Barron’s Weekend Summary: The 2024 Barron’s Top CEOs list rewarded customers and investors with companies that have smart plans
Cover:
-The 2024 Barron’s Top CEOs list rewarded customers and investors with companies that have smart plans for the future, including companies like e.l.f. Beauty's Tarang Amin and Meta's Mark Zuckerberg. Over half of these companies factor into the current artificial-intelligence investment rapture, selling chips, buying them and offering computing as a service, putting algorithms to work sharpening advertising or pricing, or selling the electricity used for all of the above. Jensen Huang, whose Nvidia became the most valuable US company, did not just climb to the top of the AI market; he created it. The list is compiled each year by a panel of writers and editors through a process of screening, nomination, preliminary harrumphing, and extended debate. Some trends and twists stand out, not all of them related to silicon, such as the expiration of excuse-making, the Covid-19 pandemic, and the recovery of many markets. S&P 500 companies that are still struggling should consider the possibility that it's them, not the economy.
Interview:
-Barron’s speaks to Kevin Holt, who has managed the Invesco Comstock fund since August 1999, with Class A shares returning an annualized 8.3%. The fund, with $11.5B in assets, has outperformed its Russell 1000 Value Index benchmark by 1.2 percentage points and its large-value Morningstar category by 1.8 percentage points. This year, Comstock is up 8% compared to peers and the index, which have returned about 7% each. Holt, along with Devin Armstrong, applies classic value-investing techniques espoused by Benjamin Graham, the father of value investing. They seek to identify a company's normalized profitability and cash flows, often digging through 20 years of history to better understand the company and its industry. Holt is also Invesco's chief investment officer for the asset manager's $63B in value strategies.
Tech Trader:
-Nvidia, a leading player in the artificial intelligence market, has seen its revenue increase 262% YoY in April, resulting in a 629% increase in profit. However, the company's quarter-over-quarter growth has slowed from 88% to 34%, 22% to 18% over the past four earnings reports. This suggests that Nvidia's market cap is unsustainable.
The company's forward price/earnings multiple has increased from 25 at the end of last year to 45, and it trades for 20 times expected revenue for the January 2026 fiscal year, based on Wall Street estimates. This raises concerns about the potential for AI to become the most important technology development since cloud computing, the internet, mobile phones, or personal computers. Nvidia's market value is now nearly 5X the industry estimate for next year's global chip sales, surpassing Microsoft and Apple. However, there are picks-and-shovels AI bets that don't require the same heroic assumptions as Nvidia stock. These include picks-and-shovels AI bets that don't require the same heroic assumptions, such as picks-and-shovels AI bets that don't grow triple digits but will all benefit from the continued growth of AI.
The Trader:
-The stock market rally has reached its 31st record high of 2024, with the S&P 500 index rising 0.7% this week and the Nasdaq Composite gaining 0.2%. The Dow Jones Industrial Average has advanced 1.4%, but remains below its record high. Economic data shows moderate growth, with inflation expectations and interest rates remaining below their multiyear peaks. Federal Reserve governor Adriana Kugler has suggested a rate cut could come this year, which would keep the economy growing. However, the market's high valuation has left many scratching their heads. The chief concern is that the Fed won't cut rates due to inflation remaining sticky. Service prices, such as energy and utility costs, rose 5% year over year in May, while shelter prices rose more than 5%. If shelter remains elevated, overall inflation won't drop to the Fed's 2% target this year. The market has never lost faith in a rate cut, though delayed, but shaking that confidence would be a problem. Wolfe Research strategist Chris Senyek warns that the most significant downside risk for U.S. equity markets is for investors to lose faith in the 'Fed Put,' referring to the central bank's willingness to cut rates if the economy or stock market appears to be falling on hard times.
-FedEx stock has been struggling since March, with the shares dropping 0.2% in 2024. The market is not convinced that the company can meet its earnings targets, and FedEx will have a chance to prove investors wrong when it reports on June 25. In March, management guided full-year earnings to $17.75 a share, but FedEx reported fiscal-third-quarter sales of $21.7B, below estimates for $21.9B and down 2.2% year over year. Analysts expect sales of $22B, up almost 1% from the same quarter last year, given that shipping volumes were stabilizing in February. For its FedEx Ground segment, the volume backdrop remains soft but stable. Combined with continued cost-cutting, the earnings picture looks decent. The company is looking to improve route efficiency, reduce flight hours, and limit head count. Salary and other administrative expenses comprise a large chunk of operating costs, and should only grow 1% for fiscal year 2025, allowing margins to increase from 7.1% to 7.9%. This means fiscal 2025 earnings can rise to $20.97, especially with a few billion dollars in free cash flow to repurchase shares.
Features:
-Penn Entertainment is considering a buyout offer from Boyd Gaming, which has sparked a 9.9% increase in Penn stock. The news comes after a Reuters report suggested that Boyd is interested in making an offer to buy the gambling company. Neither Penn nor Boyd immediately responded to Barron's request for comment. The Donerail Group, a merchant bank and shareholder of Penn, believes that a sale of the company's assets could generate value creation for equity investors. However, analysts are mixed on whether an acquisition of Penn by Boyd is a positive move. Penn stock fell 3.1% to $19.43 on Friday, and shares have fallen 25% this year. Craig-Hallum Capital Group analyst Ryan Sigdahl upgraded Penn shares to Buy from Hold and increased his price target to $30 from $20. He believes this presents a compelling risk/reward opportunity and recent activist involvement and M&A rumors provide a floor on valuation. Raymond James analyst RJ Milligan also noted that while BYD acquiring Penn makes sense on the surface, he sees few other compelling reasons other than potentially getting the portfolio at a cheap price.
-The aid industry is facing unprecedented challenges due to the shifting geopolitical environment, conflicts, climate change, and debt distress. Traditional donors must reinvent themselves, focus on impact, and give more voice and representation to developing countries and emerging markets. Aid is becoming politicized and weaponized, with superpowers like the U.S., China, and Europe opposing developing countries. This weaponization is causing famine in Sudan and reducing migration in countries like the UK and Rwanda. The new geopolitics also erosion the legitimacy of multilateral institutions, including the Bretton Woods institutions. Policy interventions in the utility sector in recipient countries are necessary for concessional lending and guarantee schemes to be bankable. The aid industry is becoming more reactive, with flows reaching historical highs. This shift towards humanitarian aid is due to intensifying conflicts and climate-related shocks. This reactive nature of aid is concerning, as less development aid is going towards structural objectives, which could have reduced vulnerability to shocks.
Europe:
-Political upheavals in Europe have slowed growth and caused bond yields to rise, while the UK is set to have its first center-left government since 2010. However, economic prospects for Europe are brightening, as growth has been slower than in the US since the end of the pandemic. Business surveys indicate a recovery in Europe, with inflation coming down, the labor market being strong, and wage growth running at a fair old clip. The European Central Bank sees growth improving, raising its growth forecasts in 20 euro countries to 0.9% in 2024 and 1.4% in 2025. The US growth rate halved in the first quarter of this year, and euro-zone unemployment fell to a record low in April. Slower inflation has allowed the ECB to lower interest rates for the first time since the pandemic, which could prove a big help to growth. The head start of the ECB, which has yet to cut, could prove a big help to the region's economic fundamentals.
Emerging Markets:
-China is focusing on the "low-altitude economy" - the airspace below commercial and military aircraft traffic, where civil-manned and unmanned vehicles operate. As the low-altitude economy takes off, China is introducing new products and experiences, including drones for package delivery, winged taxis for daily commutes, and hobbyist sightseeing helicopters. These operations could also play critical roles in aerial logistics, emergency medical rescue, and firefighting efforts. Beijing has recognized the sector as a key emerging industry, with the size of the sector exceeding 500B yuan ($69B) last year, up 34% from the previous year. The civil drone sector saw its market share rise by 32% to 120B yuan, while industrial drones reached 77B yuan. China has 1.11M registered civilian unmanned aerial vehicles at the time of last year. Provinces and cities across the country are also investing in the low-altitude economy, with officials in Sichuan province allocating 200M yuan to support the sector.
Commodities:
-Exxon Mobil is expected to generate $14B in earnings by 2027, primarily due to cost reduction and growth in Guyana's oil reserves. CEO Darren Woods has already secured $9B in savings since 2019, and is seeking an additional $6B over the next few years. Exxon's acquisition of Pioneer Natural Resources provides more untapped acreage for advanced drilling technology. Woods is expanding refineries and integrating more chemical production to drive profitability, building a global network for shipping liquefied natural gas, and exploring carbon capture and lithium mining. Woods' countercyclical investment strategy has given Exxon a financial edge, with most oil and gas investments earning yearly returns over 10% even at oil prices of $35 or less. The barrel price needed to cover Exxon's dividend is among the lowest in the group.
Streetwise:
-Delta, the largest and fastest-growing airline in the US, is turning 40% of its profit while operating 20% of its capacity. The company's success can be attributed to its on-time rate and customer satisfaction in premium classes. Delta's upswing began during its complicated integration with Northwest Airlines after a 2008 merger, which led to significant investments in technology. A predictive engineering program and a new baggage-tracking system reduced maintenance delays and made lost luggage rare. Front-line workers, such as flight attendants and gate agents, noticed the changes and benefitted from them. Today, a third of each Delta plane is fitted with premium seating, resulting in 10 points higher profit margins than in the main cabin. Delta's flywheel effect extends to American Express, which is its largest and fastest-growing card program. Delta's premium seats generated $19B of revenue last year, and AmEx remuneration was $6.8B, which combined for 55% of total revenue. This reduces Delta's sensitivity to economic swings.