Barron’s Weekend Summary: 10 Barron’s panelists help make sense of increasingly complicated market dynamics as part of their annual gathering
Cover Story:
-10 Barron’s panelists help make sense of increasingly complicated market dynamics as part of their annual gathering, which was held on Jan. 9 in New York City. The participants agree on a few fundamentals: The age of free money is over. Valuation matters again in equity markets, unlike in recent years, and fixed income finally lives up to its name, offering ample income and a viable alternative to stocks. Regardless of the economic backdrop—and few see a deep or lengthy recession in 2023—bulls and bears alike should find plenty to entice them amid the rubble of 2022. Prospective winners include, among many others, broken IPOs, dividend payers, international issues, even the shares of tech companies getting religion on costs.
Interview:
No interview in this weekend’s edition
Tech Trader:
-Even without major moves from Congress, 2023 is shaping up as a year in which the government will have a big impact on tech. For example, coming this September is the US vs. Google, the longstanding Department of Justice case asserting antitrust violations by the search giant. The crucial question is whether Alphabet has furthered a monopoly by paying Apple for the right to be the preferred search engine on Apple devices. Any ruling that breaks up the cozy relationship would be bad for both sides—Apple provides more than half of Google’s search traffic, according to some estimates, while collecting an annual fee reportedly above $10 billion. (The actual number isn’t disclosed.) A court-ordered change could be a big win for Microsoft Bing.
The Trader:
-Inflation, while slowing, is still present, though it might not be for much longer. Signs of looming price declines are starting to show up. Take apartments, which about 40M Americans call home. They felt the inflationary pain in 2022, with average rents up about 7% year over year, according to the Bureau of Labor Statistics. But those high prices have started to pinch, and now it seems like no one is looking to move. Real estate service provider RealPage notes that demand had “all but evaporated” by the end of 2022. “Volume always precedes price,” says one real estate investor, and he’s right. Rents will have to fall to get people thinking about moving again. Car prices are also too high. The average new-car price in the US hit a record $49,507 in December, according to data provider Cox Automotive. Those prices are starting to hit demand as well, and forcing companies to reconsider. Tesla, for one, cut prices for some of its vehicles by up to 20% this past week as inventory piled up and order rates took a dive.
-Barron’s calls Martin Marietta Materials a stock for all seasons. Martin Marietta is a producer of aggregates, the industry term for stone, sand, and gravel, and it’s a pretty solid business. It has some natural barriers to entry—it isn’t easy to find and start a new quarry—and high regional market shares give players some pricing stability. It can weather both inflationary and deflationary environments, and despite the weakening economy, its outlook for growth is improving.
How is that possible? For starters, Martin Marietta has between 20% and 30% share of the markets it operates in, including Texas, Florida, Georgia, and Colorado, and aggregates markets are largely local because it’s too expensive to ship gravel long distances. Rocks are dirt cheap, but pricing has been moving up over time. In the third quarter, Martin Marietta realized $16.65 for a ton of aggregate, up from $13.40 five years ago, an average annual gain of about 4%. Volumes at Martin Marietta have grown at an annual rate of about 6.5% over that span, both organically and through acquisition.
Features:
-It’s looking like a buyer’s market for companies looking for acquisitions and partnerships, according to many of the pharmaceutical and medical technology executives who gathered at this year’s J.P. Morgan healthcare investor conference, which wrapped up in San Francisco on Thursday.
“We’re getting lots of calls from companies that literally we talked to six months ago,” says Geoff Martha, CEO of Medtronic, a medical device manufacturer. The change to the medical device and biotech sector has come just in the past few months. As recently as April, when the SPDR S&P Biotech exchange-traded fund dropped 40% from its early 2021 peak, Merck CFO Caroline Litchfield told Barron’s that biotech leaders still thought their firms were worth what they had been before the market fell. Now biotech boards are no longer counting on the prices ticking back up soon. “It’s changed completely in terms of both the deal structures they’ll contemplate, the valuations that they’re thinking about,” says Andrew Dickinson, CFO of Gilead Sciences.
-Rising rates have made all types of annuities more interesting investments, but two in particular are worth considering now: Multi-year guaranteed annuities—MYGAs, for short—are the insurance world equivalent of a bank certificate of deposit. Just like with CDs, rates have shot up in the last year. Unlike CDs, gains in a MYGA are tax-deferred until you take the money out. And these same tax deferral in fixed index annuities, which are otherwise far more complicated products. They promise returns linked to a myriad of different indexes. In many FIAs, your investment doesn’t lose value when the index drops, however, you only get a portion of the gains when it rises. The upshot is that higher rates allow insurers to give investors a bigger share of gains during up years.
European Trader:
-Mining and commodities trading giant Glencore was one of the FTSE 100’s top performers last year, and it could be set to repeat the trick in 2023.
Glencore was the third-best performing stock in 2022, behind defense giant BAE Systems and publisher Pearson, climbing 47%, largely driven by record thermal coal prices. The miner’s exposure to coal is also what makes it an attractive proposition in 2023, while China’s reopening should push metals prices higher, adding to Glencore’s upside. Over the longer term, its status as one of the world’s leading producers and marketers of copper leaves it well placed to benefit from the global transition toward greener energy.
Emerging Markets:
-Despite an episode of unrest in the Brazilian capital, the markets promoted Brazil over the past week. The iShares MSCI Brazil ETF climbed 6% since rioters swarmed the Congress and presidential palace in Brasilia on January 8. The yield on 10-year sovereign bonds shrank more than half a percentage point to 12.4%. Brazil’s event bears extensive parallels with the US insurrection a year and two days earlier—only Brazil’s elite united much more decisively to defend their democracy afterwards. Society seems inclined to follow for now.
-China is reopening faster than many anticipated after policy makers’ abrupt U-turn on their harsh Covid policies. But unlike past Chinese recoveries, this one is unlikely to set off a surge in demand for commodities and send prices soaring, including for oil. That’s good news for global central bankers trying to tamp down inflation.
When Europe and the US started to reopen following pandemic restrictions, it sparked inflationary pressures by increasing supply chain snarls. Demand outstripped capacity, and created a surge in prices, including for hotels, dining out and airfare as consumers tried to make up for lost time.
Commodities:
-You say crypto, I say tomato or better corn: Over the past two years, cryptocurrency companies like FTX, Coinbase and Cash App lured several athletes, in equity and sponsorship deals ,while paying them the company’s shares, or crypto itself. That didn’t work out very well for some high-profile athletes. You might ask one Tom Brady about this. The high profile failures may have injected a dose of more common sense into athletes’ ambitions. Cincinnati Bengals quarterback Joe Burrow, Boston Celtics forward Blake Griffin, New York Islanders forward Anders Lee, Toronto Blue Jays pitcher Kevin Gausman, and Milwaukee Bucks forward Khris Middleton are among the pro-athletes who recently purchased a 104-acre corn and soy Iowa farm for $5M.The financial acquisition was made through investment vehicle Patricof Co. The plan is to lease the land to farmers, in hopes of a single-digit-percentage annual return—24 athletes in total are part of the purchase, according to FrontOfficeSports.
Streetwise:
-This week Jack Hough talks about noted activist investor Neslon Petz’s appetite for turnarounds and penchant for PowerPoint presentations to highlight the errors of smug CEO’s. This past week, Peltz targeted no less than Bob Iger, CEO of Disney. Peltz argues that Disney’s adjusted show-business earnings should have climbed from $9.4B before the Fox deal to $13.3B with promised synergies, but have instead fallen to $3.1B, or $7.1B not counting streaming losses. “Is there a large Fox write-down on the horizon?” his report asks. Debt is up, the dividend is gone, and the stock has stunk. As Peltz puts it, Disney has spent $162B since 2018 on deals, content, and capital investments, and the result is a halving of earnings per share.