Barron’s Weekend Summary: Markets aren’t exactly full of optimism about China, but Mizuho analyst James Lee thinks it’s time for investors to take a fresh look at China’s internet sector.
Cover Story:
-With stocks down 20% this year—and in many cases, much more—the Barron’s Roundtable pros are busily buying companies with durable franchises, wide moats, strong balance sheets, abundant cash flows, and share prices far below what they think the businesses are worth.
Interview:
No update this week
Tech Trader:
-Markets aren’t exactly full of optimism about China, but Mizuho analyst James Lee thinks it’s time for investors to take a fresh look at China’s internet sector. The KraneShares CSI China Internet exchange-traded fund, a popular way to track Chinese internet stocks that’s better known by its ticker KWEB, has lost about two-thirds of its value over 18 months. It’s been pressured by the Chinese government’s crackdown on the tech sector and rolling factory shutdowns tied to the country’s zero-Covid policy.
The Trader:
-Mattel stock has had a good year. The shares are relatively unchanged from where they started 2022 thanks to the perception that toys are recession-proof, as well as hopes that the company will be able to sidestep the inventory problems that have hit many consumer-goods makers and the margin pressures affecting, well, everyone. Mattel gets a chance to test all that when it reports earnings on Thursday. The numbers aren’t particularly big—Mattel is expected to report a profit of 6 cents a share, an improvement from the 3 cents it reported during the same quarter the year before, while sales are expected to be up 7%, to $1.101B, from $1.026B. Expectations may actually be higher, however. JP Morgan’s Megan Alexander notes that investors might be anticipating earnings closer to 10 cents a share, something that would normally give us pause, but the hopes might be justified.
-It’s hard to describe another week of market losses as hopeful. The DJIA dipped 0.2%, the S&P 500 fell 0.9%, and the NASDAQ dropped 1.6%. The market, however, exhibited more resilience than might have been expected. After closing near its lows on Monday and Tuesday, the S&P turned large losses into small ones on Wednesday and Thursday, before closing up 1.9% on Friday. The market action was driven primarily by worries that the Fed would become even more aggressive to bring down inflation. The chances of a full-point interest-rate hike surged to more than 90% on Wednesday after June’s consumer price index increased by 9.1% from the year-earlier level.
Features:
Lawyers for Elon Musk filed papers with the Delaware Chancery Court, their first public response to the lawsuit filed earlier this week by Twitter seeking to enforce the terms of their merger agreement. The court should reject Twitter’s “unjustifiable request to rush this,” they said in their filing. Twitter has asked the court to expedite the proceedings, citing risks from the recent economic downturn and being held in limbo by a buyer. The company requested a trial by mid-September “to protect Twitter and its stockholders from the continuing market risk and operational harm resulting from Musk’s attempt to bully his way out of an airtight merger agreement.”
European Trader:
-Danish vaccine maker Bavarian Nordic is still in the trials stage with its Covid shot, making it a latecomer and dragging down its stock price. But its smallpox vaccine, alone in having been approved for use against monkeypox, gives the Copenhagen-listed firm a virtual monopoly. This could make the shares a buying opportunity. Bavarian Nordic stock has dropped from its March 2021 peak of 356 Danish kroner ($50.41) to a recent DKK243.
Emerging Markets:
-Nearly 5 months into Russia’s invasion of Ukraine, a cruel paradox persists: Western powers are substantially funding Vladimir Putin’s war machine by buying Russian oil and gas, while they fund Ukraine’s resistance with cash and weaponry. “We’re fighting a proxy war against ourselves,” laments Simon Johnson, former chief economist of the International Monetary Fund and now a professor at the Massachusetts Institute of Technology.
Commodities:
The lumber market has taken hits from rising inflation and a slowdown in the housing market, with lumber prices down more than 40% in the first half of the year. They could fall still further before bottoming out. Lumber has bucked the overall uptrend in the commodities market. The S&P Goldman Sachs Commodity Index, composed of 24 exchange-traded commodity futures contracts, jumped 26% in 2022’s first half. “Lumber truly has its Ph.D. in trading and is the ultimate canary in the coal mine when it comes to being a leading indicator for all other commodities,” says Greg Kuta, president and CEO of lumber broker Westline Capital Strategies. “The inherent volatility in lumber pricing is highly sensitive to both demand and supply dynamics, and is very quick to reflect changes in demand and supply on a micro level.”
Streetwise:
-Overall, the movie theater business is doing much better than feared, especially if we squint and extrapolate. One Wall Street analyst predicts 66% upside for IMAX and 40% plus a favorable dividend surprise for Cinemark Holdings. North American ticket sales during the first half were up 228% from last year, which tells us little, and down 31% from 2019, which isn’t a great comparison, either.