Barron’s Weekend Summary: SpaceX is the most valuable space company in the world—and it might offer Elon Musk the key to unlocking his empire
Cover Story:
-SpaceX is the most valuable space company in the world—and it might offer Elon Musk the key to unlocking his empire. The problem, though, it’s privately held, and therefore illiquid. When Musk needs money, his only option is to sell Tesla stock. That was the case from April to December 2022, when Musk was forced to sell some $23B in Tesla shares to keep Twitter afloat, one of the reasons the stock tumbled more than 50% during that period. What Musk really needs is another publicly traded company that would allow him to unlock some of his wealth—and take the pressure off Tesla. And that’s where SpaceX comes in. To call the company wildly successful would be an understatement. SpaceX has been sending astronauts to the International Space Station and surrounding the Earth with its Starlink satellites, and has even revived the US’s moribund space program and restored it to global launch dominance. Its businesses are starting to make money, too. Each launch could bring in from $150 million to $300 million in sales, and Starlink was sporting one million subscribers at the end of 2022. An initial public offering isn’t out of the question, and it might be just what Musk and Tesla shareholders need.
Interview:
-This week, Barron’s interviews Rayna Lesser Hannaway, a portfolio manager and analyst at Polen Capital, which oversees about $61B in mutual funds and separately managed accounts. The goal is to find high-quality companies early, she says, “and begin to enjoy their great long-term compounding.” Hannaway has been doing just that for more than 25 years, including the past six at Polen, where she runs about $400 million and manages two mutual funds, the $81 million Polen US Small Company Growth fund and Polen US SMID Company Growth, a $20M institutional fund launched in 2021. It has been a challenging few years for small-cap stocks. In the interview, Hannaway explained how she picks stocks and why she expects small-caps to rally. She also discussed three small companies poised to grow much larger in coming years.
Tech Trader:
-This past week at the Google I/O developers conference in Mountain View, Calif., Google was back with another round of demos and announcements about artificial intelligence, and this time, the company got it right. Alphabet CEO Sundar Pichai delivered the first part of the two-hour keynote, and he nailed it. Alphabet stock rallied 8% in two days following the flurry of announcements. Google has effectively erased Wall Street’s fear that Microsoft might have gained the upper hand in AI. In fact, Alphabet shares are now higher than before rollout of the new Bing. “Google just took that narrative back. We don’t believe there will be only one AI winner,” Evercore ISI analyst Mark Mahaney wrote in a research note following the Google event. “We just believe the narrative that Google would be generative AI roadkill was just plain wrong.”
The Trader:
-Many expect the stock market to crash. But what if it took a bullish turn instead? One reason that a bull market may be within the realm of possibilities is that the now slowing inflation points to the possibility of a Fed pause coming at next month’s Federal Open Market Committee meeting. Futures-market pricing implies a greater than 90% likelihood of the Fed holding the federal-funds rate steady in June at a target range of 5.00% to 5.25%. There’s still time for that to change, especially with May’s employment and inflation figures due before the meeting. Stocks have historically done well during a Fed pause, writes Jonathan Golub, chief US equity strategist at Credit Suisse, who notes that the S&P 500 has returned 16.9% on average in the 12 months following the last interest-rate hike of a cycle, while losing 1% on average in the year after the first rate cut.
-Carl Icahn’s holding company, the famed corporate raider known for high-profile activist campaigns dating back to the 1980s, is under attack by short sellers, prompted by a lengthy report published by Hindenburg Research. At first glance, Icahn Enterprises, which has dropped 36%, to $32, since Hindenburg’s short report was issued on May 2, doesn’t look all that controversial. Holdings include an energy company, the Pep Boys chain of auto parts and service stores, a pharma company, and real estate. Icahn Enterprises also owns shares in several publicly traded companies, including FirstEnergy, Xerox Holdings, and Newell Brands. It has a market capitalization of around $13B. On April 28, it was trading at $50.29, right about where it had been in September 2021. The Hindenburg report faulted Icahn’s recent investing track record and claimed Icahn Enterprises was overvaluing its stakes in private businesses. But mainly, Hindenburg’s Nathan Anderson took issue with the fact that Icahn Enterprises had been trading for around 3.2 times its net asset value, or NAV—an unusual premium.
Features:
-Fans of Topgolf Callaway Brands, one of the few pure-play golf stocks, think it can deliver the investment equivalent of a hole-in-one. But lately, the performance of its shares has resembled a poorly struck shot into the deep rough. The stock lost 13%, to $18.80, on May 10, the day after Topgolf reported first-quarter results, and closed on Friday at $17.28. While earnings, at 17 cents a share, beat the consensus 15 cents estimate, the positive news was accompanied by reduced guidance for one segment of operations, and Wall Street likes lowered guidance the way players in the PGA tournament, which starts next week, like sand traps and water hazards.
-Late on May 12, a panel of experts voted to recommend speedy approval of a gene therapy for muscular dystrophy. Stock in Sarepta Therapeutics had been halted all Friday, as the biotech company faced a reckoning. The Food and Drug Administration convened a panel of outside experts to vote on whether the agency should accelerate approval of Sarepta’s pioneering gene therapy for the fatal disease Duchenne muscular dystrophy. Despite FDA staff criticism of Sarepta’s study data, the advisers voted 8 to 6 to recommend approval. FDA leaders must decide whether to grant an “accelerated” approval by May 29, although the agency isn’t bound by Friday’s advisory vote. FDA leaders have overruled their own staff’s skepticism in the past to allow treatments for dire diseases.
European Trader:
-The Bank of England lifted its key interest rate by a quarter-point on Thursday, matching the pace of the Federal Reserve and the European Central Bank this month. Governor Andrew Bailey hinted that there could be more hikes to come. The UK is dealing with the fastest inflation among the Group of Seven nations, with annual price gains north of 10%. As Britons fret about a national cost-of-living crisis, nurses, train drivers, and teachers are going on strike for higher pay, underscoring the challenge the BoE faces in bringing inflation back down. “If there were to be evidence of persistent pressures, then further tightening in monetary policy would be required,” Bailey said at a press conference. The increase marks the 12th consecutive move after the central bank started tightening in December 2021—a few months earlier than the Fed. It puts the main BoE rate at 4.5%. That’s higher than the ECB’s main rate of 3.75%, but below the Fed’s range of 5% to 5.25%.
Emerging Markets:
No updates in this section
Commodities:
-The price of raw sugar has surged to levels not seen in more than a decade after bad weather withered harvests from some of the world’s biggest producers. At the same time, demand remains strong as refined sugar is an important ingredient for baked goods, candy and soft drinks, while sugar cane is used to produce ethanol fuel. In recent weeks, the raw sugar-cane futures contract—the international benchmark—for delivery in May, surged to more than 27 cents a pound, the highest level since October 2011. On Thursday, the futures contract for July delivery closed just above 26 cents a pound in New York. Refined sugar prices are also rising, which could feed into higher retail prices for goods in grocery stores.
Streetwise:
-This week, Jack Hough notes that Ford Motor has two anniversaries coming up, one of which is cause for celebration. The company was founded 120 years ago next month. Its $12 stock, meanwhile, first hit that level 37 years ago next January, adjusted for splits and spinoffs. Longtime Ford Motor shareholders who have been reading about rampant auto inflation must wonder when some of it will seep into their brokerage accounts. Jim Farley, Ford’s chief executive officer since 2020, spoke to Jack Hough told me this past week about shortages, pricing, robodriving, and more. Ford is still producing 10% fewer vehicles than it would like, but shortages have shifted to general parts from chips, says Farley. Dealer profit margins have started to come down, but Ford is still “at the very high end of the pricing.” Farley says he is “very encouraged that everyone’s going to keep their stocks a little lower than in the past.” Loan rates and car payments are up. Economy cars are scarce. Ford got out of sedans before the pandemic, starting in 2018.