Barron’s Weekend Summary: Energy has been a focal point of global events
Cover:
-Energy has been a focal point of global events, including the Israel-Hamas war and the growing electricity consumption of artificial-intelligence applications. Investing in these events has proven challenging. A roundtable of industry experts, including Natasha Kaneva from J.P. Morgan, Stephen Byrd from Morgan Stanley, Stan Majcher from Hotchkis & Wiley, and Lucas White from GMO, discuss oil prices, geopolitics, and the green energy transition. The group also shared their favorite stock picks, including a few stocks that could potentially double or triple. The geopolitical risk premium in the oil market is zero due to three reasons. Firstly, the main players in the Middle East have strong incentives to prevent the conflict from expanding beyond their geographical positions. Gulf states, such as Saudi Arabia, are attempting to re-establish diplomatic relationships with Israel and Iran, but are aware that these transitions are impossible with a militarized Iran.
Interview:
-no interview this week
Tech Trader:
-Alphabet's shares have risen as investors believe it has not fallen behind ChatGPT developer OpenAI and its partner Microsoft. Alphabet's stock has risen 30% since early March when fears of AI rivals eroding its 90% share of search activity peaked. Google's annual developers conference began on May 14, and OpenAI demonstrated its next-generation technology, which provides quick written or spoken answers when prompted in audio, visual, or text input. Google's CEO Sundar Pichai and colleagues demonstrated their own multimedia abilities through its AI engine, Gemini. AI assistants and advisors will be embedded across Google's ecosystem, offering advice on projects and tracking user information. Google's travel tool, which draws on data on flights, hotels, local attractions, and weather, is a good case study for this. Other companies, such as Expedia and Booking.com, have also built AI travel assistants using OpenAI's platform. These tools could create new placements for search ads that bring Alphabet $200B a year.
The Trader:
-Uber Technologies' recent announcement of buying Foodpanda, Delivery Hero's Taiwan-based food-delivery business, for $950M in cash and investing $300M into the company for a 3% stake in the German company, has caused a 16% drop in Uber stock since its peak in March. The acquisition could weigh on Uber's near-term profits, as Delivery Hero is expected to see a $377M net loss this year. If Uber owned Foodpanda, around $11M of its net loss would be attributable to Uber, or about 0.5% of its expected $1.89B of net income this year. However, the market seems to be overreacting, as the deal is strategic and small losses are a short-term blip on the radar that will ultimately boost Uber's earnings substantially. Uber aims to establish itself in Asia, where it gets just over a tenth of its $38B of revenue, which is the highest growth market for food delivery.
-The stock market has seen gains this week, with the S&P 500 index rising 1.4%, the Nasdaq Composite up 2.1%, and the Dow Jones Industrial Average gaining 0.9%. The gains come after the April consumer price index release, which showed a 3.4% year-over-year increase in inflation, down from March's 3.5%. The market was concerned that the Federal Reserve would have to raise rates to bring prices down, but rate cuts are back on the table. The core CPI, which strips out food and energy, increased by 3.6%, and shelter prices, which comprise almost half of the core index, rose 5.5%. Core inflation remains too strong, and if inflation does start trending up again, many pillars of the current rally would fall. Bond yields, which slipped from nearly 5% in April to just over 4.3% this week, have certainly helped stocks rally, but a reversal could send the S&P 500 lower, as has happened in the recent past.
Features:
-Walmart's reliance on wealthier customers, defined as those with household incomes over $100,000, has contributed to its success in the past two years. However, former Walmart CEO Bill Simon warns that this reliance could be a double-edged sword. While attracting affluent shoppers during high inflation and a volatile economy is easy, retaining them once economic conditions improve is harder. Walmart has been gaining market share among wealthier shoppers, which make up about a third of its overall customer demographic. This is important as higher-income shoppers tend to buy more discretionary items, which carry higher margins than groceries. Both investors and company executives want share gains to improve and push revenue higher.
-Nestlé, the world's largest food company, has been experiencing a decline in its stock over the past five years. The company, which generates over $100B in annual revenue, has reported weak sales volume in recent quarters, causing a shift in sentiment towards the company since 2022. Nestlé's U.S. shares have fallen 15% to $105.47 over the past year, lagging behind the S&P 500 index, which has gained over 25%. However, CEO Mark Schneider believes that first-quarter sales were affected by one-time factors and that volume will rebound in the coming quarters. Nestlé's adjusted EPS were up 8% in 2023 and are expected to be at the lower end of the 6% to 10% range this year. Despite missed expectations and a loss of its premium, the company has a good opportunity to recover by delivering decent results in the second quarter and second half of 2024.
Europe:
-The Bank of England is set to become the first major central bank to have a majority of women voting on interest rates. Clare Lombardelli will join the Monetary Policy Committee in July, bringing the number of women on the panel to five. This diversity puts the BOE at the cutting edge for diversity, which psychologists say is important for high-quality decision-making. The change comes as central bank banks worldwide are under scrutiny after failing to see the surge in inflation following the Covid-19 pandemic. Research suggests that greater diversity guards against groupthink, and poor forecasts and ill-considered moves can have big consequences when setting interest rates.
Emerging Markets:
-Vietnam, once an economic tiger and manufacturing rival to China, has been plagued by political infighting. The country's president and parliamentary speaker have both resigned amid concerns of impropriety. Investors are concerned that Nguyen Phu Trong, head of Vietnam's Communist Party, could follow the example of China's President Xi Jinping, purging rivals to forge a quasi-dictatorship. Gregory Poling, director of the Southeast Asia program at the Center for Strategic and International Studies, or CSIS, believes that Trong will at best limp to the next Party Congress in 2026. Vietnam’s economic growth is expected to return to 6%-plus this year after a dip to 5% in 2023 on diminishing global trade. President Joe Biden's visit to Vietnam last autumn and a $250M from Nvidia have helped. Vietnamese talent is ideally suited to the semiconductor and AI sectors. This spells bargains in underappreciated Vietnamese stocks, with top picks such as FPT, an information-technology services pioneer, and Mobile World Investment, a retail chain expanding from its base in electronics to groceries. Still, corruption-linked purges at the top have a chilling effect on lower-level Vietnamese officials, delaying vital infrastructure improvements. The political stalemate may also delay important regulatory upgrades for banking and real estate, sectors highly prone to crisis and scandal. Fallen property tycoon Truong My Lan was sentenced to death last month after bilking a bank she controlled.
Commodities:
-Copper and gold have seen significant gains this year, with front-month futures in New York pricing copper around $5/lb., up over 25% since the start of the year. Gold is up around 16% and traded over $2,400/oz. on Friday, up 0.9%. Factors fueling copper's run include demand trends like utilities upgrading grids, electric vehicle usage, and home-building, as well as energy demand for data centers running AI apps and servers. A supply squeeze with the U.S. awaiting shipments of copper from South America and Australia may keep copper prices rising until shipments arrive. Technical factors are also lifting copper, with commodity traders scrambling to buy physical copper on US exchange CME 0.19%. However, futures markets don't see demand holding up in the near term, as copper futures trading about 6% lower than front-month futures contracts, suggesting demand is expected to fall.
Streetwise:
-McDonald's reported a 2.5% growth in US same-store sales for the first quarter, but its second quarter started flat. The company is set to launch a limited-time $5 meal starting June 25. Shares are down 8% year to date, despite an 11% gain for the S&P 500 index. This could be a sign of consumer stress, as Oreo maker Mondelez International has criticized increasing price sensitivity and Kraft Heinz has seen a pullback by low-income shoppers. UBS expects more promotional activity in the second half of this year, with chains with the most low-income exposure faring worse. Jack In the Box and Chipotle Mexican Grill have seen their shares sink and rise respectively. Starbucks, which skews posh, has seen its shares down 20% this year, including a one-day, 16% plunge after quarterly results. BofA Securities sees little sign of economic stress in average check sizes or add-ons, but Starbucks is likely affected by social-media boycotts related to Israel and Gaza.