Barron’s Weekend Summary:US investors have largely focused on China’s tech giants, but given the situation today, there are better options.
* Cover Story
-US investors have largely focused on China’s tech giants, but given the situation today, there are better options. For years, the Chinese government allowed—even assisted—internet companies, enabling them to blossom with little intervention. This created lucrative returns for investors and helped the nation mint more billionaires—257—last year than any other country. Investors became less wary, even complacent, as the world’s second-largest economy seemed to be embracing capitalism. That narrative has been unraveling. As President Xi Jinping makes an expected bid for a third term next year, he is trying to strengthen his grip on the Communist Party and address public discontent, emphasizing social welfare and national security, and regulation that targets swaths of the economy.
* Tech Trader:
-One peculiar outcome of the pandemic has been a newfound appreciation for the personal computer. The humble PC had been out of the spotlight for years. Eclipsed by the rise of smartphones, the PC had become a stale, dull, largely underappreciated appliance—technology’s toaster. This revival has boosted the fortunes of Apple (AAPL), Dell Technologies (DELL), and HP Inc. (HPQ). Earlier this year, demand jumped into ludicrous mode: In its March quarter, Apple posted 70% growth in Mac sales. In their April quarters, consumer PC sales rocketed upward by 72% at HP and 42% at Dell.
* The Trader:
-Federal Reserve Chairman Jerome Powell’s masterful message was received loud and clear by an optimistic stock market—yes, a taper is coming, but don’t even think about rate hikes. The Kansas City Fed’s Jackson Hole Economic Symposium has a reputation for being the place where Fed chiefs drop bombshells on the market. It was where Ben Bernanke hinted at the coming of new Fed stimulus programs in 2010, 2011, and 2012, and where Jerome Powell laid out a backward-looking, rather than forecast-based, monetary policy in 2020. -
There’s no doubt that the housing boom has gone to extremes. New home prices, we learned this past week, rose 18.4% in July from the level a year earlier, and are now 18.5% higher than they were in December 2019, prior to the Covid-19 pandemic. Before a 10.9% jump in December, home prices hadn’t experienced a double-digit year-over-year gain since 2016. The iShares U.S. Home Construction exchange-traded fund (ITB) this year has returned more than 30%, including reinvested dividends, easily outpacing the S&P 500’s 20% return. But as sharp as the rise in home prices has been, they still have a way to go before reaching the level of the housing bubble.
-Lululemon Athletica’s (LULU) stock hasn’t gone very far since its six-month stay as a stay-at-home darling in the immediate aftermath of the pandemic bear market. Its second-quarter earnings might just be the catalyst it needs to get moving again. The drop began with a downgrade, one that cited its valuation—it traded at over 11 times 12-month forward sales estimates when it was cut on Sept. 4, 2020. Lululemon results, scheduled for release on Sept. 8, could change all that. The company is expected to report a profit of $1.18 a share on sales of $1.33 billion, while same-store sales are expected to have increased by 36.1%. And there’s a good chance that earnings will be even better than that.
* Interview:
-Former collegiate basketball player Doug Ramsey is constantly balancing this dynamic, only in a different arena. As chief investment officer of Minneapolis-based investment-research firm Leuthold Group, Ramsey oversees the firm’s extensive macroeconomic research, which it publishes in its widely followed Green Book. At the same time, he is a co-manager of two funds, the $614 million Leuthold Core Investment (ticker: LCORX) and the $29 million Leuthold Global (GLBLX). The former is a 25-year-old tactical allocation fund that aims to keep pace with the overall market but with less risk. Since its inception through the end of July, it has returned an average of 8.5% a year, versus 10.1% for the S&P 500 index, though with significantly less volatility.
* Features:
-Many people claim Social Security earlier than the age at which they would receive 100% of what they are entitled to receive. In fact, roughly 50% of all working men claim at age 62, and nearly 70% have claimed before full retirement age. And they do so for several reasons, according to Neha Bairoliya, an assistant professor at the University of Southern California and co-author of a recent paper that examined Social Security claiming decisions.
-Change has been constant for Berry Global Group. It’s changed its growth strategy, its capital structure, even its name. What it can’t change is what it does: make plastics. While that’s contributed to its underperformance recently, it also created a buying opportunity for investors. The fact that Berry (BERY) makes plastic containers hangs over the stock like a plastic bag on an ocean reef. But writing off Berry for plastics overlooks changing practices in the industry and ignores one of the sturdiest of materials stocks. Berry management recognized that things needed to change, so it started reducing debt and focusing on organic growth. Currently, Berry has $8.9 billion debt, net of cash, and has generated $2.3 billion in Ebitda over the past 12 months, for a debt to Ebitda ratio of 3.9 times. It also has committed to operating between three and four times debt to Ebitda, which isn’t far off packaging peers Sealed Air (SEE) and Amcor (AMCR)
-Even before the pandemic made some common senior living arrangements less desirable, a growing number of older Americans had been expressing a preference for remaining in their current home throughout retirement. The reasons given for this desire to age in place range from community ties to nearby family members to tax breaks such as property-tax exemptions. And it’s cheaper: If homeowners can stay in their dwellings, it may be possible to delay or forgo moving into assisted living that could cost tens or hundreds of thousands of dollars.
* Europe:
-Synthomer (SYNT.UK), a British-based chemical manufacturer that makes latex for medical gloves, has excelled during the pandemic as demand for personal protective equipment has soared. The company’s stock has surged more than 70% over the past 12 months, far ahead of the gains of rival BASF of Germany, up 22%, and U.K.-based Croda International, up 53%. The gains could well continue, with Synthomer poised to grab significantly more market share. The Essex-based company, with a market value of 2.29 billion pounds sterling ($3.14 billion), operates in 21 countries. In addition to latex, it makes such products as flooring adhesives and materials used in paint, packaging tape, and mattress foam. But latex has been the big growth engine.
* Emerging Markets:
-China’s consumer spending is weakening and helping slow overall economic growth, forecasts for which have been trimmed over the past few months. The entire economy is on edge. But consumer sales have been especially laggard. Retail sales rose 8.5% last month from a year ago, easily missing analysts’ forecasts of 11% to 12%. Vehicle sales were particularly discouraging, being the only retail subsector to actually fall in July—and that was for the third straight month, according to China’s National Bureau of Statistics. One of the drivers was the continuing shortage of global semiconductor chips, and the China Association of Automobile Manufacturers (CAAM) said it did not expect that to let up anytime soon. Yet all is not lost. While traditional auto sales plummeted, new energy vehicles are weathering the storm impressively, with sales doubling in July year-over-year, according to CAAM data. Sales of medicines and home electronics are stable as well.
The good news from Brazil is that Covid is receding and the economy is rebounding with surprising strength. Economists now predict 5% growth in 2021. The bad news is that V-shaped recovery has reignited Brazil’s traditional scourge, inflation, forcing the central bank to tighten interest rates from 2% to 5.5% since March. Investors expect at least 7% by the end of the year. Meanwhile, President Jair Bolsonaro continues to make expensive promises as he looks toward re-election next year.
The good news looks priced in after a 17% rise in the iShares MSCI Brazil exchange-traded fund (ticker: EWZ) from a March low. Investors are accentuating the negative. “The easy money has been made,” says Pablo Riveroll, head of Latin American equities at Schroders.
* Commodities:
-Commodity producers look appealing after a pullback from May highs. While prices for industrial metals like copper and iron ore have been weaker, Chris LaFemina, a mining analyst at Jefferies, is upbeat on the sector. “The soft patch will end,” he says. “There won’t be a massive acceleration in demand, but things will start to pick up, and there are supply constraints in commodities like copper that will result in demand growing faster than supply.” Among diversified miners, BHP (BHP), at $66, is down 20% from its peak; Rio Tinto (RIO) is off 19%, to $75; Anglo American (NGLOY) is off 13%, to $21; and Freeport-McMoRan (FCX), a global copper producer, is down 21% from its peak to $36.
* Streetwise:
-Jack Hough discusses “NFTs and the Million-Dollar Rock.” In this edition of his podcast Jack tackles bored apes and CryptoPunks to explain what's behind the mania in non-fungible tokens.