Barron’s Weekend Summary: The world has stopped worrying about Covid—and Pfizer is paying the price.
Cover Story:
The world has stopped worrying about Covid—and Pfizer is paying the price. The sales of its two Covid blockbusters may decline over 60% in 2023, after generating a combined $57B in revenue during 2022. And there is considerable uncertainty about demand for both in the coming years. Pfizer stock, too, has fallen out of favor, along with other Covid plays. At $44, it’s down 15% this year, making it one of the worst performers in the S&P 500 SPX -1.04% index. And it’s 30% below its late 2021 peak, badly trailing the rest of the drug group. And therefore: Now looks like the time to buy the stock. Pfizer trades for 13 times projected 2023 earnings and yields 3.7%, more than double the S&P’s dividend rate. The payout, backed by ample earnings and one of the industry’s best balance sheets, looks very safe.
Interview:
Jurrien Timmer, director of global macro at Fidelity Investments, sees himself as a storyteller, connecting the dots between history and current economic trends to get a sense of where markets are headed. Although stocks are much cheaper today than they were a year ago, he worries that U.S. investors are still too sanguine about the outlook for the economy and corporate profits. In other words, they’ve bought into a just-right, or Goldilocks, scenario that seems unlikely to play out. Timmer is part of the firm’s global allocation team that oversees $586B. He expects non-US stocks to outperform this year, and bonds to reward investors as inflation and interest rates return to more normalized levels. Timmer recently spoke with Barron’s about the challenges and opportunities that lie ahead for investors, and why the next 10 years won’t resemble the zero-interest-rate era just past. An edited version of the conversation follows.
Tech Trader:
-The Federal Reserve’s aggressive campaign to raise interest rates may be about to end-and the market’s pendulum has swung decisively back to greed from fear. Just like the good old days. C3.ai AI +18.07% (ticker: AI) shares have doubled over the last month, I suspect largely because they have the ticker symbol AI—and there’s nothing hotter right now than all things AI. Avaya Holdings AVYA +2.56% (AVYA), an old school telecom hardware company on the verge of bankruptcy, has nonsensically doubled since year-end. The triple-digit gainers include battered merchandise like home goods seller Wayfair W –7.70% (W), buy-now-pay-later financing outfit Affirm AFRM –14.14% (AFRM) and, of all things, Coinbase Global COIN –8.38% (COIN), the cryptocurrency trading house. Makes you wonder if SPACs are about to make a comeback.
The Trader:
-The jobs data confirmed is that it’s tough to see a recession, no matter how hard you squint. The release on Friday morning showed that the U.S. economy added a seasonally adjusted 517,000 nonfarm payrolls in January, more than doubling the job growth expected by economists. The unemployment rate at 3.4% is at a nearly 54-year low. Despite that, average hourly wages increased by 4.4% year over year, slower than the 4.8% increase through December. That’s a promising sign that salary growth can slow without widespread job losses—and an economic slowdown. There’s still a big disconnect in the market’s logic. If the labor market and the economy hold up, then the Fed would probably not feel inclined to lower interest rates in the back half of 2023, as futures pricing implies.
-Infrastructure stimulus and the transition to renewable-energy generation could provide a big boost to some stocks in 2023. Unfortunately, one of them won’t be around for investors to play. That would be Atlas Technical Consultants, which Barron’s recommended buying ahead of Congress passing the $1.2T Infrastructure Investment and Jobs Act in late 2021, when shares were around $9. Atlas, which provides engineering and design services, inspection and certification of buildings and public works, and other construction-related services, benefited from the infrastructure-spending buzz in the following months: The stock rose to $13 by March 2022. Those gains didn’t last. By the end of the year, shares were below $6 as investors fretted over Atlas’ substantial debt load in a rising-rate environment.
Features:
-January’s stronger-than-expected jobs report, released this Friday, has surprised—and baffled—economists on Wall Street. Although the latest numbers suggest diminished risks of a recession, they generate more uncertainty about the current state of the economy and the Federal Reserve’s course. Economists called the strong jobs numbers “confusing,” “noisy,” “eye popping,” a “head scratcher,” and a “paradox.” Still, many view it as an “encouraging” sign of the “surprisingly resilient” jobs market: The US economy added more than twice as many jobs in January than economists had expected—nonfarm payrolls increased to 517,000. Unemployment rate fell to the lowest level in at least 50 years, and weekly working hours increased, partially thanks to the warmer winter weather this year that allowed more time for outdoor work. While all this sounds like good news, it isn’t what the Federal Reserve wanted.
-The labor report released Friday shows that fewer Americans are unemployed than any time in the past five decades. The unemployment rate fell to 3.4%, as the economy added 517,000 jobs. But in some industries the rate is much lower. In the category defined as “mining, quarrying, and oil and gas extraction,” for instance, the unemployment rate is now just 0.3%, versus 8.4% a year ago. Only 2,000 people were looking for work in the industry in January, versus 46,000 last year. It’s a testament to the rebound in those industries since the depths of the pandemic, but also to a growing labor shortage.
European Trader:
-As the recovery in international travel continues, and demand in the UK stays strong and pricing remains robust, it might be worth checking into the UK based hotel group Whitbread. The stock has had a stellar start to the year, climbing 20%—in comparison to the broader FTSE 100’s 4% rise. But it might not be too late for investors to book the hotel and restaurant group because there are potential catalysts for more gains. Whitbread’s budget Premier Inn chain is showing no signs of a slowdown, with strong sales in the third quarter and an upbeat outlook. It is also poised to gain market share as UK hotel supply declines, a trend which the company says will keep pricing strong.
Emerging Markets:
-A lot of hype has gathered around India recently. The South Asian giant is on track to surpass China as the world’s most populous nation this year. It’s overtaking its neighbor in economic growth, too. India should expand by 6.1% during 2023, compared with 4.4% for China according to the UN. India’s once-dreaded overpopulation has morphed, in economists’ eyes, into a “demographic dividend”: Citizens with a median age of 27.6, against China’s 37.9, will power progress for decades to come. Timely reforms from Prime Minister Narendra Modi are unleashing this latent juggernaut. That’s the line anyway.
Commodities:
-Silver has sharply outpaced gold’s gains in the past three months, and its classification as both an industrial and precious metal may lead it on a path to even higher prices. From Oct. 31 to Jan. 31, Comex silver futures climbed nearly 25%, outpacing gold’s almost 19% climb, a “statistically unusual amount that shows the precious metals market is bullish on global economic growth in 2023,” wrote Nicholas Colas, co-founder of DataTrek Research, in a Jan. 25 report. He pointed out that silver is primarily an industrial metal, while gold is used mainly as an investment and for jewelry—so the better performance for silver prices supports the idea that the “global economy is in better shape than feared in mid-2022.”
Streetwise:
-This week, Jack Hough takes on activist investors: Activists in general don’t seem to add much value to the companies they target beyond an initial pop in the stock price. They also tend to earn uninspiring returns for their own investors, after taking hefty fees. What’s an activist? A corporate raider without the commitment. If you’ve ever been to a Peewee basketball game and heard parents coaching from the stands, picture one of them walking to the bench, sitting down, grabbing the clipboard, and telling Silas to stop chucking from the outside, Jasper to hit the boards, and Henry to go turn his shorts right-side-out. The actual coach would probably welcome that help as much as CEOs appreciate raiders and activists, the two main types of high-finance buttinskys.