Barron’s Weekend Summary: Municipal bonds have surged during the pandemic, but yields are small and many cities face challenges; Tech IPOs are hot again
* Cover story: Municipal bonds have surged during the pandemic, even as city and state governments falter because of a host of problems, and yields are at their lowest levels since the 1950s, yet the rally seems unlikely to stop even as some professional bond investors are turning cautious on the market; Small yields may not be enough to compensate investors for the risks some cities face because of massive holes in their budgets, businesses closing, people working from home, and sales and income tax revenue down substantially.
* Tech Trader: The column looks at key drivers of the current tech IPO boom: Investors are ravenous, the supply is deep, the cloud is thriving and creating a host of new opportunities, startups are experiencing growth (though perhaps not profits), direct listings are back, SPACs are growing more popular, and auction pricing models are on the rise.
* Trader: Unlike almost any other asset class, holding stocks for the long run increases the odds of making money in the market, says Bank of America Securities strategist Savita Subramanian, and with stocks trading at such lofty valuations, the S&P 500 could offer a four percent annual price gain plus a two percent dividend; Positive on SBUX: The coffee giant has been hit hard by the pandemic, but Stifel analyst Chris O’Cull says efforts such as curbside pickup are helping, though he’s most impressed with the company’s ability to adapt on the fly; Positive on MSFT, WMT: Jefferies analyst Christohper Mandeville thinks a deal for TikTok could be transformative, especially if it can match what Tencent achieved with WeChat, and it “could complete the digital ecosystem puzzle in the coming years.”
* Profile: Damon Ficklin and Jeff Mueller, co-managers of the Polen Global Growth fund, adhere to the firm’s high conviction, low turnover strategy developed three decades ago by founder David Polen, and they seek to compound wealth over time by investing in high-quality, growing businesses (top 10 holdings: MSFT, ADBE, GOOGL, Tencent Holdings, BABA, MA, SAP, FB, V, ADSK).
* Interview: Brian Tolles and Patrick Fortier, money managers at Jackson Square Partners, discuss the growth drivers, business models, and potential for industry disruption of some of the stocks they own, including superstar companies V and MA as well as up-and-comers such as WIX and BILI.
* Features: 1) Positive on DHI, LEN, MTH, PHM, TOL, TMHC: Demographic trends, ultralow interest rates, and urban flight spurred by the pandemic are boosting home sales, and a tighter-than-usual supply of existing homes and chronic underbuilding of new ones has led to bidding wars, rising prices, and a run-up in home-builder stocks; 2) Positive on MGA: The Canadian auto parts giant is a major supplier, and its Steyr division engineers and assembles complete vehicles for global auto makers, from major players to smaller electric-car makers, a combination that makes the stock a winner; 3) Positive on MCD: During the pandemic McDonald’s changed menus, added safety procedures, and improved drive-through times, and its restaurants are doing well even as independent rivals stumble; Despite questions about the previous chief executive’s behavior, the company is “built to succeed in an environment like today’s” and should be a portfolio staple; 4) Positive on VNO, SLG, ESRT: While the share prices of New York City’s largest commercial landlords have taken a hit during the pandemic, based on free cash flow they all trade cheaply, and they “amount to a speculative bet on a postpandemic recovery, because a successful vaccine would be sure to give a big lift to the city’s economy”; 5) Cautious on ABBV, MRNA, PFE, BNTX, NVAX, JNJ: With a possible Covid-19 vaccine on the horizon, more than $100B in investors’ money is riding on the outcome—that estimate roughly reflects the value the stock market is placing on the Covid-19 vaccines now in development, says Geoffrey Porges at SVB Leerink; For now, nobody knows which among the leading companies will come out ahead, making the stocks volatile because so much is at stake.
- European Trader: Cautious on Coca-Cola Hellenic Bottling: The shutdown of restaurants and closure of cinemas has dented sales at the company, which produces and distributes carbonated and still drinks, but analysts think the stock has room to rise as the company adjusts package sizes from larger lower-margin two litre bottles to smaller higher-margin single serve bottles and cans.
- Emerging Markets: Positive on Saudi Aramco: The company is the second largest in the world by market capitalization, and shares have gained nine percent since its IPO last December, but it falls beneath most investors’ radar because 98.5 percent of the company is in state hands, with the rest of the shares mostly owned by other Saudis—though the Kingdom seems to be running the company to their benefit.
- Commodities: “Gasoline has likely experienced the most price-steady summer in at least a decade. And recent Atlantic storm-related refinery snags and the expected seasonal slowdown in fuel consumption may do little to shake things up for long.”
- Streetwise: Columnist Jack Hough says he views “an ugly election as a big risk confined to a short, knowable time period, and the costs of containing that risk seem low, because stock prices look high.”