Barron’s Weekend Summary: Warren Buffett is expected to be the focal point at Berkshire Hathaway's annual meeting on May 4 in Omaha, Nebraska
Cover:
-Warren Buffett is expected to be the focal point at Berkshire Hathaway's annual meeting on May 4 in Omaha, Nebraska. However, investors are increasingly seeking insights into the future of the company as the long-standing CEO and chairman is no longer in charge. Berkshire could face pressure to break itself up, and it might decide to pay a dividend instead of amassing cash. Charlie Munger, Buffett's longtime friend and business partner, will not be present at the meeting. The future will be the focus for 30,000 Berkshire shareholders, with Vice Chairman Greg Abel and Vice Chairman Ajit Jain on the dais. Questions include whether the stock can beat the S&P 500 index, why share repurchases have declined since 2021, the company's new management's capabilities, and whether Berkshire should break up.
Interview:
-Barron’s interviews Sinead Colton Grant, the chief investment officer at BNY Mellon Wealth Management. Grant did not believe the recent economic outlook was a gloomy one. Instead, she suggested that resilient consumers could boost the US economy, urging the Federal Reserve to take a "less and later" approach to interest-rate cuts. This was a prescient call, as US stocks later charged higher and investors rolled back expectations for rate cuts. Grant advises high-net-worth clients to favor the US but now to broaden their shopping list beyond megacap technology stocks and rethink where their cash is parked. She began her career at Chase Manhattan and later moved into asset-allocation roles at BlackRock and BNY Mellon Wealth Management.
Tech Trader:
-The tech earnings season is halfway through, and it seems that the focus is primarily on AI, with companies like Meta Platforms, Microsoft, Intel, Alphabet, IBM, and ServiceNow investing heavily in AI data centers. Microsoft reported 31% growth in its Azure Cloud business in the March quarter, three percentage points higher than expected, with seven points of growth coming from AI-related workloads. The company expects June-quarter growth to be in the 30% to 31% range, ahead of previous estimates. Google Cloud also saw a 28% growth in the quarter, two points ahead of Street estimates. This trend is expected to be the most important technology trend since the discovery of electricity, the airplane, or frozen yogurt.
The Trader:
-High prices and slower growth caused fears of stagflation to send markets tumbling. Facebook parent Meta Platforms fell as it announced it would have to spend billions more than planned on artificial intelligence, despite projected light second-quarter revenue. However, robust results from Microsoft and Google parent Alphabet after the bell bolstered the case that AI is alive and not a money sink. This allowed stocks to zoom higher on Friday, brushing past March's PCE uptick. Inflation is expected to be higher for longer, delaying any potential rate cut. The yield on 10-year Treasuries rose to 4.706%, putting yields up 0.514 percentage point this month. Inflation metrics are the most important economic indicators right now, and the more they point towards sticky inflation, the higher the 10-year yield will rise and the stronger the headwind on stocks.
-The Federal Trade Commission (FTC) has blocked several high-profile mergers this year, including the proposed JetBlue Airways- Spirit Airlines combination, Albertsons and Kroger merger, and Tapestry's acquisition of Capri Holdings. The FTC argued that these mergers would reduce consumer options and potentially lead to higher prices. Tapestry owns affordable-luxury brands like Coach, Kate Spade, and Stuart Weitzman, which compete in the same space as Capri's Michael Kors and Jimmy Choo labels. However, Tapestry and Capri pushed back, arguing that there are other competitors in the space and the $8.5B deal would allow them to compete against luxury powerhouses like LVMH Moët Hennessy Louis Vuitton. Both Tapestry and Capri shares ended the day lower after news of the FTC move against the deal. Analyst Aneesha Sherman pegs the deal's chances around 50% but raised her Tapestry price target by $2 to $48. She believes that either way, there's "asymmetrical upside" for the stock, with limited impact if the deal closes and around 40% upside if it breaks.
Features:
-Bank of America and Goldman Sachs' annual shareholder meetings saw two failed proposals to prevent CEOs from holding board chairs. The resolutions called for policies to prevent CEOs from holding the title of board chair, which is currently the case for both banks. The proposals received increased support from shareholders, with Goldman's 33% support and BofA's 31% support. The challenges to two-in-one CEO-chairs are influenced by firm-specific problems and broader forces, such as a challenging market for big banks' operations, investors' growing awareness of their governance dynamics, and passive investing. The same resolutions are also on the ballot at JPMorgan Chase, Citigroup, and BlackRock this year.
-Thomson Reuters, a Canadian company, might be the AI stock you hadn’t thought of as AI…Thomson Reuters is not just in the news business, accounting for only 10% of its revenue. The other 90% comes from data businesses like Westlaw, UltraTax, and ONESOURCE. The company's stock has outpaced the market over the past decade, with CEO Steve Hasker stating that it is a tech stock, not a media company. The company focuses on delivering unique and proprietary content through artificial intelligence and machine learning, using best-of-breed software. Thomson Reuters' revenue last year was $6.8 billion, and its market capitalization is $69 billion. The company's stock has gained 26% in the past six months, compared to 21% for the market. The company offers a mix of organic growth and free cash flow conversion, with a demonstrated track record of returning capital to shareholders. The complexity of the corporate world has made data more valuable, and Thomson Reuters' strategy has been successful in leveraging this trend.
Europe:
-BHP will have to dig deeper into its pockets if it wants to buy Anglo American, the world's largest miner and major producer of iron ore. BHP’s all-share bid was made public, but Anglo American rejected it, stating it undervalues the firm and its prospects. Elliott Investment Management, an activist fund led by Paul Singer, has built a stake in Anglo American of about $1B, making it one of the top 10 shareholders. The news has boosted Anglo American shares, which have already climbed above BHP's offer price. BHP's offer for Anglo American is non-binding and subject to customary conditions, including completion of due diligence to the satisfaction of BHP. Jefferies analyst Christopher LaFemina estimates that a price of at least £28/share would be necessary for serious discussions to take place. The most desirable business within Anglo is its copper business, which consists of tier-1 assets in low-risk jurisdictions and has organic growth. Other possible buyers could be Glencore and Rio Tinto.
Emerging Markets:
-China's property market has been struggling, with all major real estate indicators showing weak or worse performance in the first quarter. Despite Beijing's efforts to revive the market with incentives and easing borrowing requirements, nationwide sales were about two-thirds of the seasonally adjusted levels in 2019. This has led to developers pulling back on new projects and construction starts declining to about a third of what they were in the quarter in 2019. For China's stock market or confidence to broadly turnaround, sales need to rise. The latest data doesn't help investors who were drawn back into the market by cheap Chinese assets and a view that the economy was holding up relatively well as Beijing put a floor under it. The weak sales also raises the prospects of more developer defaults that could spark another downturn. Beijing has intervened to prevent defaults in state-owned developers, but Gavekal analysts note the risk of a policy error that is higher after the sales declines in the first quarter. A default could deal consumer confidence yet another blow, creating another downturn in property sales.
Commodities:
-Emerging market bonds have experienced a decline in value over the past two weeks, following a hawkish shift in US interest rates by Federal Reserve Chairman Jerome Powell. However, the average spread for hard currency sovereign paper over U.S. Treasuries remains near its post-pandemic low, around 3.4 percentage points. This is a significant rally in fixed-income terms. The market is divided between spread sellers and yield buyers, with spread sellers focusing on solid credits from countries like Mexico, Indonesia, and Saudi Arabia, while yield buyers are shifting towards higher-yielding names. Portfolio managers at T. Rowe Price and Samy Muaddi emphasize that they are not chasing risk in their portfolios.
Streetwise:
-Private credit, a term often associated with exclusivity and positive sentiment, has seen a significant increase since 2008, reaching $2.1T. However, collateralized loan obligations, which sound like they were named by the marketing team behind irritable bowel syndrome, are often associated with damage and borrowers. This raises questions about the nature of these loans. A minimalist investment approach called financial nudism, which focuses on quality stocks and bonds, has been suggested as a solution. Jared Woodard, who studied theology and traded derivatives before becoming head of the investment research committee at Bank of America, believes that a virtue is the middle between two vices: bond quality. He prefers corporate bonds in the lower end of investment grade and fallen angels that have dipped into junk status, as they offer better deals over most time frames. This approach is not exclusive to private credit, but rather a more balanced approach to investment.