Cover:
-The drone-delivery industry in the US began in 2013 when Amazon's Jeff Bezos introduced drones to Charlie Rose in a conference room. Despite 11 years, Amazon Prime Air and its competitors are still in the testing phase, with Tesla and Alphabet’s Waymo mainly in the testing phase. However, writing off drone delivery would be shortsighted, as billions of investment dollars have been invested and significant strides have been made. Zipline, founded in 2014, is now the leading drone-delivery company by miles flown, and whoever succeeds will be one of the largest companies on Earth. The drone ecosystem now includes hobbyists, high school drone clubs, real estate agents' beauty videos, companies inspecting power lines, and military operations. Drones are now delivering medicine, sundries, snacks, and takeout food in dozens of countries, making it a rapidly growing industry. The success of drone delivery could make it one of the largest companies on Earth.
Interview:
-First Eagle Investments' Matthew McLennan is a portfolio manager and co-head of the firm's global value team. The firm focuses on scarcity value, or finding businesses with an incumbency advantage, either through a scaled market position or well-located long-duration real assets that generate better cash flows even in cyclical markets. He accounts for both probabilities in the funds he manages, such as the First Eagle Global fund, which has about $57B of assets as of September 30. The fund's largest equity investments are Oracle and Meta Platforms, but its largest holding is an 11.4% position in gold. First Eagle Global, which earns a five-star rating from Morningstar, returned 12.41% this year through December 23, outperforming both its global allocation category and related Morningstar index. McLennan sees ample investment opportunities beyond the most richly priced US tech shares and beyond US markets generally. His worries include America's growing deficit and sovereign risk globally. Resilience is a pervasive theme at First Eagle, which means finding the right balance between participating in the march of humankind and the upward drift of markets, and doing so in a way that provides protection during crises.
Tech Trader:
-No updates
The Trader:
-Subaru, a Japanese automaker, has a strong presence in the US market due to its rugged, all-wheel-drive cars like the Forester, Outback, and Crosstrek. The company produces about a million cars annually, with two-thirds of its sales in the US, and less than 10% in its home country. Subaru's inexpensive stock could benefit from further consolidation in the Japanese auto industry, which may be getting underway due to talks between Honda and Nissan. Subaru's U.S. shares trade around $8, down 8% this year and half of where it stood 10 years ago. Matthew Fine, a portfolio manager for the Third Avenue Value Fund, believes that Subaru is profitable and grossly overcapitalized, trading for around five times earnings. With a market capitalization of around $12 billion and $7 billion of net cash, investors are paying little for its car business, which is expected to earn about $2 billion in the current fiscal year ending in March.
-In 2024, the S&P 500 index experienced a decline in December due to a holiday-shortened week and a selloff fueled by the Federal Reserve. The index is now down 1% for the month, which is not the expected Santa Claus rally. Typically, December tends to be one of the best months for the S&P 500, with an average gain well over 1%. However, this month's anemic showing is atypical. According to Dow Jones Market Data, a December decline is a rarity, as the S&P 500 has been positive in the month 56 times over the past 75 years. However, during the 19 years when December was a downer, it was followed by January losses 10 times, and the index recorded a loss for the entire year afterward five times. The Magnificent Seven ETF (MAGS) has done well this month, as investors doubled down on what worked in 2024. Apple and Tesla were the only two stocks in the red, falling 24.6% and 4.2%, respectively. However, the other five stocks more than made up for that: Google parent Alphabet gained 0.3%; Amazon.com gained 2.1%; Microsoft gained 5.7%; Facebook parent Meta Platforms gained 10.2%; and Nvidia gained 24.2%. Market breadth worsened in December, with the MAGS ETF up about 10% this month, while just 64 of the S&P 500 stocks joined the party. The index has more than 500 stocks, despite its name, due to some companies' multiple stock classes.
Features:
-Tesla recalled 5.1M in vehicles in 2024, with over 99% of the issues being fixed with over-the-air software updates. The company recently made headlines with a recall of 694,304 vehicles to correct a potential error with the tire-pressure monitoring system. The National Highway Traffic Safety Administration (NHTSA) changed the form of its notification to include the statement "software update repairs recall," distinguishing between hardware recalls and those meant to update computer programs. The Tesla recall appears to be the first to be labeled as a software fix, adding context for investors following the recall process. The shift to labeling the Tesla recall as a software fix is likely to make Tesla shareholders happy, as most of the recall numbers generate negative headlines, even though most amount to little more than a regular software update. Recalls are part of the system for keeping cars safe and operating efficiently, and most car owners are aware of how the recall process works.
-Materials companies, which produce essential components like industrial chemicals, plastics, metals, and construction materials, have been struggling due to concerns about US growth and a slowdown in China. Fidelity portfolio manager Ashley Fernandes predicts that performance in this highly cyclical sector will continue to track the ups and downs of the US and global economies for 2025 and beyond. If interest rates continue to fall, it could usher in a new cycle of growth to help propel stocks. However, this is a big if, considering stubborn inflation and increasingly hawkish comments by Federal Reserve officials. Most Wall Street investors now see only one or two more Fed rate cuts next year, with fewer than 5% seeing the Fed cutting short-term interest rates by a full percentage point. Ned Davis Research reports that materials stocks are having their "worst bull on record," lagging behind the broader market by a bigger margin than they have during any run-up since 1974. Despite the rough environment, some materials stocks look attractive, such as Dow and LyondellBasell Industries.
Europe:
-ASML, a Netherlands-based company, is Europe's No. 2 tech company, behind only Germany's SAP. The company produces specialized lithography machines for high-performance chips used in smartphones, PCs, and data centers, which can cost $200M or more. ASML has virtually no competition in its high-end EUV machines, which use extreme ultraviolet light. The stock trades for 28 times 2025 earnings of $25 a share and looks appealing after falling 20% in October following a cut to its 2025 revenue guidance. ASML sees lithography spending rising at a 10% to 20% annual rate through 2030, reaching about $55B at the midpoint of a recent forecast, up from $32B this year. Analysts Sandeep Deshpande and Davit Khachatryan believe ASML's monopolistic position and alignment with secular trends position it as a cornerstone investment in the semiconductor supply chain.
Emerging Markets:
-Indian stocks have experienced a 21.8% annual gain since March 2000, just behind the 22.7% gain logged by the S&P 500. As global investors soured on China due to Covid and geopolitical tensions, many gravitated to India, finding an economy remade by reforms and aggressive infrastructure investment. This energized entrepreneurs, supported a burgeoning middle-class, and made India a more attractive manufacturing destination for global companies looking for an alternative to China. However, the Indian market has started to lose momentum, with some veteran investors warning of a major correction. The country's red-hot initial public offering market raised more than $16B this year, more than double the take of the year before. Ajay Krishnan, managing Wasatch Emerging India and Wasatch Emerging Markets Select, predicts a major correction in India due to froth and low-quality banks trading at 50 times earnings. Indian stocks have started to pull back, with the MSCI India down 7%TK since September. However, the market is still pricier than the S&P 500, at 23.8 times forward earnings compared to 23 times for the S&P 500.
Commodities:
-No update
Streetwise:
-International Paper is a poor long-term stock performer with no significant ties to current hot topics like artificial-intelligence chips, quantum computers, and cryptocurrency. However, its largely box business has led to a 62% increase in shareholders since the announcement of a new CEO in March, more than triple the S&P 500 index's return. This suggests a turnaround afoot, as seen in the ugliest turnaround attempts of 2024, including Intel, CVS Health, and Boeing. Jefferies sees over 20% further upside for IP stock in 2025 and calls it a top pick. The company's stock is gaining attention due to its potential for a turnaround. International Paper's stock is a top pick, with Jefferies seeing over 20% further upside for IP stock in 2025. The company's packaging is cushiony with multiple layers, including a squiggly one in the middle, unlike cardboard boxes. While the company is wary, it is intriguing to consider its potential for growth.