Barron’s Weekend Summary: This week’s cover features four panelists who participated in the 2023 Barron’s Roundtable
Cover Story:
-This week’s cover features four panelists who participated in the 2023 Barron’s Roundtable: Delphi Management’s Scott Black, Gamco Investors‘ Mario Gabelli, Epoch Investment Partners’ William Priest, and Abby Joseph Cohen, a longtime strategist at Goldman Sachs and now a professor of business at Columbia University’s Graduate School of Business. Collectively, they scoured the markets and dug deep to find 26 companies, both familiar and obscure, whose shares are poised to shine in the year ahead. Overall, the Rountable featured 10 participants, who were divided in their market outlook when the group met in New York on Jan. 9. Some expect stocks to lose further ground as the Federal Reserve hikes interest rates, likely pushing the economy into a recession in the back half of 2023. Others think the Fed will cease its exertions sooner rather than later, declaring inflation sort of tamed and paving the way for a market rebound.
Interview:
-No interview this week
Tech Trader:
-For over two decades, Thoma Bravo has invested in more than 420 technology businesses. They currently have stakes in more than 70 companies, and they are stepping on the accelerator. In 2022, the tech-rich NASDAQ Composite index fell more than 30%, with many cloud-based software companies suffering steeper declines. For a firm in the business of buying, fixing, and selling tech companies, the opportunity came loudly knocking. In December, Thoma Bravo raised $32.4B in fresh capital, including $24.3B for its Thomas Bravo Fund XV, the single-largest tech buyout fund ever assembled. It has stockpiled cash. In 2022, tech deals ground to a halt: The initial public offering market shut down; strategic buyers turned cautious, amid economic worries and greater regulatory scrutiny; and spiking interest rates slowed the buyout market. The exception was Thoma Bravo. Since the start of 2022, either alone or in combination with other investors, the firm has bought or announced plans to acquire UserTesting, Nearmap, Coupa Software, Ping Identity, ForgeRock, SailPoint, Mercell, Anaplan, and Bottomline Technologies, to name a few. And there will be many more to follow.
The Trader:
-Compass resembles a publicly traded middle-market private-equity firm, which buys, holds, and sells a portfolio of businesses in niche industrial and consumer markets. Its 11 subsidiaries sell everything from baseball bats, to diamonds, to foam packaging and insulation, to baby carriers. Altogether, Compass should generate about $2.2B in sales and adjusted Ebitda—short for earnings before interest, taxes, depreciation, and amortization—of about $465M in 2022. The company has a market capitalization of about $1.5B. Compass’ portfolio has evolved over time. Its management is shifting money toward faster-growing businesses, rather than cash cows that may generate more sales today, but operate in mature markets with less growth potential.
-Sometimes, being a value investor means going where others prefer not to go. For some, that means wading into controversial situations in which a business is unloved due to past transgressions. That describes Wells Fargo and Walt Disney, says Aaron Dunn, co-head of the value equity team at Eaton Vance. Wells Fargo, which dropped 1.1% this past week, has been subject to a Federal Reserve-mandated asset cap since 2018 and has paid fines to settle charges of illegal conduct. Its recent earnings report revealed that profits had been cut in half. But the stock trades for nine times 2023 estimated earnings and one time book value, versus about 10.5 times and 1.4 times, respectively, for JPMorgan Chase, which lacks the same drama—and that makes it attractive. “There’s a lot of internal change and cost cutting that the management team is bringing in [at Wells Fargo], and you have a relative-valuation tailwind,” says Dunn, who co-manages the Eaton Vance Value Opportunities fund.
Features:
-Several stocks highlighted in Barron’s fell victim to the same dynamics that sunk the broader market—inflation, high interest rates, and supply-chain slowdowns. But overall, its bullish picks fared better than their benchmarks in 2022. From the date of publication through the end of the year, Barron’s names fell 4.8%, while the indexes they are tracked against fell 5.2%. Its two bearish calls hit the mark, too, falling far more than their benchmark. Barron’s follows the performance of its stock picks throughout the year, to allow readers to see how well our predictions work out versus the S&P 500, or the S&P MidCap 400, or the Russell 2000 , depending on company size.
-Americans are flocking to electric vehicles (EV), pushing sales up 127% over the past two years. To encourage the EV market, the US Federal government is offering a tax credit of up to $7,500 for EVs and other “clean vehicles,” including plug-in hybrids. But to qualify, buyers will have to untangle a myriad of eligibility rules. Dealers aren’t likely to sell for anything below sticker price. And note that additional rules are expected from the Internal Revenue Service in March—cutting or eliminating credits for some models. “If you want an EV, now is the time to go after it,” says Ingrid Malmgren, policy director for Plug In America, an EV advocacy group.
The credit rules, revised under the Inflation Reduction Act, are a hash of good and bad news for buyers. One positive change is that models from General Motors and Tesla now qualify. The government no longer has an eligibility cap of 200,000 EV sales—a provision that restored the credits for GM and Tesla. Tax breaks are also available for plug-in hybrids like the Audi Q5 PHEV and BMW 330e. And, for the first time, you can get a credit on used cars.
European Trader:
-ArcelorMittal, the world’s second-largest steel maker by volume, with facilities in 16 countries on five continents, has faced severe headwinds the past year as the cost-of-living crisis caused consumers to rein in spending. In addition, the company has had to navigate Covid-19 lockdowns in China, which caused companies to scale back production.
The stock has fallen 8.6% to 28.90 euros ($31.25) over the past 12 months, and the prospect of a recession in 2023 will make it a tough year. But this could prove to be a buying opportunity because ArcelorMittal is using its scale, its geographical spread, and its focus on growth markets to defy the odds. Access to gas to power factories and offices is a key issue. And while Russia’s war in Ukraine hit gas supplies in Europe, ArcelorMittal has facilities spread across eight countries, which mitigates this impact. Energy is a big overhead, but prices have fallen and the steel maker stands to benefit because it had the foresight to not hedge its energy costs in the fourth quarter.
Emerging Markets:
-China’s stunning policy U-turn hasn’t excluded real estate, which in better times powered a quarter of the No. 2 economy. Developers, who the government decided two years ago were overleveraged, were supposed to comply with the three infamous financial limitations by June 2023. Authorities are easing back that deadline now, if not junking it altogether. “Forestalling and defusing risks in the sector is the bottom line,” housing minister Ni Hong said recently. Beijing has backed that dovish line with a raft of stimulus measures: soft credits for beleaguered builders, lowering mortgage rates and requirements. Investors like it. The Global X MSCI China Real Estate ETF has gained 60% from a trough in October. Developers’ dollar bonds have done better than that, erasing most of the past year’s losses, says Tracy Chen, a portfolio manager for global credit at Brandywine Global.
Commodities:
-Energy exploration and production company EOG Resources had a bullish 2022, and one of its directors made his second purchase of shares in three months. EOG stock surged 46% last year, lifted by rising oil prices. The company also announced a strong third quarter in November, along with a higher dividend. “EOG is in a better position than ever to deliver value for our shareholders and play a significant role in the long-term future of energy,” the company said. On Jan. 12, EOG director Mike Kerr paid $2.6M for 20,000 shares, at an average price of $130.49 each. According to a filing with the Securities and Exchange Commission, Kerr purchased the shares through a family trust that now owns 170,000 EOG shares. Kerr also owns 10,854 EOG shares through a personal account.
Streetwise:
-This week, Jack Hough talks about Davos, which, he complains, is a ski-resort and, therefore, is not very dress-shoe friendly. Hough does mention that there were plenty of substantive talks with companies about business conditions, growth strategies, and how investment do-goodism is evolving. At a Barron’s event, a private-equity CEO responded to our critical coverage of his real estate fund. Another described how she has turned skepticism around scorekeeping used in social-conscience investing into a revenue opportunity. Frédéric Lissalde, who runs BorgWarner, talked about a planned spinoff of a NewCo to sell fuel injectors and other systems tied to gasoline and diesel. The remaining company, still called BorgWarner, would be more focused on systems for electric vehicles, as well as drivetrains for fuel burners, where know-how can be put toward battery propulsion, too.