, Parks says. The bright side may be that a sobered China is inching toward cooperation on cleaning up these multilateral messes, and that “enthusiasm for the BRI has reduced significantly,” according to Kung Chan, founder of Anbound Consulting in Beijing. “Future emphasis will be on ‘joint building’ with other participating countries.”
Commodities:
-Palladium has outperformed gold and silver, as well as sister metal platinum, so far this year, and the market is showing some signs of further gains to come. Palladium has outperformed other precious metals by a “healthy margin” in 2022, with the metal’s fortunes changing dramatically as events in Ukraine escalated, says Steven Dunn, head of exchange-traded funds at investment management firm abrdn. Financial sanctions on Russia could have “worsened an already tight supply challenge, which is why you saw such a violent rally in the price,” says Dunn, adding that 45% of global palladium reserves are in Russia. Palladium futures touched record intraday highs in March above $3,400 an ounce.
Streetwise:
-Jack Hough says that a long-term chip winter seems unlikely, given trends like rising artificial intelligence and self-driving cars. The SOX traded recently at 14 times forward earnings projections, down from an average of 18 times over the past five years. Time to buy? “It’s getting close,” says Needham analyst Quinn Bolton. “I don’t know if you have to buy today.” Bolton is waiting for companies to slash earnings predictions, perhaps later this year. For now, Bolton recommends companies that are less tied to the industry downturn. MaxLinear MXL +2.51% (ticker: MXL) makes products for broadband infrastructure like modems, and trades at seven times earnings—“way too low for the quality of the business,” says Bolton. Macom Technology Solutions Holdings is more expensive, at 18 times earnings, but Bolton likes that nearly half of sales are tied to defense. For investors seeking broader exposure now or later, there’s the iShares Semiconductor exchange-traded fund (SOXX). It includes US companies that make many kinds of products, including logic chips for processing information and memory for storing it, as well as machines for chip-making. Then there are a few of the rare companies that make machines for putting circuits on high-end chips: California’s Applied Materials, Tokyo Electron, and ASML Holding, which has a monopoly in the most advanced type of circuit-drawing, called extreme ultraviolet lithography.