Barron’s Weekend Summary: A golden age could be dawning for patients and healthcare practitioners—and investors in pharmaceutical and biotech stocks
* Cover Story
Thanks to our rapidly evolving understanding of biology and the application of new technological tools—and a bit of urgency sparked by the Covid pandemic—explosive change is coming in our ability to diagnose, treat, and even cure many debilitating diseases. Indeed, a golden age could be dawning for patients and healthcare practitioners—and investors in pharmaceutical and biotech stocks. Along with the abundant hope, there’s also lots of hype, and separating the two can be a formidable challenge. That’s one of the goals of Barron’s annual healthcare roundtable, which met virtually in mid-September. The members of this year’s healthcare roundtable are Ziad Bakri, manager of the $20 billion, five-star-rated T. Rowe Price Health Science fund (PRHSX); Liisa Bayko, a managing director and biotechnology analyst at Evercore ISI; Stephen Berenson, a managing partner of Flagship Pioneering, a creator of life-sciences companies, including Moderna (MRNA), on whose board he sits; and Chris Schott, a managing director and healthcare analyst at J.P. Morgan.
* Tech Trader:
A who’s who of the media and telecommunications world gathered this past week at Goldman Sachs’ annual Communacopia conference, held virtually for the second-straight year.
Most executives described their companies as being in a period of transition toward new business models or technologies. On the media side, the focus remains on direct-to-consumer streaming. Telecom players, meanwhile, are deploying fifth-generation, or 5G, wireless networks and expanding their wired fiberoptic footprints, moving on from 4G and copper. The major wireless CEOs doubled down on their unofficial corporate credos: Verizon Communications (VZ) as the network nerds, AT&T (T) as the number crunchers, and T-Mobile US (TMUS) as the scrappy upstart.
* The Trader:
Investors should pay attention to the type of language that management uses on earnings calls, according to research from Nomura quantitative strategist Joseph Mezrich, who looked at how stocks performed based on whether the language used was simple or complicated. Previous research has shown that the difference between the simplest and most complicated language in 10-Ks is rather narrow, with both the simplest and most complicated written at a level that requires a graduate-school education to understand it. That’s based on the Gunning Fog index, which looks at sentence length and the percentage of words with three or more syllables to come up with a readability score.
-While the S&P 500’s decline felt like a lot, it fell just 4% from its all-time high on Sept. 2 through the end of trading this past Tuesday, and hasn’t had a pullback of 5% or more in 224 days, the seventh-longest streak on record. Still, investors should expect more downdrafts—and bigger ones. And for that they can thank the central bank. Fed Chairman Jerome Powell did a solid job of setting expectations at his Wednesday news conference following last week’s policy meeting.
He indicated that the Fed would probably start outlining plans to pare bond purchases at its November meeting, and said that the taper would probably be done by the middle of next year. He also told investors that rate increases could start next year if inflation required it, but still sounded convincing in his description of rising prices as transitory. “The market was bracing a bit, but didn’t see anything overly concerning,” says Yung-Yu Ma, chief investment strategist at BMO Wealth Management.
-Morgan Stanley is bullish on electric vertical takeoff and landing, or eVTOL, aircraft. These are smaller, helicopter-like vehicles that many start-ups want to use in ride-hailing applications. It’s a little like an Uber ride in the sky.This past Thursday, Kristine Liwag launched coverage of eVTOL maker Joby Aviation (JOBY) with a Buy rating. The “sky’s the limit,” she wrote. Liwag sees upside as high as $60 a share. But there are risks to any new disruptive technology, so on balance, she takes a more conservative approach. Her target price is $16 a share.
* Features:
- A recent Barron’s Retirement article on how to tailor your home for aging in place drew a big response from readers. Many had questions about certain suggestions by architects and interior designers or about universal design ideas we didn’t mention. Some readers had good tips on how they’ve added accessibility features to their homes. And a few were critical of certain aspects of the advice. One reader found fault with our suggestion that people book an accessible hotel room to get a feel for how a universal design layout might work. “Please bear in mind that an able-bodied person who books an accessible hotel room denies availability of the room to those who truly need it,” the reader said.
-Bond yields have been on a mini-surge this week. The current yield on the 10-year Treasury suggests it can rise even more in the short-term, making cyclical stocks look like good bets. The 10-year yield rose to 1.46% on Friday from a low point of 1.3% this week. It passed 1.38% this week, a key level of support at which buyers had tended to step in for the past few months. Bond prices and yields move inversely. Signs point to a continued climb for the 10-year yield. Bay Crest Partners’ chief market technician, Jonathan Krinsky, writes that the 10-year yield looks to be headed to 1.6%. With the yield pushing above 1.38% and breaking out of its six-month downtrend, he writes, it looks like “a new trading range is underway.”
-Scotts Miracle-Gro has a dominant franchise in the consumer lawn and garden market, and it has a fast-growing hydroponics business catering mainly to the marijuana industry. A beneficiary of the stay-at-home trend during the pandemic, Scotts (SMG) has seen its stock fall over 40% from an April high to a recent $146. Investors have worried about lower consumer demand in 2022 and narrower profit margins.Yet the stock looks inexpensive, trading for 17 times projected earnings of $8.61 a share in the company’s fiscal year ending in September 2022. The dividend yield is 1.8%.“Scotts has a fantastic consumer franchise,” says Jon Boyar, a principal at Boyar Value Group, which holds the stock. “At the current stock price, you’re effectively getting the hydroponics business for free.” He values the two businesses at more than $200 a share.
* Europe:
-Investors should watch carefully the results of the vote that will determine the direction Europe’s largest economic power will take over the next four years, for many reasons.The first being that Chancellor Angela Merkel will retire after 16 years in power. The second is that the race is wide open in a political context marked, as in most of Europe, by the decline of the big traditional political parties, conservative and center-left, which had alternated in power since World War II.
-French energy giant TotalEnergies (TTE.France) has entered into an agreement with Stellantis (the group that owns Fiat, Peugeot, Alfa Romeo and Chrysler among others (STLA) and Daimler (DAI.Germany) luxury division Mercedes Friday in a pact to make EV batteries. The trio will each own a third of the joint venture, called Automotive Cell Company, which plans to produce at least 120-gigawatt hours of batteries annually by 2030. That’s roughly enough to provide power for 2 million EVs a year. “This new step is another demonstration of TotalEnergies transformation into a broad energy company and of our willingness to extend our footprint in electric mobility,” said Patrick Pouyanné, TotalEnergies’ Chairman and CEO, in the announcement.
-Shares of German car giant Volkswagen (VOW3.Germany) tumbled in the past three months over fears that production will be hurt by the global shortage in semiconductors that control the electronic brains of its vehicles, and by supply-chain problems that will delay its parts. The company behind Audi, Bentley, Porsche, Skoda, and Seat has seen its stock decline 16.2%, to 189.30 euros ($222.07), worse than rival Ford Motor (F), down 10%, and Mercedes-Benz owner Daimler (DAI.Germany), off 9.3%.This dip could be a good buying opportunity because optimism over VW’s advances in manufacturing electric vehicles could boost sales and trim costs.
* Emerging Markets:
-The debt troubles of property developer China Evergrande Group couldn’t come at a worse time for China’s already slowing economy. Global markets, too, may feel the ripples in the near term from a China-centric crisis. But there could be a silver lining: If Evergrande’s travails get too painful, Chinese authorities could offer investors a reprieve with targeted stimulus and possibly an easing of some recent investment restrictions.
-China bears are ruling the markets’ conversation as the China Evergrande Group real estate meltdown follows months of regulatory crackdowns.But China’s investment landscape is broad, with plenty of companies seemingly on the right side of President Xi Jinping’s economic upheaval. Awful sentiment could offer a buying opportunity for them. “We’ve adjusted our portfolio to be aligned with the government,” says Nuno Fernandes, co-manager of the emerging wealth strategy at GW&K Investment Management.
* Commodities:
-The race has begun to supply the hundreds of millions of batteries it will take to power the electric-vehicle revolution. Most of that effort depends on mining materials like lithium, cobalt, and nickel. But recycling will be a huge part of the battery supply, too, and a newly public company has a head start.Li-Cycle Holdings (LICY), a Canadian company based in Toronto, is already one of the leading recyclers of lithium-ion batteries. It went public by merging with a special-purpose acquisition company, or SPAC, and started trading last month. Li-Cycle opened at $11.70 on Aug. 11, the day after the merger, and mostly traded lower until this week, when multiple analysts weighed in with positive reviews.
* Streetwise:
- In television, the dongle is dead, and set makers are suddenly gaining show-business swagger. Stock buyers should consider newly public Vizio Holding , which completed “upfront” advertising negotiations with more than $100 million in commitments, up fourfold from last year. Jack Hough says that two decades ago, before Netflix (NFLX) went into streaming, TVs seemed as dumb as toaster ovens. Awkward, too: A top-of-the-line set measured 40 inches, cost several thousand dollars, and weighed nearly as much as a car engine. Then came slimmer and lighter “smart TVs”—with ugly software that couldn’t be updated, since few users connected their sets to the internet.