Barron’s Weekend Summary: Disgruntled Carvana customers have long shared their gripes about registration delays and other issues—including late deliveries, undisclosed vehicle damage, and missing accessories—on online message groups and to the media
Cover Story:
“Disgruntled Carvana customers have long shared their gripes about registration delays and other issues—including late deliveries, undisclosed vehicle damage, and missing accessories—on online message groups and to the media. Barron’s interviews with Carvana customers and former employees shed light on why registrations were delayed and how state regulators have tried to address the issue. The reporting reveals a company scrambling to address the problem, at one point forming an ad hoc unit known as the ‘undriveable-car task force.’”
Interview:
Fund managers Brian Smoluch and David Swank began dreaming of investments as college roommates nearly three decades ago. Now, they’re navigating the tumultuous world of small-cap stocks, looking for companies that are rapidly growing but overlooked by other investors. The former students at the University of Virginia are co-principals and portfolio managers of the Hood River Small-Cap Growth fund. They graduated from college in 1994, and while their professional paths initially took them in different directions, they “always wanted to do something together,” says Smoluch.
Tech Trader:
The tech giants have conviction that artificial intelligence is going to drive enterprise software from here. IBM CEO Arvind Krishna may have sold off the company’s old Watson Health business, but he remains a big believer in AI, which he thinks will spread across the company’s software offerings. Still, during his session, Krishna expressed skepticism about the recent claim that Google’s AI software has achieved sentience. Krishna thinks we might be 50 years away from software that’s self-aware—maybe longer. Meanwhile, as the Microsoft executive vice president for business development, strategy, and ventures, Christopher Young gives plenty of thought to the company’s future. He is convinced it will be tied to AI. Among other things, he’s bullish on tools that will make it easier for “citizen developers” to write code.
The Trader:
Polestar stock gained 14% after the electric-vehicle maker completed its merger with a SPAC the day before. That’s bad news for Lucid Group. The issue for Lucid isn’t direct competition. Polestar makes the all-electric Polestar 2, a $48,000 sedan that competes with Tesla’s Model 3. Lucid, for its part, sells the $170,000 Air Dream Edition, which costs even more than Tesla’s Model S Plaid, which can top out at $155,000. The issue is valuation: Polestar makes Lucid stock look way too expensive. Polestar has about 2.1B shares outstanding, giving the company an enterprise value of roughly $26B. That prices Polestar at 3.9x projected 2023 sales of $6.6B.
-Kellogg surprised investors this past week by announcing plans to split into three pieces. The stock might still be worth a look. Usually, when a company announces a spinoff, it’s to separate businesses that don’t work well together. That’s the case with the recent trend of pharmaceutical companies spinning off their consumer businesses, or General Electric’s decision to split into separate healthcare, power, and aerospace companies.
Features:
Early Friday, Polestar (the electric car company borne from Volvo) stock was at $12.10, up almost 8% to start its first day as a public company on the NASDAQ. But by late morning, the gain had vanished, leaving the shares down about 6.5% at $10.69. Then came the late rally. Shares closed at $13, up 14% for the day. The S&P 500 and Dow Jones Industrial Average ended Friday with respective gains of 3.1% and 2.7%. The closing of the deal, which Polestar announced Thursday afternoon, brings roughly $900M onto the books of the merged company. The final amount might be a little different, depending on how SPAC shareholders voted.
-Shares of Carnival rose Friday after the cruise line posted second-quarter revenue that rose sharply from the first quarter of 2022. Carnival reported a GAAP loss of $1.61 a share, wider than analysts’ estimates for a loss of $1.08 a share. Revenue was $2.4B, increasing by nearly 50% from the first quarter, but below projections for $2.76B, according to FactSet. Occupancy in the second quarter was 69%, up from 54% in the previous quarter. Customer deposits, in turn, increased $1.4B to $5.1B as of May 31, up from $3.7B at the end of February.
European Trader:
-De La Rue was founded by Thomas De La Rue, who relocated to London from the French-speaking British island of Guernsey in 1821 to seek his fortune. After making straw hats and fancy stationery, he moved on to printing color playing cards, railway tickets, and postage stamps. In 1860, his company made the first paper money for the government of Mauritius in east Africa. Today, De La Rue has designed 35% of all new bank notes issued in the world in the past five years. The company also prints passports, still makes postage stamps, and designs software for security and authentication. (It doesn’t make U.S. dollars—only the Treasury does that.)
Emerging Markets:
-Colombia’s newly elected president, Gustavo Petro, 62, brings a long, but not necessarily comforting, track record. Three decades in electoral politics have not sobered the former teenage guerrilla and political prisoner, detractors fear. “He’s a very messianic guy, a very ideological guy,” says Andres Pardo, chief Latin American macro strategist at XP Investments. Petro has praised Chávez in the past, and campaigned on declaring an “economic state of emergency,” which would enable him to govern by decree. He promised to fire the board of state oil company Ecopetrol and halt new exploration contracts, in the name of a green transition and reducing mineral export dependency. That would be a nontrivial move for a nation that exports more than 500,000 barrels a day, with plans to increase.
Commodities:
-Oil supply is “very tight, and getting tighter,” says Darwei Kung, head of commodities and a portfolio manager at DWS Group. About two million barrels a day of Russian oil and refined-product supplies are likely “stranded at the moment from either official or voluntary sanctions.” Meanwhile, US production, hasn’t climbed back to pre-Covid-19 levels as pandemic-related labor shortages and supply-chain constraints take time to be resolved, Kung adds. At current prices, the energy industry should be seeing significant capital investments, but increased regulations, tariffs, and the protectionist policies of some governments “inhibit the free flow of capital,” says Taylor McKenna, an analyst at Kopernik. That’s contributed to tight oil supplies and suggests high prices may continue.
Streetwise:
-Jack Hough thinks that “Kellogg needs a new company name that evokes snacking and overseas growth, not Americans slurping down Frosted Flakes. Something subtle. Is ¡Munch-ivërsal! taken? See, the company said this past week that it will split into three parts by the end of next year: Global Snacking Co, North American Cereal Co, and Plant Co. Don’t worry: Those names are only placeholders, and the plant one will sell veggie burgers, not geraniums.”