Barron’s Weekend Summary:
Cover Story:
-Tellus App, founded in 2016, uses social media to advertise its “smart savings platform powered by real estate.” It has made about $100 million worth of loans, according to industry tracker Attom. Tellus says its mortgages are funded using customer deposits. The company has played down the risks it takes with those deposits, Barron’s has found, even as the firm attracts millions in funding from tech-investment heavyweight Andreessen Horowitz and other venture-capital firms. The lack of candor is rare in the world of banking, where federal and state regulations require a strict set of practices around risk and the use of customer funds. But start-ups, many backed by VC firms, have pushed the envelope with their fusions of finance and technology that fall under the buzzy “fintech” banner. These tech-banking mashups largely go unregulated as authorities face the challenge of applying analog-era rules to digital disrupters.
Interview:
-This week, Barron’s interviews Larry Pitkowsky, who in 2011 cofounded GoodHaven, a company that has finally started performing the way its founders imagined. GoodHaven trailed its peers and the S&P 500 from its inception through the end of 2018, as large positions in oil and other commodity-related stocks soured, and bets on turnarounds failed to pay off. Net assets under management at GoodHaven totaled $551M on Aug. 31, 2014. Recently, the fund oversaw just $110M. But, in 2019, GoodHaven reorganized. Pitkowsky became controlling owner and sole portfolio manager, with fellow founder Keith Trauner holding a minority stake, along with Markel goodh the holding company that had helped seed GoodHaven when it launched. Pitkowsky’s plan, laid out in GoodHaven’s 2019 letter to shareholders, was to get back to basics by acknowledging that investing is “not an IQ test,” among other principles.
Tech Trader:
-Tech shares have dramatically outperformed the broader market in 2023, thanks in part to what Meta Platforms CEO Mark Zuckerberg calls “the year of efficiency.” Tech companies have reduced head count and tightened spending in response to weaker revenue growth and a slumping macroeconomic environment. The job cuts have attracted most of the headlines—27,000 at Amazon.com, 21,000 at Meta, 10,000 at Microsoft. But layoffs aren’t the only place where money can be saved. Companies can also spend less in the cloud. The ability to quickly dial up or dial down spending on the cloud is a feature, not a bug—it’s core to the whole premise of cloud computing that users can modulate spending on computing resources as business conditions fluctuate. That flexibility wasn’t possible when companies had to buy servers, storage, and switches and staff their data centers.
The Trader:
-The major indexes finished a listless week not far from where they started, with below-average daily trading volume and declining volatility. The S&P 500 closed up 0.8%, while the Nasdaq Composite gained 0.3% and the Dow Jones Industrial Average added 1.2%. The tone started to change on Friday when JPMorgan Chase, Wells Fargo, and Citigroup reported their first-quarter results, marking the beginning of earnings season for banks big and small. So far, so good—JPMorgan and Citigroup finished the day up 7.6% and 4.8%, respectively. The next few weeks will be chock-full of large and small banks revealing their numbers. The stakes are especially high for small to medium-size institutions following the failures of Silicon Valley Bank and Signature Bank. Many trade at valuations that reflect investor concerns over their long-term viability, explains Spenser Lerner, head of multi-asset solutions at Harbor Capital Advisors.
-Gold is near a record high—and the rally might not stop there. Three related forces are propelling gold toward a record price: economic concerns, lower bond yields, and a weaker US dollar. A boost in buying this year by central banks has added fuel to the rally. The tailwinds look likely to continue. The price of gold settled at $2,041.30 an ounce on Thursday, the second-highest value in history and about half a percentage point below the August 2020 record of $2,069.40. The yellow metal has gained 13% since late February, before Silicon Valley Bank failed. Gold is up more than 25% since November. Other precious metals have rallied even more lately: The price of silver has surged nearly 30% in a month.
There has been a flight to safety among investors in the past month, spurred in part by several high-profile bank failures and concerns about the broader implications for the U.S. financial system. Gold is among the world’s oldest stores of value, and demand tends to increase at times of heightened uncertainty.
Features:
-Life insurance stocks look cheap and inviting and their shares are also; because their finances are sound and the industry has gotten better at risk management. But many life insurance stocks fell more than 10% in March and trade for an average of 7.5 times projected 2023 earnings, among the market’s lowest valuations. Brighthouse Financial and Jackson Financial change hands for less than three times estimated 2023 earnings per share. There are valid reasons for the industry’s depressed valuations, including exposure to commercial real estate, but there are also opportunities to be had. Some of the better life-insurance plays are Equitable Holdings, Corebridge Financial, Globe Life, Primerica, Reinsurance Group of America, Unum Group, and Voya Financial (VOYA). Dividends range from 0.8% for Globe Life to 5.7% for Corebridge. “The life-insurance industry is in a good place,” says Andrew Kligerman, a Credit Suisse insurance analyst. “The companies are sound from a liquidity and capital perspective. Since the financial crisis, the industry has improved its risk-management practices.”
-Tesla stock drops on more price cuts. But investors should focus on something else: the electric-vehicle company’s first-quarter gross profit margins are due to be reported on April 19. Bulls believe price cuts reflect Tesla’s falling costs, while bears believe price cuts are a sign of weakening demand. The April 19 earnings report will be the next chance bulls and bears have to hear from the company about demand and pricing.
Tesla delivered 422,875 units in first quarter, up about 36% year over year. Sales, however, will grow closer to 20% because of the cuts. Investors will be focused on automotive gross profit margins, wrote UBS analyst Patrick Hummel in a research note. Investors expect a number in the 20s. “A miss on this metric would likely trigger a significant negative share price reaction,” added the analyst. He isn’t expecting that, though. Hummel projects 21.5% for first-quarter automotive gross profit margins. He rates Tesla shares a Buy and has a $220 price target.
European Trader:
-Zara’s owner Inditex is looking to the US as an engine for growth. If American shoppers can be tempted to spend more on its fast-fashion outfits, investors should find the shares are a good fit. Inditex’s expansion in the US has been cautious. It only has 101 U.S. stores, having opened its first in New York in 1989. That could change under CEO Oscar Garcia Maceiras, who has been in charge for just over a year. Over the next two years the company plans 30 projects—including new stores, relocations and enlargements—in major American cities. That will include new locations in New York, Boston, Charlotte, Los Angeles, Las Vegas, Dallas, San Antonio and Baton Rouge. The U.S. has become Inditex’s second-biggest market at around 7% to 8% of total revenue with less than 2% of its global store network, due to its strong digital presence, according to Bryan Garnier analysts.
Emerging Markets:
-The Financial System Is Looking Shakier and the IMF is keeping an eye out for potential trouble spots. Risks to financial stability have risen “significantly” amid the recent turmoil in the banking sector, the International Monetary Fund’s economists said on Tuesday, sounding a warning about hidden trouble, not just at banks but also nonbank financial intermediaries.
For several years, the multilateral organization has warned in its Global Financial Stability report of the potential fallout of interest rate rises after an era of historically low rates on banks and nonbank financial intermediaries. Those have come to pass with the trouble at Credit Suisse (ticker: CS) and failures of Silicon Valley Bank and Signature Bank in the US. There could be more pockets of strain but the steps policy makers have taken in recent weeks have contained the situation for now, Tobias Adrian, director of the IMF’s Monetary and Capital Markets Department, said in a press briefing as the IMF and World Bank kicked off their annual spring meetings in Washington. He expects monetary policy to stay focused on inflation, which has proven to be more persistent than expected.
Commodities:
The US. grows roughly one-third of the world’s corn, in the range of 380M metric tons each year. More than 40% of the annual US corn crop is used to make ethanol, a fuel that is mixed with gasoline to achieve desired octane ratings for the gas we use to fill up the tanks in our cars and other vehicles.
Some of that corn demand is at risk by from electric-vehicle adoption, D.A. Davidson analyst Michael Shlisky wrote in a Friday report. As more electric vehicles are sold, less ethanol is needed. So if Tesla gains, corn loses. Tesla remains the global leader in EV sales. Of course, Elon Musk’s company wouldn’t be solely to blame for reduced ethanol demand. Other major auto makers, such as Ford Motor and General Motors, are pushing their businesses toward EVs, and a slew of start-ups are chasing the market as well.
Streetwise:
-This week, Jack Hough talks about what to consider when investing in zing. Zinc ore is typically only 5% to 15% zinc. Miners crush and separate it to make 55% zinc concentrate, which gets sent to smelters, which use high heat to turn it into 99%-plus finished metal. Last year, a smelting bottleneck left zinc ore in a glut and finished-metal prices high. This past week, industry giants raised smelting fees by 19%. That should provide plenty of incentive to ramp up finished zinc output, so analysts consider it a bearish sign for prices. But watch construction in China closely, as much of zinc is used to “galvanize” steel for corrosion resistance. Also, track the war in Ukraine, because smelting is energy-intensive, so any rebound in European energy supplies could revive smelting capacity there.