Barron’s Weekend Summary: The tech sector may be in a bubble, but that doesn’t mean it’s ready to burst; Barron’s 2020 Top Independent Advisors
* Cover Story: The tech sector is in the midst of a bubble, but while the tech trade, including tech companies that aren’t officially labeled as such, went too far before correcting suddenly in the past two weeks, one correction doesn’t mean that the story is over, or that the bubble is ready to burst—on the contrary, the forces that drove stocks such as AAPL and AMZN astonishing heights remain firmly in place, including continued growth, Fed efforts to keep the economy afloat, and retail investors’ interest in trading.
* Tech Trader: “Subscriptions have remade the way Americans consume entertainment, food, and technology—and they’ve benefited investors, who love the certainty of recurring payments”; This trend is especially prevalent in gaming, where MSFT is set to offer financing for its new Xbox models that will include access to hundreds of games at no additional cost.
* Trader: Positive on GM: The automaker’s deal with NKLA may help it convince investors that its suite of new technologies should translate into a higher price/earnings multiple than its current single-digit one, and the tie-up signals that it can compete with even TSLA on battery cost and technical prowess; Things could get worse next year regardless of whether Donald Trump or Joe Biden wins the White House in November—2021 will be the first year of a presidential term, always tricky times for the stock market that will be more so given all the recent volatility.
* Profile: Chuck Bath and Austin Hawley, co-managers of the $7B Diamond Hill Large Cap fund, believe in the power of compounding rates, and the concept drives their management philosophy; As high-conviction managers, they hold about 50-60 stocks, and they seek business models where intrinsic value is growing consistently (top 10 holdings: ABT, AIG, Berkshire Hathaway, C, PG, MDLZ, PEP, DIS, KKR, MDT).
* Features: 1) Among a half-dozen Wall Street strategists whom Barron’s recently canvassed, none sees the S&P 500 ending the year very far from current levels—the strategists’ average year-end S&P 500 target is 3492, less than five percent above Friday’s close, though the group expects the picture to brighten in 2021; 2) Barron’s list of the Top 100 Independent Advisors is led by Spuds Powell of Kayne Anderson Rudnick Investment Management, Charles Zhang of Zhang Financial, Edward Cronin of Manchester Capital Management, Kimberlee Orth of Ameriprise Financial, and Richard Saperstein of Treasury Partners at HighTower; 3) The heavy buying of call options, which give holders the right to purchase individual stocks or indexes, helped fuel the August surge in stocks like AAPL and TSLA and probably contributed to a recent sharp reversal in tech stocks earlier this month; Much of the action this summer has been speculative trading, an attempt by investors to effectively get leveraged bets on leading stocks; 4) Positive on CROX: The footwear company once known for its resin clogs now has a varied product lineup, a growing e-commerce business, and a savvy social-media strategy based in part on brand ambassadors and licensing partnerships—analysts have applauded its turnaround efforts and see further room for growth as it partners with fashion influencers and entertainment giants such as DIS; 5) Positive on ELAN: Since Elanco Animal Health went public two years ago after spinning off from LLY, its shares have significantly trailed those of its larger rival, ZTS, but with its recent $7B acquisition of Bayer Animal Health, the company should be able to narrow the divide amid ongoing growth in the companion animal sector, and it is well positioned for gains; 6) “Investors have already mostly given up on the idea that the Treasury market can provide income, as the 10-year benchmark yield is now trading around 0.7 percent, down from 1.9 percent at the start of the year—but that selloff in Treasuries held another message for investors: don’t rely on the US government bond market to provide the same ballast that it did even a year ago”; 7) The SEC is trying to push Trump’s deregulatory agenda over the finish line, and has issued a range of new and proposed rules that may be good for some businesses, but not so good for investors, including proposals to streamline mutual fund and ETF disclosures, new rules on corporate disclosures and proxy advisors, and an expanded definition of “accredited” investors who are allowed to own non-publicly-traded companies or securities.
* European Trader: Barron’s asked a trio of European experts to forecast how the remainder of the year will pan out for investors, and they discuss three big uncertainties that hold the key to growth: coronavirus, the global economic recovery, and the US. presidential election—and even as Europe sees a second virus wave, the strategists believe stocks will continue to rally.
* Emerging Markets: Emerging markets have acted pretty much like developed markets for the past six months—a handful of tech stocks, concentrated in China, went on a rampage, pulling the broader asset class from the abyss it faced in March, yet the iShares MSCI Emerging Markets ETF, which tracks the broader market, is only back to about even for 2020.
* Commodities: “Many of the biggest movers in commodities this year, including oil and precious metals, will continue to take the spotlight as the year draws on. Traders are trying to assess the effects of the pandemic on demand and are looking for signs of a global economic recovery.”
* Streetwise: Columnist Jack Hough looks at GM’s deal for NKLA, noting chief Marry Barry “has gotten the company out of loss-making Europe, and sharply reduced the number of vehicle sales needed to break even each year. What she hasn’t done since being named chief nearly seven years ago is produce a positive stock return, with or without dividends, during a massive bull market.