Barron’s Weekend Summary: Wall Street has become increasingly involved in the world of sports
Cover:
-Wall Street has become increasingly involved in the world of sports, with private-equity executives becoming go-to buyers of marquee sports teams. Investment firms are acquiring stakes in teams, leagues, and global competitions, including women's soccer, professional bull riding, lacrosse, and sailing. Professional investors are also creating tertiary sports businesses, leveraging broadcast, digital, and scripted series rights, as well as bespoke stadium concessions. The influx of Wall Street money into sports is becoming more global, with wealthy individuals controlling or owning significant slices of half of Britain's 20 Premier League teams, including those with ties to investment firms. The influx of money is easy to see, as private-equity firms and their honchos have mountains of money, which teams in newer leagues or women's sports covet.
Interview:
-Evan Greenberg, the CEO of Chubb, has a strong connection to Warren Buffett, the CEO of Berkshire Hathaway. Berkshire Hathaway recently disclosed that it had acquired a 6% stake in Chubb, one of the world's largest insurance companies, at the end of 2023. Chubb's stock has returned about 40% in the past year, besting the S&P 500's 25% total return and earning the company a market capitalization of $110B. The insurer's superior financial performance is attributed to its sober underwriting practices and conservative management of its $140B investment portfolio. Greenberg, the son of former AIG CEO Maurice "Hank" Greenberg, served on various nonprofit boards focused on international affairs and Asia. Chubb is the No. 1 provider of commercial lines in the U.S. and is known for its high-end Masterpiece homeowners insurance. Greenberg serves on various nonprofit boards focused on international affairs and Asia.
Tech Trader:
-Nvidia recently surpassed Apple as the world's second-most valuable company, with Nvidia's shares rallying 144% this year and its revenue growing 262% year over year in its most recent quarter. Apple's latest quarterly revenue was down 4%, and sales nearly quadrupled over five quarters. This highlights the importance of CEO Tim Cook's keynote address at Apple's 2024 Worldwide Developers Conference, which will focus on AI. Apple has been including neural processing capability in iPhone and Mac chips since 2017, using AI for facial recognition, fingerprint scanning on Macs, and improving iPhone photos. Apple has published papers on large language models and made vague promises of AI magic to come.
Apple seems unlikely to directly take on OpenAI, Microsoft, Meta Platforms, Alphabet's Google, or Anthropic in large language models. Instead, Apple is likely to partner with an LLM provider, similar to its longstanding search relationship with Google. The smart speculation is that Apple will join forces with OpenAI and its cloud computing partner Microsoft. However, the exact nature of this relationship remains murky.
The Trader:
-In 2023, the S&P 500 will be remembered as the year of the Magnificent Seven, consisting of Google parent Alphabet, Amazon.com, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla. These stocks collectively powered the rally that carried the S&P 500 to a 24% gain. However, the worry about the Big Three has been overblown as these stocks rarely moved in lockstep, resulting in less concentration risk in the market. The performance of the Mag 7 has diverged, with Tesla deep in the red this year and Apple lagging behind the S&P 500. Instead, the top three stocks in the S&P 500—Microsoft, Nvidia, and Apple—have accounted for 20% of the index for six days in the past two weeks. This is the first time on record that the S&P 500's top three stocks were worth more than 20% since at least 2000. Bear Traps Report founder Larry McDonald argues that the index's largest three stocks have never accounted for a fifth of the S&P 500 before in its history, and in the past 40 years, the top 10 components' weight has tended to hover around the 20% mark.
-Energy demand has been weak in recent weeks, leading to concerns of a coming oversupply of crude oil. This has resulted in big losses for oil and energy stocks, which have lagged this year. Brent crude had its worst day since December, and the Energy Select Sector SPDR exchange-traded fund had its worst daily performance since April. However, oil's action is not indicative of a recession, as an economic slowdown is usually preceded by a big spike in oil prices. Falling oil prices have a twofold benefit by giving consumers more money to spend, taking pressure off inflation, and making a Federal Reserve interest-rate cut this year more likely. Despite the cold comfort for energy investors, it is possible for the sector to make a comeback, particularly since there might be more wiggle room than initially apparent in OPEC's announcement. RBC Capital Markets Head of Global Commodity Strategy Helima Croft believes that the only thing "set in stone" is the UAE's increase next year.
Features:
-Saudi Aramco sold $11.2B worth of shares, providing the government with cash and broadening its investor base to include more European shareholders. However, recent oil market dynamics show that Saudi Arabia's role as the most powerful member of OPEC may conflict with its role as a maximizer of shareholder value. The Aramco offering was priced at 27.25 Saudi riyals (about $7.20), the lower end of the expected price range. The Saudi government owns the majority of Aramco shares. OPEC is struggling to take back control of the oil market from companies ramping up production. OPEC and its allies, including Saudi Arabia, plan to bring back some production this October, eventually adding 2.2M barrels over the coming year.
-Americans are becoming increasingly concerned about the economy, with retail sales in April remaining flat compared to March. This has led to a decline in consumer stocks, with the Consumer Staples Select Sector SPDR ETF up 9% this year but still trailing the broader market. However, Costco and Walmart have seen significant increases, up nearly 30% this year, beating the broader market and trading at record highs. These retail giants are classified as staples companies, selling everyday household goods and groceries. Concerns about high inflation may be impacting some big consumer goods firms, while concerns about the rising popularity of weight-loss drugs may not benefit food and beverage companies. However, consumers are still looking for bargains at Walmart and Costco, which fuels their sales and profits. Walmart Chief Financial Officer John David Rainey stated that many consumers are spending more of their paychecks on non-discretionary categories and less on general merchandise. Costco Chief Financial Officer Gary Millerchip added that the company is intentionally creating incremental value for its members by delivering lower prices wherever possible.
Europe:
-The European Central Bank (ECB) has announced its first cut since the Covid-19 pandemic, moving ahead of the Federal Reserve. The move, which had been anticipated for months, brings the ECB deposit rate to 3.75%. The move is not the first by a central bank, with Canada, Switzerland, and Sweden also making similar cuts earlier this year. The Federal Reserve has not yet lowered rates in this cycle due to stronger inflation in the US and stronger economic growth in Europe. However, ECB President Christine Lagarde stated that the ECB is not committing to any future interest rate path. The STOXX Europe 600 briefly touched an intraday high as the ECB announced the cut, but the euro rose against the dollar, reflecting shifting views on when the ECB might cut again. This leaves the question of where the ECB will go from here.
Emerging Markets:
-TJX, an off-price retailer, has announced plans to expand its global footprint through a joint venture in Mexico. The deal, which would own 51% and 49% of Grupo Axo, is expected to close later this year. TJX has taken a stake in Axo's bricks-and-mortar business, which includes over 200 stores under the Promoda, Reduced, and Urban Store banners. CEO and President Ernie Herrman said that TJX sees "excellent potential to grow in another region and deliver our value proposition to a growing population of fashion- and value-conscious consumers in Mexico." TJX shares are up 1.3% in Friday afternoon trading and have gained 5% this week, on pace for their best week since November 2022. The company's first-quarter earnings showed lower-than-expected same-store sales of a 3% gain year over year, beating Wall Street's 88 cents estimate. TJX believes the deal will not impact its current fiscal year and has over 4,900 stores across nine countries.
Commodities:
-Cleveland-Cliffs, an American steel maker, experienced a rare double downgrade on Thursday, with analyst Gordon Johnson cutting his rating to Sell from Buy and slashing his price target to $10.13 from $27.20. Johnson is concerned about a slowing US economy, more steel capacity, and mismatched Wall Street expectations. The slowing economy could hurt steel demand, and Johnson sees US steel capacity expanding by about six million tons soon. The Wall Street consensus compiled by FactSet is $363 million. Cleveland-Cliffs shares were down about 20% over the past three months, leaving them down about 21% year to date. The average analyst price target for Cleveland-Cliffs stock is about $21 a share, while the Sell-rated analyst average price target is lower, averaging about $13. The stock is now up 0.7% at $16.23 in midday trading, while the S&P 500 and Dow Jones Industrial Average were flat and up 0.1%, respectively.
Streetwise:
-Nvidia has surpassed Apple's market value by over $3T, causing investor attention to shift to other chip stocks. Broadcom, a California-based company, has also risen to the No. 10 spot in the S&P 500 index by market value. Broadcom's growth is attributed to its growing free cash flow and dividend yield of over 4%. The company's 2018 purchase of Computer Associates was viewed as straying too far from its core expertise in chips. Broadcom has since bought Symantec in 2019 for cybersecurity and VMware last year for cloud computing. Broadcom is now up 900%, 700 points more than the S&P 500, and is now the No. 2 chip maker behind Nvidia. However, the stock-picking expert suggests forgetting Broadcom and selling everything but a toothbrush and change of clothes, and letting it ride on Nvidia, which has seen a 7,000% increase over the same stretch. Broadcom's recent gains have little to do with the attributes mentioned and much to do with artificial intelligence.