Cover:
-The US opioid crisis has led to over 290,000 Americans dying from prescription-related overdoses, with Purdue Pharma agreeing to billions of dollars in legal penalties and pleading guilty to criminal charges. Pharmacies and drug distributors have signed their own global settlements. Pharmacy-benefit managers (PBMs) are often overlooked, but a Barron's investigation reveals that they enabled sales of opioids at a peak of the epidemic. During a 12-month period ending in late 2017, the three largest PBMs received about $400M in rebates and fees from Purdue. These transactions have been treated like state secrets, but Barron's is reporting on the details for the first time. PBMs have been accused by the Federal Trade Commission of inflating insulin prices, but they claim to work to make insulin more affordable and defend themselves against the FTC lawsuit. The industry is dominated by CVS Caremark, UnitedHealth's Optum Rx, and Cigna's Express Scripts, which control nearly 80% of the market for prescription claims.
Interview:
-The housing-affordability crisis in America has been a long-standing issue, with mortgage rates still double their pandemic level and the number of homes for sale at a four-year record. However, existing-home prices continue to rise, and shares of home builders are nearing a peak. Economists are incorrectly evaluating the housing market based on the volume of existing-home sales, which are close to recessionary lows. Ivy Zelman, executive vice president of real estate research firm Zelman & Associates, explains that the lack of supply is the main reason for the market's decline. She argues that the housing market is not an indicator of a recession, but rather a healthy market. The NAR settlement, which bars real estate agents from communicating about commission rates on most home listings, is not the only factor contributing to the market's weakening. The housing market is not an indicator of a recession, and the industry's outlook remains rosy.
Tech Trader:
-T-Mobile US has been a dominant player in the wireless market for years, using lower prices, flexible contracts, and a 5G rollout to attract customers from AT&T and Verizon. Recently, T-Mobile has taken a lead in providing broadband to homes using its 5G connections, known as fixed wireless. T-Mobile's shares have returned 86% over the past three years, against a 33% return for the S&P 500 index. However, the company's fixed-wireless subscribers are slowing down, with the pace of additions slowing down in the second quarter. Raymond James analyst Frank Louthan believes fixed-wireless access will end up with roughly 10% of the primary home broadband in the U.S. The main drawback for fixed-wireless access is the slow speeds, which may make it more of a niche product.
The Trader:
-Cognizant Technology Solutions, a leading provider of outsourcing services for the healthcare and financial sectors, is facing a cold shoulder from investors due to the push for more jobs in the U.S. and "nearshoring" with allies closer to home. The company, based in Teaneck, N.J., has nearly 75% of its employees based in India. The stock is down 1.4% this year after falling 3% to $74.50, along with Indian peers. However, Cognizant plans to boost growth by acquiring Belcan, a provider of engineering research and development services, for $1.2B earlier this year. The addition of Belcan, whose customers include the US Navy, Airbus AIR, NASA, and Rolls-Royce, will help Cognizant diversify its business. The Belcan deal is expected to boost overall revenue in the near term, with Jefferies analyst Surinder Thind suggesting it could add between $200M and $300M in revenue over the rest of 2024.
-Healthcare stocks have seen a significant increase in recent years, with shares of mounjaro maker Eli Lilly soaring nearly 60%. However, the rest of the healthcare sector is still experiencing a cold. The Health Care Select Sector SPDR ETF, trading under the symbol XLV, is up about 12% in 2024, compared to a more than 21% increase for the S&P 500 index. Lilly is the largest holding in the ETF, with a nearly 13% weighting. However, earnings are expected to increase 20% in 2025, following a 20% drop in 2023. The sector pulled forward three years of earnings into a single year due to the Covid-19 vaccine boom. Valuations are reasonable, with the XLV trading for 18 times 2025 earnings estimates, a discount to the broader market. Insider selling in the sector has plummeted, suggesting further upside potential.
Features:
-In 2024, property and casualty insurers have been a significant player in the stock market, with even hurricanes not affecting investor interest. Hurricane Milton hit Florida's Gulf Coast, causing insured losses of $40-$50B. P&C stocks, such as Chubb, Allstate, Travelers, and Progressive, have seen average gains of over 30%. Milton weakened to a Category 3 hurricane before making landfall, avoiding a direct hit on the heavily populated Tampa metropolitan area. The storm could cause more turmoil in the Florida homeowners insurance market, where rates are high and policies are sometimes unobtainable. Citizens Property Insurance, the largest carrier in the $19 billion market, has a nearly 20% market share.
-Egg prices in the US increased this fall due to the avian influenza outbreak, which has affected poultry farms and dairy herds. The consumer price index for eggs increased 8.4% from August to September, with the average price of a dozen large Grade-A eggs in a US city rising from $2.07 in September 2023. The increase in egg prices comes after a new wave of infections in US chicken farms reduced the egg supply just as demand was climbing. The Department of Agriculture spokesperson stated that supply tightness related to bird flu and strong demand were the primary drivers of higher egg prices. The outbreak has not been completely contained, and the Department of Agriculture has emphasized the importance of addressing the issue to ensure the safety of consumers.
European Trader:
-Rio Tinto is set to buy Arcadium Lithium for $6.7B, aiming to diversify its operations beyond its core products of iron ore, copper, and aluminum. The acquisition is an all-cash transaction, with Arcadium Lithium being acquired for $5.85 a share, a 90% premium to the stock's closing price on October 4. CEO Jakob Stausholm described the acquisition as a significant step forward in Rio Tinto's long-term strategy, creating a world-class lithium business alongside its leading aluminum and copper operations. Rio Tinto's London-listed shares slipped 0.6% after the deal was announced, while its American depositary receipts fell 1.4% to $65.71. Arcadium Lithium's Sydney-listed shares spiked 31% to $5.54. The acquisition also boosted some of Arcadium's peers, with Albemarle climbing 1.7% and Sociedad Quimica y Minera De Chile up by the same amount.
Emerging Markets:
-Emerging markets experienced a boost in September after the Federal Reserve cut interest rates to keep the US economy humming. Chinese policymakers stepped up their efforts to stabilize their struggling economy, which lowers interest-rate costs for companies and entices US investors to get more for their dollars abroad. China also took coordinated steps to stabilize the situation, including bigger interest rate cuts, proposals to support the domestic stock market, and vows for more fiscal stimulus. This sent Chinese stocks soaring, making them the best asset class in the past month with a 30% gain. Emerging markets have been in the shadows of US stocks for the past decade, but in August and September, they started to outperform, returning 8.4%, beating the S&P 500 by four percentage points. However, details on China's stimulus are still a mystery, and volatility is likely to continue in coming months as investors analyze its effectiveness. Despite this, fund managers see the new stance from policymakers as a marked change that should help the market in the near term.
Commodities:
-Energy stocks are often bought for their high dividends, which can pay off over several years. However, the hottest trade in energy is making options bets that oil prices will soar over $100 per barrel. This hit-or-miss trade can either pay off with huge gains or be a total loss if prices don't reach $100. Oil still has a long way to go to reach $100. Brent crude, the international benchmark, was down 0.6% to $78.89 per barrel on Friday, while West Texas Intermediate crude, the US benchmark, was down 0.8% to $75.28. Traders have placed an unusual number of bullish call options since the conflict between Israel and Iran has heated up in the past two weeks. Oil prices have increased more than 10% since Israel caused pagers carried by members of Iranian-backed Hezbollah to blow up two weeks ago, escalating the war. The world now awaits Israel's response. Oil last hit $100 in 2022, propelled by the shock of Russia's invasion of Ukraine and the resulting sanctions.
Streetwise:
-PepsiCo recently reported its weakest sales result in four years, largely due to a slump at Frito-Lay. The decline in America's obesity rate has been attributed to households cutting costs, with 40.3% of U.S. adults being obese. The Centers for Disease Control and Prevention have stated that the drop is not statistically significant. PepsiCo trimmed its sales guidance following a decline for Frito-Lay North America. Morgan Stanley estimated that over seven million people are taking new class of obesity drugs, including knockoffs. This could explain why chips are down for Pepsi. However, hypothesis 2 is still a work in progress, as strange snack mash-ups may be a sign that Big Food is out of ideas. Some grocery stores have added Old El Paso Cinnamon Toast Crunch Dessert Taco Shells, leaving General Mills with few options but to introduce a “Treaty of Guadalupe Hidalgo Cookie Crisp” writes Jack Hough ironically. PepsiCo CEO Ramon Laguarta remained bullish on the earnings call, stating that Gen Z snacking patterns and food patterns favor the growth of their category. He called Frito-Lay results a "normalization" after three years of fast growth, citing consumers reassessing their budgets and weak convenience-store traffic.