Barron’s Weekend Summary: Medicare Advantage is facing increasing concerns due to higher costs and lower profits
Cover:
-Medicare Advantage, the insurance plans that manage Medicare coverage for over 30 million people, is facing increasing concerns due to higher costs and lower profits. Big players like Humana are reporting falling stocks and this could translate to potential ancillary benefit cuts and denials of service. Other pressures include dropping Advantage plans due to low payments and administrative issues. The federal government is scrutinizing Advantage plans for increasing costs and marketing practices that may be misleading consumers. As cost pressures rise in the Medicare market, consumers face complex decisions over which plan to choose, potentially impacting their finances and health. Over half of the eligible Medicare population is enrolled in Advantage, which provides Part A hospital coverage, Part B outpatient coverage, and extras not offered by traditional Medicare.
Interview:
-Suzanne Franks a money manager at First Eagle Investments, has spent her career studying and buying small-cap stocks, about which there has been plenty of chatter on Wall Street. The inflection point hasn’t come yet, though. The iShares Russell 2000 exchange-traded fund is roughly flat year to date, after rallying late last year on rate-cut expectations, while the S&P 500 index has gained almost 9% in 2024. Franks and her team used the volatility as an opportunity to scoop up bargains. Franks graduated from the University of Chicago Booth School of Business. She founded an independent research firm focused on event-driven investment opportunities, and later spent a decade as part of a small-cap team at Royce Investment Partners. In 2021, the team moved to First Eagle, where she is currently an associate portfolio manager on the $1.8 billion First Eagle Small Cap Opportunity fund, which returned 15% over the past year. Barron’s spoke with Franks by phone in late January and again on March 19 to learn why small companies could finally get a closer look from investors, and which small-caps she favors.
Tech Trader:
-Artificial intelligence has transformed memory chip producer Micron Technology into a thriving growth stock, with the stock currently trading at an all-time high and up 29% year to date. Micron has always been a challenging company to value due to its cutting-edge semiconductor technology, which applies to both DRAM and NAND memory chips used in various electronic devices. However, the memory chip business has complex dynamics, requiring vast and expensive production capacity and extensive R&D. Despite having only a handful of competitors, Micron has experienced a post-Covid downswing, with revenue down 49% to $15.5B in the August 2023 fiscal year. The company's main change is that running artificial intelligence software requires massive amounts of memory, which has led to a decrease in demand and pricing.
The Trader:
-Big Tech stocks like Nvidia, Microsoft, Meta Platforms, Tesla, and Amazon.com have outperformed the market, with the S&P 500 up 2.3% this week. The Federal Reserve's steady rate forecast for three rate cuts in 2024 helped keep the 10-year Treasury yield down to 4.22%. Investors were also excited about artificial intelligence, with Nvidia announcing its new Blackwell chip and Micron Technology's revenue benefiting from its AI business. Broadcom announced a new customer, believed to be ByteDance, and the iShares Semiconductor exchange-traded fund rose nearly 3%. This indicates that investors are looking to buy each minor dip, a vote of confidence in these stocks. Momentum stocks, which have consistently risen without high volatility, should push the S&P 500 higher, as their correlation to the index has been positive in the past couple of months.
-The S&P 500 has become more expensive than the Stoxx Europe 600, trading at 20.7 times the per-share earnings its component companies are expected to bring in over the coming 12 months. The gains are driven by expectations that the economy will continue to grow, bringing higher corporate profits. Investors are betting the Federal Reserve will beat inflation without steering the economy into a recession and can soon begin to lower interest rates. However, current equity valuations are likely too expensive, as the 11 rate increases the Fed has rolled out since March 2022 make bonds more appealing investments. The yield on 10-year Treasury debt is now about 4.29%, while the earnings S&P 500 companies are expected to generate over the coming year amount to about 4.8% of the index price.
Features:
-Boeing CFO Brian West has shattered Wall Street's free cash flow expectations for 2024, but shares rose 3.5%. The company's plans to hit $10B in annual free cash flow by 2025 or 2026 are still intact, but they need to invest in a new medium-size aircraft. The debate about Boeing's next single-aisle jet has raged since 2015, when the company considered replacing the 757 jet. Current CEO Dave Calhoun killed off the idea in November 2022, stating that he didn't want to fill a gap in a product line. He wanted to wait until engine, manufacturing, and materials technologies imply that level of gain before spending the money. Boeing has a significant hole in its product line that needs plugging, as the A321neo has taken a lion's share of the market for single-aisle planes that carry more than 200 passengers. The A321neo can fit up to 244 people, while the 757 could carry 290 passengers in certain configurations.
-Digital World Acquisition Corp. has approved a merger with Trump's Truth Social media platform, resulting in nearly $3B in paper gains. Trump owns 60% of Trump Media & Technology Group, which runs Truth Social. The deal has caused legal drama between Trump and ARC Global Investments II, a firm that would own about 10.8M shares. With the deal approved, Trump would control 78.75M shares of the new combined company, trading under the ticker symbol DJT on Nasdaq. The timing of Trump's access to the proceeds is unclear. The deal has seen Digital World stock surge 111% this year.
Europe:
-The Swiss National Bank has unexpectedly cut its interest rate, marking the first major economy to lower rates since the Covid-19 pandemic. This move highlights the side effect of monetary policy, as raising interest rates strengthens a currency by making investments more attractive, while lowering rates weakens it. The SNB's unexpected cut led to the Swiss franc falling almost 2% against the dollar and almost 1% against the euro, the currency used by the country's most important trading partners. The franc's drop makes Switzerland an example for other countries considering a jolt in economic activity, as long as inflation rates continue to fall.
Emerging Markets:
-Bondholders are supporting Javier Milei's radical reforms as Argentina's president wraps up his first 100 days. Benchmark 2030 bonds have risen to 50 cents on the dollar, while Argentine legislators are less enthused. The Senate voted down Milei's Decree of Necessity and Urgency 42-25, and the Chamber of Deputies is likely to follow suit, killing the president's Plan A for overhauling the country's economy. Investors applaud Milei's unilateral actions, such as slashing fuel subsidies and reducing the peso's official exchange rate. Argentina reached a primary budget surplus in January and February for the first time since 2011, and inflation has halved to a 13% monthly rate. However, lawmakers are focused on poverty, which has soared from 40% to 60% in Argentina since last autumn.
Commodities:
-Anglo American, a leading global mining company, has seen its stock drop by 24% over the past year, trailing larger peers like Glencore and BHP Group. The company faces operational problems and tough conditions in key markets, including diamonds, which led to a disappointing multiyear production outlook. However, Anglo American's future looks bright, with metals prices improving and the company vowing to cut costs, improve operations, and review its businesses, including a capital-intensive fertilizer project in the UK. CEO Duncan Wanblad has stated that nothing is off the table, and a potential sale of the $30B company could be a viable option.
Streetwise:
-Zillow.com, a website where homeowners can check their house's Zestimate, has a business model where realtors, builders, and landlords pay to advertise listings. The company views itself as a "housing super app" with expanding services for sellers. Last year, Zillow had free cash flow of $189M on revenue of $1.95B, with revenue falling modestly on declines related to houses and mortgages, offset by sharp rental gains. Zillow's financial results are uncertain, as last year's home sales were the lowest in nearly 30 years. However, February home sales rose 9.5%, marking the first two consecutive months of gains in more than two years. The 30-year mortgage rate has drifted lower since peaking near 7.8% in October, and there's talk of interest-rate cuts later this year. Wall Street predicts a 12% revenue increase for Zillow this year, with free cash flow swelling to $320M.