Barron’s Weekend Summary: Barron’s 10 Roundtable panelists—including some growth-stock gurus, and value-investing keeners—love to hunt for overlooked stocks attached to companies with temporary problems
Cover Story:
-Barron’s 10 Roundtable panelists—including some growth-stock gurus, and value-investing keeners—love to hunt for overlooked stocks attached to companies with temporary problems, savvy management, and demonstrable growth potential, some of it even fueled by AI. In a recent round of phone calls, they identified 40 promising investments to consider now, including a batch of fixed-income funds that finally live up to their name.
Some of the stocks that are mentioned include Target and 7 More Names That Can Beat Warner Brothers in the Second Half of 2023 such as Airbus and Biogen. The panelists also discuss the economic outlook, which some consider benign and others more dire. The wide range of opinions echoed those voiced on Jan. 9, when the group last met in person, in New York, with the editors of Barron’s. You’ll find their latest picks and prognostications in the edited conversations below.
Interview:
-No interview on this week’s edition
Tech Trader:
-Netflix will be kicking off second-quarter tech earnings on Wednesday, amid parallel strikes by Hollywood’s actors and writers, the first time both groups have hit the picket lines at the same time since 1960, when Ronald Reagan was head of the Screen Actors Guild. Both groups are focused not just on improved pay but on how streaming is changing the entertainment business. Meanwhile, TV and film production companies are grappling with the unraveling of cable and satellite TV—this year, the number of U.S. households subscribing to those services is likely to drop below 50% for the first time in decades, and the trend is accelerating. Meanwhile, Walt Disney CEO Bob Iger told CNBC that the traditional linear TV business—like its ABC broadcast unit—“may not be core” to Disney’s future. Meanwhile, FAST channels—free ad-supported linear channels—are taking a growing slice of TV ad dollars, posing a new challenge for subscription-based services. Netflix’s financial results for should begin to reflect the company’s restructured business model. It’s been 15 months since Netflix founder and former CEO Reed Hastings disclosed on an earnings conference call that the company was exploring the addition of an ad-backed subscription tier. Netflix has since launched a $6.99-a-month ad-supported plan, while also launching a crackdown on password sharing.
The Trader:
-The Dow Jones Industrial Average rose 2.3% this past week, the S&P 500 added 2.4%, and the Nasdaq Composite jumped 3.3%. The two-year Treasury yield fell to 4.7% after topping 5% the previous week. These results occurred as inflation stood at 3.1% after peaking at 9.1% in June 2022, when prices were rising across nearly all categories of the CPI. These days, the decline is being driven by energy prices, which were down nearly 17% in June from a year earlier; prices of used cars and trucks, which fell 5.2%; and airline fares, appliances, health insurance, and footwear, all of which were cheaper than a year ago.
But the drop has really been about inflation lapping some big months. The CPI soared 1.2% in June 2022 alone. Replacing that with June 2023’s 0.2% month-over-month increase shaved a percentage point off the annual change.
-MasterCard and Visa are both buys. “It’s hard to overstate just how attractive the companies’ business is.” Visa and Mastercard operate competing networks that process hundreds of billions of credit, debit, and other transactions annually by connecting consumers, businesses, and financial institutions. They each take a percentage off the top of the trillions of dollars of payment volume that travels across their networks. It doesn’t cost them any more to process an additional swipe on a network that already exists—each marginal transaction is nearly all profit.
Put simply, there may be no greater big business out there than payment processing. The stocks have sought-after attributes for any investor and enjoy premium valuation multiples as a result.
Features:
-With a new management team and a refreshed balance sheet,Frontier Communications stock is looking attractive as it progresses toward its goal of 10M fiberoptic locations connected to its network. Life hasn’t been easy for Frontier shareholders. The company filed for bankruptcy just over three years ago, wiping out the equity and some $11B in debt. Armed with a new balance sheet, Frontier is upgrading its network to fiber from copper. That’s capital-intensive—a turnoff to growth investors—and requires burning cash—discouraging value seekers. Its shares, at a recent $14.31, have dropped 42% over the past 12 months. Extending fiber to millions of homes by digging up streets or climbing telephone poles won’t happen overnight, but it will happen. Frontier is more than halfway to its goal after adding 339,000 fiber locations in the first quarter. It’s getting more profitable with each fiber customer added, while pruning costs. Frontier might not be the most exciting story, but it does have a clear plan that should pan out.
-Eli Lilly is adding another molecule to an obesity drug pipeline that has seized the attention of investors and made Lilly the most valuable pharma company in the world. On Friday, Lilly announced it had reached a deal to buy Versanis Bio, a privately held biotech which is testing a monoclonal antibody drug called bimagrumab as a new treatment for obesity. Versanis is currently running a Phase 2b trial of bimagrumab in overweight and obese adults, both alone and in combination with Novo Nordisk’s obesity drug Wegovy. Lilly said that Versanis shareholders “could receive up to $1.925B,” a figure that includes both an upfront payment and potential future payments contingent on development and sales milestones.
Europe:
-Illumina got hit with a hefty fine after the European Commission said the gene-sequencing company completed its acquisition of Grail, a cancer test developer, before receiving the appropriate approvals. The European Commission fined Illumina €432M ($476M). The commission said in a statement Wednesday that the companies announced their merger one month after it opened an investigation of the acquisition in July 2021, citing competition concerns. “If companies merge before our clearance, they breach our rules. Illumina and Grail knowingly and deliberately did so by implementing their tie-up as we were still investigating. Today’s decision to fine both companies, for a total amount of €432 million, shows that this is a very serious infringement,” said Margrethe Vestager, the EU’s antitrust commissioner.
Emerging Markets:
-China is a behemoth accounts for 25%-30% of broad-based emerging market indexes. Investors wanting to limit their exposure to the Asian nation until now had only a few fund options. That’s changed. Since late 2022, at least five “ex-China” emerging market funds have hit the market from asset managers such as Goldman Sachs, Putnam, and WisdomTree, bringing the total to at least 10 exchange-traded funds and mutual funds that shun Chinese stocks. Investors have reasons to consider them. Persistent geopolitical tensions with the US grab headlines, and tepid post-Covid growth means China has underperformed other emerging market countries in 2023. Others may want to avoid investing in China because of its human-rights record.Marc Zeitoun, chief operating officer, North America, at Columbia Threadneedle Investments, cites increased advisor interest in its $231M Columbia EM Core ex-China ETF, with year-to-date net inflows the second-highest of its 12 ETFs. It’s the oldest ex-China ETF, launched in 2015, when investors worried that the inclusion of mainland China companies in emerging market indexes would diminish diversification, he says.
Commodities:
-Downgrades of Alcoa stock have been piling up. It’s becoming a headwind for shares. JP Morgan analyst Bill Peterson on Friday downgraded Alcoa shares to Hold from Buy. He reduced his price target to $36 a share from $54. The cut has shares down in early trading. Alcoa stock is off 2.3% at $35.86. S&P 500 and Dow Jones Industrial Average futures are up 0.1% and 0.5% respectively. “Cautious on aluminum base metal near-term driven by planned China restarts and summertime demand lull,” wrote Peterson. China accounts for almost 60% of global aluminum production, so any changes in output over there impact aluminum prices everywhere. Prices have already started to slide. Benchmark aluminum prices are down roughly 10% over the past 12 months and are off about 20% from January highs. Commodity-related stocks typically don’t like it when commodity prices decline. Alcoa stock is down more than 35% since aluminum hit its 2023 high early in the year.
Streetwise:
-Jack Hough noticed that a major investment bank considers the resurgence of Meme stocks as a bad sign for the stock market, one investment bank says. Hough retorts that while this might be the case recent action doesn’t look especially meme-y, while the return of meme stocks appears to be a tactical trash bounce. “Return of the Memes Is a Red Flag,” read the title of a July 11 technical-strategy note from BTIG. It pointed out that an index of meme stocks was up 10% in three days, compared with a decline of close to 2% for consumer staples. Over the past 18 months, when the three-day spread between the two has grown that wide, the S&P 500 has lost an average of 1.5% over the following 20 days. A decline that small would perhaps be more interesting to day traders than long-term savers. But the note has a takeaway for everyone: A broadening out of this year’s rally is “encouraging,” but a surge among low-quality stocks “often is the tail end of the move.” The S&P 500 index is up 17% year to date. Seven stocks combining for $11T in market value contributed 73% of the index’s first-half gains, according to BofA Securities and they are: Apple, Microsoft, Alphabet, Amazon.com, Meta Platforms, Nvidia, and Tesla.