Barron’s Weekend Summary: In 2022, a surge of interest in the primary-care market exploded into a buying binge
Cover Story:
In 2022, a surge of interest in the primary-care market exploded into a buying binge. Amazon.com announced a $3.9B deal to buy One Medical in July, while Walgreens Boots Alliance and Cigna pitched in on an $8.9B deal to create a massive doctor’s group that includes a primary-care chain. Walmart, meanwhile, is expanding its primary-care offering, and UnitedHealth Group continues to snap up doctor groups. More recently, a couple of costly new issues emerged for CVS: In October, the federal government cut the quality ratings for certain Medicare Advantage plans run by CVS’ insurance arm, Aetna. That will eliminate government-paid bonuses that the company had expected to receive in 2024. Then, insurer Centene, a customer of CVS’ Caremark PBM, announced that it will switch to a competitor in 2024, further ramping up pressure on earnings targets.
Interview:
-About a year ago, Felix Zulauf, who heads Zulauf Consulting in Switzerland, and who is a former Barron’s Roundtable member, was looking for a steep market drop in 2022 from tightening monetary and fiscal policies. Barron’s spoke to him recently Zulauf suggests that before any predictions for 2023, it’s important to take one step back to see the big picture: “I think that geopolitics and politics will play a more dominant role. We see the building of two major blocs—a democratic bloc led by the U.S. and an autocratic bloc let by China. And this means that the period of globalization of the past 30 years is over. I think we deglobalize for, let’s say, the next 10 years. That means the world will get less efficient and more inflationary. A safe supply chain will be more important than a cheap supply chain.”
Tech Trader:
-There are bargains to be had in the financial markets if you look hard enough and have a little patience. I would suggest that internet and media company IAC is a textbook case of an undervalued stock that deserves more attention. Founded in 1986 as a TV station owner called Silver King Broadcasting, IAC has bought, built, revamped, and sold companies in the media and internet business, over and over again. It’s a holding company, and the nature of its portfolio changes significantly over time. In a 2006 interview with Barron’s, IAC’s longtime chairman and former CEO, Barry Diller, laid out his philosophy on running IAC, which still applies 16 years later.
The Trader:
-“With Christmas just a couple of weeks away, it’s easy to look ahead to candy canes, caroling, and presents under the tree, but there’s still work to be done. The coming week certainly won’t be boring, with highly anticipated inflation data and a Federal Reserve decision on back-to-back days. The two events will do much to determine the direction of the market for the coming weeks—a deeper slide or a resumption of the Santa Claus rally. All eyes will be on the November consumer price index, out Tuesday morning. It’s expected to show some moderation in inflation from the reading a year ago on the headline and core levels—but for both to remain above 6%.”
-It was a bad week for Carvana and a bad week for used-car dealers. But some auto-dealer stocks might still be worth buying. After falling almost 40% this past week, Carvana (ticker: CVNA) is off an incredible 98% this year, wiping out almost $44 billion in market value. That’s more than the size of all other publicly traded auto dealers combined. It’s not hard to see why. Analysts and journalists have started using the word “bankruptcy” to describe where it might be headed. Carvana dismisses this, saying it has “substantial liquidity” to attain its business goals. The concerns about Carvana, along with falling used-car prices, have dinged other preowned-auto dealers, such as CarMax. Yet Carvana just isn’t big enough for its problems to disrupt the market. It sold about 103,000 used vehicles in the third quarter of 2022, or 1.2% of total U.S. used-car volume. And the Carvana brand “has value, so even if it [restructures] the brand will remain,” says Benchmark analyst Mike Ward.
Features:
-A week ago, internet infrastructure supplier Rackspace reported that after discovering a “security incident,” it took some servers offline, resulting in a major service outage preventing thousands of the company’s customers from sending or receiving email. The issue involves the company’s Microsoft Exchange hosting business, which provides customers with Microsoft-based email, calendar, and contact software. Rackspace says the Exchange business accounts for about $30M a year in revenue, or about 1% of the company’s revenue. But the outage is disrupting the operations of a huge number of small businesses, and the company is likely to face considerable related legal and remediation costs.
-Regal Rexnord, a maker of motors and powertrain equipment used in factories, has slumped 15% over the same period. Regal did it to itself. On Oct. 27, the company announced the acquisition of Altra Industrial Motion, a smaller competitor, for $62 a share—and the stock promptly tumbled 13%. Investors have concerns about the timing of the deal.. At a time when many investors thought Regal should be getting ready to play defense, it decided to go on the attack. Those concerns are fair but overblown. Regal has a long history of doing deals and making them work. At the same time, the new company will make enough money to pay down its debt, leaving more equity for shareholders. And while the timing isn’t ideal, it’s better than investors think, given the government spending on infrastructure that could boost demand for Regal’s products. If all goes well, Regal Rexnord’s stock could gain 40% or more over the next 12 months.
European Trader:
-Hermès International, the French maker of Birkin handbags, watches, and silk scarves, has seen its shares fall 3.8% in the past 12 months to a recent 1,516 euros ($1,599), worse than Vuitton bag maker LVMH Moët Hennessy Louis Vuitton, which is flat, but better than the 19.2% decline of Gucci owner Kering. The dip in Hermès shares might be a buying opportunity because luxury goods are typically resilient during hard times—wealthy consumers tend to cut back less on spending. Hermès is in a strong position. Sales in the key China market “picked up strongly” in the third quarter, according to the company, and group sales for the third quarter exceeded analysts’ consensus by 9%. The company also boasts hundreds of thousands of high-end enthusiasts willing to pay whatever it takes to snap up the latest exclusive limited-edition leather goods, which means that Hermès won’t have problems passing on price increases.
Emerging Markets:
-On December 6, the Jakarta parliament unanimously passed a new criminal code that dictates a year in jail for sex outside marriage, and three years for “insulting” the president or various state institutions. Not a great look for a country that welcomed 16 million foreign tourists in the prepandemic year of 2019. President Joko Widodo, better known as Jokowi, blocked similar legislation three years ago. This time, with 14 months left in his second and final term, he sat on his hands. “Jokowi is either so passive now, or he shares a distrust of how democracy has developed in Indonesia,” says Joshua Kurlantzick, senior fellow for Southeast Asia at the Council for Foreign Relations.
Commodities:
-Many traders expected oil prices to hit $200 per barrel mere weeks ago. Instead, prices have crashed. Brent, the international benchmark, fell below $80 per barrel on Tuesday for the first time since January and continued to drop on Wednesday. West Texas Intermediate, the US benchmark, was down 3.3% to $71.84. The crash has been caused by a mix of fundamental factors and trading dynamics. Yawger thinks that fundamentals carry about 70% of the weight and speculation accounts for the other 30%. The biggest fundamental factor was that Europe’s ban on Russian oil shipments included a mechanism for Russia’s oil to flow elsewhere. Oil can still be sold to other countries like India as long as prices are capped at $60.
Streetwise:
-Jack Hough offers some considerations about social media companies and, especially, those that offer an important video streaming component. He notes that BofA Securities has recently published a report predicting that rising short-form video consumption will be the biggest shift in internet usage over the next five years. By 2024, short videos will account for more than 12% of time spent on the internet, up from 5.4% last year. By 2028, shorts will fetch an estimated $108B in advertising, even assuming lower ad rates than for traditional video. Meanwhile, Texas Gov. Greg Abbott banned TikTok on government devices, citing data-harvesting risks. He joins his colleagues in Maryland, South Dakota, South Carolina, and Nebraska. BofA reckons that a broader US ban on TikTok isn’t the likeliest course, but that it would provide the most immediate benefit to industry pipsqueak Snap. New rules limiting TikTok’s access to user data, on the other hand, could hurt its monetization push.