Barron’s Weekend Summary: CA Healthcare, the country's largest for-profit hospital operator, has faced criticism for its recent acquisition
Cover:
-HCA Healthcare, the country's largest for-profit hospital operator, has faced criticism for its recent acquisition of Mission Hospital in Asheville, North Carolina. The hospital, which is the second-largest in the HCA system by net patient revenue, generated nearly $1.3B in 2022. The acquisition was one of more than a dozen hospitals that HCA acquired between 2017 and 2021. HCA's share price has increased more than 140% in five years and outperformed the S&P 500 index. Unionized nurses at Mission Hospital have publicly decried low staffing and stretched workloads, with dozens of physicians signing an open letter expressing concern about the hospital's quality under new ownership. HCA is fighting the suit, stating that the issues have been resolved and Mission Health continues to be recognized as one of the top hospitals in the country in third-party quality and patient safety ratings.
Interview:
-Savita Subramanian, head of U.S. equity and quantitative strategies at BofA Securities, advises investors to increase their exposure to value stocks in cyclical industries. The S&P 500 index has gained nearly 14% this year, and the Nasdaq 100 has 16%, largely due to rallies in megacap tech stocks. Subramanian, who has been following markets for over two decades, has earned a reputation for prescient investment calls. She marries quantitative research with fundamental analysis and draws on behavioral finance principles. Subramanian raised her S&P 500 year-end price target in March to 5400 from 5000, which was one of the most bullish calls on Wall Street. However, she is not planning to change her target now, as market sentiment has moved from bearish to more neutral. She has been following markets for over two decades and has a dual major in mathematics and philosophy at the University of California, Berkeley.
Tech Trader:
-Artificial intelligence (AI) is gaining traction as investors continue to invest in the technology. Nvidia, Arm Holdings, C3.ai, and Taiwan Semiconductor have all seen significant increases in their stock prices over the past month. The recent unveiling of Apple's AI strategy and AI-juiced earnings reports from Oracle, Broadcom, and Adobe have also boosted the market. Corning, a specialty glassmaker, has seen its revenue decline for six consecutive quarters due to declines in key markets such as smartphones, TVs, autos, and telecommunications. However, CEO Wendell Weeks believes a turnaround is possible due to improvements in underlying businesses and new opportunities, such as AI. Weeks predicts that Corning can boost annual revenue by at least $3B by 2026, potentially as much as $5B, on top of the $13.6B reported in 2023. Weeks believes that material science is slow, but a catalyzing customer application can trigger a big secular trend to take off.
The Trader:
-The Federal Reserve remains optimistic about its battle against inflation, with the stock market experiencing positive momentum. The S&P 500 index has hit four new closing highs, with a 1.4% gain this week. The NASDAQ Composite has advanced 3%, while the Dow Jones Industrial Average has fallen 0.7%. Apple's announcement of artificial-intelligence capabilities in new iPhones has boosted hopes that consumers will upgrade to the iPhone 16, sending the stock up 8.7% for the week. The inflation data also provided optimism, with the consumer price index rising 3.3% year over year in May, below the forecast and down from April's 3.4%. The S&P 500 gained 0.9%, while the Fed emphasized that inflation is not close enough to its 2% target to cut rates. The Fed's "dot plot" showed one rate cut later this year, down from three at the previous meeting.
-Pacific Gas & Electric (PG&E) shares have seen a partial recovery after filing for bankruptcy in 2019 due to a $30B settlement with victims, the state of California, and insurance companies. The company is expected to have negative free cash flow over the next two years, despite increasing earnings per share. However, the stock has gained about 150% since bottoming out in 2019, and its current market cap of $39B has returned to near peak levels. The bull case starts with PG&E's deal with California, which includes a provision allowing the utility to receive cash from the state for every $1B billion in damages it settles from a $21B fund. J.P. Morgan analyst Richard Sunderland upgraded the stock to Overweight from Neutral, citing the company's clear guidelines and financial protections. PG&E's investor day presentation confirmed its direction in safety, financing, and demand outlook for the coming years.
Features:
-French stocks and bonds experienced a drop due to President Emmanuel Macron's call for snap elections three years early, following a stronger showing for Marine Le Pen's far-right National Rally in European elections. The move could fuel increased spending, sparking concerns about a European debt and currency crisis. A rushed coalition on the left vows to break with Macron as the elections approach. The bond market also showed uncertainty, with the gap between 10-year bond yields in France and Germany widening to 80 basis points, its highest point since the euro debt crisis in 2011. Gavekal Research founder Charles Gave cited a decline in French bank shares and its debt situation as reasons investors should not dismiss the prospects of a currency and bond market crisis.
-Pharma stocks have traditionally been chosen based on the number of drugs and vaccines sold to large numbers of people. However, the dominant force in pharma stocks is closing, and investors will need to find a new strategy. Advanced therapies and personalized medicines, also known as precision medicine, are rapidly emerging. This field allows healthcare providers to order specific therapies for each patient based on their unique genetics and other factors. The battle against certain cancers is one of the most important developments in this field. Over one-third of new drugs approved by the Food and Drug Administration have been personalized medicines, and further growth is expected. The personalized medicine market is valued at over half a trillion dollars worldwide and is predicted to exceed $1T by 2031. However, investors should not use a "patent cliff" model, as patent laws are not as consequential for personalized therapies as they are for one-size-fits-all medicines.
Europe:
-The iShares MSCI France exchange-traded fund fell 7.22% on the week, despite being tilted away from luxury sectors. The largest component is LVMH Moët Hennessy Louis Vuitton, controlled by Bernard Arnault, who is now at No. 3 in the Bloomberg Billionaires Index. Other big components in the French ETF include global luxury brands like L'Oréal and Hermès International, whose businesses are less affected by the domestic economy than big spenders around the globe. Airbus, half of the global duopoly in commercial aircraft with Boeing, is half of the global duopoly in commercial aircraft with Boeing. Election politics have roiled France's markets, as have those in India and Mexico. Stocks had another winning week, with the NASADQ Composite closing at record levels and the S&P 500 index nearly ending the week at a fresh high.
Emerging Markets:
-Recent elections in India and Mexico have highlighted the potential for political instability and a potential for radical changes to jeopardize government checks and balances. Claudia Sheinbaum's victory as Mexico's first female president and her supermajority in the lower house led to concerns about radical changes that could jeopardize checks and balances. In contrast, India's Prime Minister Narendra Modi's coalition victory and his ability to stay in power have allayed concerns about the world's largest democracy. The market has interpreted supermajorities as a threat, especially in the hands of left-leaning leaders. Divided governments are generally a win for investors, but investors are pulling back from Mexico after Sheinbaum's win. Mexican stocks had doubled since 2020 due to a strong U.S. economy and rising U.S.-China tensions. However, concerns now are that Sheinbaum's supermajority could lead to increased spending to bolster state pensions and minimum wages, as well as constitutional changes that could compromise judicial independence and government oversight.
Commodities:
-The Energy Select Sector SPDR Fund, which includes oil producers like Chevron and Exxon Mobil, saw an 18% increase through early April, then a rough patch but still maintained a solid 5% gain. The fund reached a multiyear high of $98, boosted by WTI crude oil's 12% rise. Copper names like Freeport-McMoRan and Southern Copper rose 50% and 29%, respectively, while the metal itself rose just over 30%. The price jumps for copper and oil show confidence in the global economy's growth and the potential for it to continue growing now that central banks have stopped raising interest rates. Additionally, copper is benefiting from AI mania, as data centers that power the world's adoption of artificial intelligence require more of the metal. However, the commodities and their associated stocks moved in sync, with the oil ETF and copper stocks dropping slightly.
Streetwise:
-Shares of major home builders have slowed since March, with Toll Brothers down 8%, Lennar 10%, and D.R. Horton 14%. Mortgage rates have not been the main reason for the selloff, with the 30-year rate at just under 7%. Mixed economic signals also don't explain the builder selloff. UBS blames an increase in home inventory, with 1.52 million single-family homes for sale in April, a 15% increase from a year ago. This raises concerns for investors due to a housing shortage keeping selling prices high and profits for builders being fat. Publicly traded companies have taken market share, and if a rush to sell homes is taking hold, big builders could give up more gains. However, nationwide, inventory is up but still exceptionally low, with an average of 2.36 million single-family units for sale since 1982. Houses for sale are old and expensive, with some homeowners shooting for the stars due to tight supply and lavish sales prices.