Barron’s Weekend Summary: The tech-stock declines—the Nasdaq Composite just finished its worst year since 2008
Cover Story:
-The tech-stock declines—the Nasdaq Composite just finished its worst year since 2008—are a continuing unwinding of rapid changes that took place early in the pandemic, when homebound consumers spent lavishly on technology products, digital services, and physical goods. Along the way, venture capitalists urged start-ups in their portfolios to boost spending in order to capture trends and increase growth. And they gave them the funds to get that done. All that spending was fueled by a flood of money from government stimulus and interest-rate cuts, making it easier to borrow. But extrapolating growth turned out to be a bad assumption. As economies reopened, spending shifted back to real-world experiences and away from technology.
Interview:
-Dave Bujnowski, who co-manages Baillie Gifford’s US equity growth portfolio. While Bujnowski says last year’s experience forced him to challenge his assumptions—the U.S. fund fell more than 50% last year, after returning an average of 43% annually in the prior three years—he is unflinching in his view that Baillie has the right approach in making long-term bets on the power of change. Bujnowski spoke with Barron’s about why he remains a true believer in the power of change-driven growth, why he still likes cloud stocks, and why he remains a bull on Tesla.
Tech Trader:
-This year, organizers at the Consumers Electronics Show (CES) were targeting 100,000 attendees. It felt busier. The halls were bustling, taxi lines were long, and restaurants were packed. At last year’s show, almost everyone was masked; this year, almost no one was. Abbott Labs was handing out free two-packs of Binax Now Covid test kits, but there was no testing requirement, and no one asked for my vax card. The show felt giddy, a throwback to the days before most people had heard of the coronavirus. The talk from the stage was optimistic about the future, particularly around the power of artificial intelligence. But it became clear that the industry faces tough months ahead. In 2022, tech stocks cratered in the face of soaring interest rates, rising inflation, and a potential recession. In 2023, things seem likely to get worse before they get better.
The Trader:
-The Fourth Quarter reporting season is about to begin. Some major companies— JPMorgan Chase, Bank of America, UnitedHealth Group and Delta Air Lines will be among those kicking off the festivities. The vast majority of the S&P 500 will report over the following month and a half. Few are expecting a good fourth quarter. In aggregate, S&P 500 companies are expected to report their first losing quarter since 2020. Earnings per share are forecast to decline by 2.2% year over year, to $53.87, after roughly 4.4% growth in the third quarter and 8.4% in the second quarter, per IBES data from Refinitiv. The consensus fourth-quarter outlook became much gloomier as 2022 proceeded—at the start of last year, analysts had penciled in 14.1% year-over-year earnings growth for the period.
-Schwab finished last year off 1%. But there was a lot more action than that minuscule loss implies. The stock tumbled 29% through June 17, as investors fretted about higher rates pushing money out of Schwab’s deposit accounts and into higher-yielding money-market funds, before bouncing 38% over the rest of the year to finish roughly flat. This year has gotten off to a better start, with Schwab gaining 1.5%, to $84.54, during the first week of trading—and there’s a good chance those gains continue. Goldman Sachs analyst Alexander Blostein upgraded the stock to Buy from Neutral this past week. In all, Schwab should be able to grow earnings at 15% in 2023 and by 32% in 2024. Blostein has a 12-month price target of $98 on Schwab, up 16% from Friday’s close.
Features:
-Michael Kops, a vice president and partner at Heartland Advisors, recommends value investing, He says that for today’s investors wondering if it’s too late to embrace value, that experience should offer an important clue. Growth and value tend to take turns leading the market, but the cycles often last years, not days. More importantly: Value investing and “buying on the dips” are not the same thing. Just because popular growth stocks that were once the market’s darlings are down considerably from their peak doesn’t mean they’re cheap. Or cheap enough to make them worth buying. They may well have more room to fall. Looking back at 2000, investors who bought beaten-down growth stocks on the dips were not thinking like true bargain hunters. As Graham noted, the intelligent investor focuses on the fundamentals and is always conscious of building in a margin of safety to their strategy.
-Airlines enjoyed a strong second half of 2022 as robust demand and industrywide capacity constraints led to higher airfares and bumper revenue. For US carriers, the year ended on a bit of a sour note as a brutal winter storm left passengers stranded at airports across the country. Aside from Southwest Airlines, the worst affected carrier by some distance, the disruption is unlikely to have a major impact on US airlines’ fourth quarter earnings. The large carriers are better placed than their low-cost counterparts to weather those cost pressures. The bigger airlines are also more likely to benefit from three trends–and potential positive catalysts–emerging in 2023. Raymond James analysts expect United Airlines to have the greatest upside from the reopening of the Pacific region to travel. In Europe, Ryanair, with its robust balance sheet and ultralow cost base, could be one to watch. But, the European long-haul sector isn’t the same as it was prepandemic. Two major players, Norwegian Air and Thomas Cook have exited that market and British Airways owner International Consolidated Airlines is likely to benefit from their market shift.
European Trader:
-Investors hoping to play defense might look for companies that use inflation to their advantage. That’s where a stock like Bunzl can be attractive. The British company is a worldwide distributor of equipment for food-service providers and other companies. Its logo can be found on disposable cutlery in fast-food restaurants and on the sides of trucks delivering cleaning and safety products. Bunzl operates in 31 countries (in the Americas, Europe, and Asia Pacific) and enjoyed a decent 2022. It benefited from the pickup in activity as most of the world emerged from the pandemic—and was able to raise prices along the way. Bunzl had a “strong 2022, benefiting from the highest levels of product inflation in decades, plus continued post-lockdown rebounds,” says Karl Green, an analyst at RBC Capital Markets, who rates the stock a Hold.
Emerging Markets:
-Investors brimmed with optimism when Luiz Inácio Lula da Silva was elected Brazil’s president on Oct. 30, returning to power after two prior terms in 2003 to 2011. It didn’t last. The iShares MSCI Brazil exchange-traded fund dropped 17% since then. Brazilian bonds could be more attractive than equities nonetheless, says Thierry Larose, portfolio manager for emerging markets local debt at Vontobel Asset Management. Yields on 10-year sovereign Brazilian bonds have risen 1.5 percentage points since Lula’s election, to more than 13%, while inflation keeps declining, to less than 6% annually. “Brazil’s real rates are the highest in the world,” Larose says. “My long-term opinion is cautiously optimistic. Some Brazilian stocks could become attractive depending on how the early dust settles. Continued decline in the real could boost exporters like meat giant JBS or aircraft giant Embraer, says Steven Schoenfeld, CEO of MarketVector Indexes. A Lula tilt to pragmatism, and a stable environment to follow, would boost the leading private banks, Itaú Unibanco Holding and Banco Bradesco.
Commodities:
-Last year, global oil companies boomed. BP and Shell, both based in London, saw share prices rise some 40% in 2022 and trade at five times forward earnings. US-based Exxon Mobil soared nearly 80% and trades at almost 10 times earnings, while Chevron rose 50% and trades at 11 times. Why that gap? Many blame windfall-profit taxes. All of the oil giants feasted on rising oil prices after Russia invaded Ukraine. While prices have fallen, they’re still at levels that produce sizable profits. However, European governments are clawing back some of those gains by taxing oil producers to subsidize high energy costs for consumers.
Streetwise:
-Jack Hough likes biotech. He says that he just needs to figure out what the stocks will do. Last year, Respira Technologies became Qnovia. It’s run by a former tobacco executive with vape experience, and it’s developing an inhaled nicotine platform for quitting smoking. On one hand, Hough says he found years ago that a pretty good platform for that is just to not inhale any more nicotine. But on the other hand, going from Q straight to N in a company name sounds clinically promising. A biotech once called CytRx fell from over $4 a share in 2021 to 10 cents last September, before changing its name to LadRx. Still 10 cents. Bone Therapeutics is now BioSenic and still into bone therapeutics. The industry blog FiercePharma calls this and many other examples a “biopharma name-changing craze.” The biotech industry could use a fresh look. The SPDR S&P Biotech XBI exchange-traded fund gained 32% in 2019, and then 48% in 2020, before sliding 20% in 2021, and another 26% last year. Now it’s back to a price it hit in 2015. There was a rush of companies going public when shares were riding high. Many weren’t only prerevenue, but also not yet testing in humans. With interest rates rising, investors have favored pharma stalwarts instead. Geoff Meacham, who covers drugs for BofA Securities, says to favor quality companies with good growth prospects. This past week, he downgraded Pfizer PFE to Neutral from Buy, and did just the opposite with Merck, raising it to Buy.