Barron’s Weekend Summary: The widening wealth gap in the US threatens the sustainability of the stock market recovery; AAPL faces growing scrutiny of its App Store commissions
* Cover story: “The one-two punch of the worst health crisis and economic downturn in decades has brought to the fore an issue that has been simmering for decades: an increasing income and wealth disparity among Americans. This widening gap has long-term economic implications and threatens the sustainability of the stock market’s recovery”; Economic disparity creates deep divides, which increases political risk for investors and opens the door to potential tax and regulatory changes that can weigh on corporate earnings.
* Tech Trader: +/- AAPL: As the company prepares to hold the first-ever virtual version of its Worldwide Developers Conference, kicking off with a keynote speech on Monday by chief Tim Cook, there’s growing scrutiny of the 30 percent commission Apple charges for App Store sales, which have boomed during the coronavirus lockdown.
* Trader: There’s no doubt that the economy is getting better—retail sales rose by 17.7 percent in May from April, and the Conference Board Leading Economic Index gained 2.8 percent in May—but for a truly sustainable rally, improvements must keep coming; XBI, the SPRD S&P Biotech exchange traded fund, may be the best way to play the biotech trend—unlike IBB, the iShares Biotech ETF, it is equally weighted, so that smaller players are given greater heft than in the market-weighted iShares fund.
* Profile: Brian Campbell, co-manager of the Touchstone Mid Cap fund, and his peers at the fund’s subadvisor, the London Company, take significant long-term positions in midsize companies with high and growing returns on capital, pricing power that is improving over time, and strong balance sheets with flexibility to take on additional debt if needed (top 10 holdings: CTXS, ENTG, ODFL, SWKS, CPRT, CTAS, BKI, APH, KMX, AWI).
* Interview: Eddie Yoon, manager of the Fidelity Select Health Care Portfolio fund, discusses the outlook for the coronavirus pandemic and how investors should navigate investing in healthcare, one of America’s biggest sectors; he says that because many vaccine programs are being developed on industrial-scale vaccine platforms, he’s hopeful one will be available by this time next year.
* Features: 1) Most economic data are averages, which means that greater inequality—more wealth in the hands of the few—mathematically masks the real economic data that reveal the fragility of our system; wealth gaps make Federal Reserve policy less effective, and low-income borrowers can’t typically access ultralow rates, exacerbating inequality; 2) Fred Hickey, editor of the High Tech Strategist, says this is the second most expensive tech market, after the first Internet bubble, and he is skeptical of tech valuations—though as Barron’s notes, the issue for investors is that fundamentals don’t often apply to tech stocks; 3) Positive on BC: Boating stocks have lagged behind their recreational vehicle peers even though shares of outdoor-oriented companies are hot as consumers look for ways to vacation in the great outdoors, making this a good time to consider Brunswick, which is no longer a hodgepodge of leisure brands and is focused only on boats; 4) Positive on ROLL, WAB, EMR, AME: Barron’s found four industrial companies—two midsize and two large-cap—whose stocks look compelling because they are high-quality operations that should benefit from a cyclical recovery in the US and global economies, and can expect secular tailwinds for their businesses; 5) Positive on JPM, BAC, WFC, T, COF, PSA, PFF, FPF, JPI: Preferred shares, a sector dominated by large banks, have made a comeback since the stock market’s turmoil in March, and now offer attractive yields of about 5% from a range of issuers, making them a “compelling opportunity,” according to Douglas Baker of Nuveen.
* Follow-Up: NKLA, DKNG, and SPCE, which went public by merging with special-purpose acquisition companies instead of traditional initial public offerings, have cult followings and have seen their shares multiply several times over, a sign the model has won acceptance from investors, even if not every SPAC can achieve the same success.
* European Trader: Positive on Kinepolis Group: The cinema chain, one of Europe’s biggest and most profitable, is in a better position that most of its peers—it owns 53 of its sites and doesn’t have onerous rent bills, and has wider seating than rivals, giving it a better chance of rebounding when the pandemic subsides.
* Emerging Markets: Argentina looks on the verge of restructuring its ninth bond default in the two centuries since its independence—and investors should get ready for the tenth as the new left-leaning government and the Wall Street firms that lent its predecessor some $65B battle over a plan amid the coronavirus pandemic.
* Commodities: “Demand and prices for transportation fuels took a hit when it became apparent that Covid-19 would slow down travel, but gasoline, diesel, and jet fuel are set to establish their own paths toward recovery.”
* Streetwise: There are gathering signs of hope for coronavirus drugs—Geoffrey Porges of SVB Leerink, a doctor and analyst, is bullish REGN and GILD, but sees more upside for Gilead, which traded up on remdesivir hopes but has now settled back to 12 times earnings, a deep discount to the market.