TheChek News Flow

Bag makers that can charge more today should also be able to charge more tomorrow — but some push against the limits

Luxury handbags are not just for Christmas. They can be something of an investment piece, too. Some hold much of their value in the second-hand market. A few even exceed it.

That is surely a worthwhile consideration for anyone browsing for that adorable basket bag on Bond Street. For those browsing a basket of luxury stocks instead, a bag’s performance on the secondary market offers useful insight into the pricing power of the company that sells it. That is another worthwhile consideration given slowing demand in the luxury sector.  

The bags that best hold their value tend to be those that were more expensive to start with, according to data from broker Bernstein, based on Rebag’s Clair report. That makes intuitive sense. After all, the price consumers are willing to pay for a smattering of finely stitched hide has very little to do with the cost of making it. It is solely a reflection of that brand’s desirability. 

In the broad scheme of things, bag makers that can charge more today should also be able to charge more tomorrow. Unsurprisingly, Hermès — whose primary sales are typically constrained by capacity — is off to the races in this situation. It looks a good bet both for consumers wishing to preserve the value of their arm candy and for investors wanting to benefit from a slowing 2024. 

Sometimes, however, successive price rises may leave a bag looking expensive relative to its desirability. One early way of spotting bags that may be pushing against the limits of their pricing power is to see whether the second-hand market is keeping up with the primary one.

Of course, resale prices are not the only data point investors in luxury stocks should use when looking at where to shelter in 2024. But the amount of bucks that customers are willing to shell out for a bag surely provides some indication.

The deals that show how lucrative private equity deals can be

3G’s acquisition of Burger King and the purchase of VMware have proved to be among the most profitable industry transactions

It’s been a rough year for private equity firms. The highest interest rates in more than a decade have combined with relatively high inflation and led to a disconnect between buyers and sellers. Without a meeting of those two minds, it’s tough to get deals done. The numbers bear that out.

According to S&P Global, in the first nine months of 2023 global private equity investments had an aggregate value of $365.3bn, a decline of 44 per cent year over year. The number of private equity deals fell 36 per cent to about 13,000.

In fact, a bit of a surprise, the biggest private equity deal of the year — the roughly $15bn buyout of Toshiba Corporation — is happening in Tokyo, not New York, and involves Japan Industrial Partners and not any of the typical American buyout stalwarts, such as Blackstone, KKR and Apollo. But the paucity of new deals in 2023 will no doubt be temporary. For why, just take a look at two of the most successful private equity deals of all time.

The scale of the profits on one of those came to light this year — the move to take Dell Technologies private and then subsequently buy and sell VMware, a cloud computing company, by Silver Lake Partners and billionaire Michael Dell. In November, Dell and Silver Lake completed the sale of VMware to Broadcom for $92bn, reaping part of an astounding windfall of $70bn for Dell, Silver Lake and their investors from the combined transactions, according to Financial Times calculations. 

I also have been following another remarkable deal, the Brazilian-American firm 3G’s 2010 buyout and transformation of Burger King into Restaurant Brands International, which has yielded 3G nearly $19bn on its initial $1.6bn equity investment.

Both deals needed a decade or more to gestate and both required a fair amount of risk and vision. But let’s focus on the 3G deal. In 2009, like countless other private-equity hopefuls scouting for deals, 3G partner Daniel Schwartz screened a bunch of undervalued companies. He came across Burger King.

At the time, the company was publicly traded after having been taken private by buyout firms TPG, Bain Capital and a division of Goldman Sachs, which together still owned 32 per cent of the stock. In 2010, led by 3G partners Schwartz and Alex Behring, 3G bought Burger King for $4.1bn, including debt. At the time, there was one brand — Burger King — with a network of 12,000 outlets across 70 countries. So-called system sales from all the outlets that used the brand were $15bn.

Since then, 3G has worked some kind of magic. Schwartz joined the company as its chief financial officer (and was named chief executive in 2013) and Behring became executive chair of the board. It’s rare for buyout partners to become executives of the companies they own. Cutting costs, 3G sold off the 1,300 company-owned restaurants to franchisees. It expanded overseas, into China, Brazil and France, among other countries.

In 2012, Bill Ackman convinced 3G to merge with Justice Holdings, a UK special purpose acquisition company, sponsored by the hedge fund manager, Martin Franklin and Nicolas Berggruen. That deal valued Burger King at $8.1bn including debt; 3G received another $1.8bn in cash from the Spac deal and earlier capital return while continuing to own 71 per cent of the company.

Then 3G went on an acquisition spree. In 2014 Burger King, soon to be renamed Restaurant Brands International, bought Canada’s beloved Tim Hortons for nearly $12bn, including $3bn of financing from Warren Buffett’s Berkshire Hathaway. In 2017, Restaurant Brands bought Popeye’s Louisiana Kitchen for $1.8bn in cash to get into the chicken sandwich game. And in 2021, Restaurant Brands paid $1bn in cash for Firehouse Subs.

In February 2023, the Restaurant Brands board selected insider Josh Kobza as its new chief executive to take charge of a company that now has more than 30,000 outlets in more than 100 countries that take in some $40bn in system sales.

After 13 years of ownership, 3G has realised $11.4bn so far and still owns 27 per cent of the company, worth $9.2bn. That represents nearly $19bn in gains, making the deal one of the most profitable ever for a single buyout firm. “There’s been a lot of value created,” Schwartz told me. “But we’re not going anywhere and I think there’s a whole lot more value to be created. I love the business.”

There’s no question private equity dealmaking will rebound, if for no other reason than the ungodly amount of money that can still be made if it is done right.

The car of the future has driven into a ditch.

With consumer uptake proving slower than expected, electric-vehicle sales growth has been falling, and the stocks have been plunging. On top of that, the industry pioneer, Tesla, just recalled virtually all of its vehicles sold in the U.S.

It’s enough to make investors give up on the companies that produce electric vehicles. But despite the turmoil, there are still opportunities. The key is to focus on auto makers with two attributes: affordable cars and profitable operations. In the early days of EVs, which is to say two or three years ago, things like that didn’t matter. Excitement alone drove the stocks to staggering heights. Now, practicalities count.

There’s no question the EV bubble has burst. The combined peak market capitalization, reached in 2020 and 2021, of Nikola, Fisker, Rivian Automotive, Lucid, NIO, XPeng, Polestar Automotive, Canoo, and Lordstown Motors was as high as $470 billion. Today, the nine companies’ market caps add up to just $68 billion—a drop of 86%.

So far, only three EV makers are consistently profitable: Tesla, BYD, and Li Auto. But even those stocks have taken it on the chin. Their peak market capitalizations totaled some $1.4 trillion. Today, that sum is down to about $910 billion. Tesla

TSLA’s market value has gone from about $1.2 trillion to about $790 billion.

Perhaps the biggest problem for the industry has been the high prices of the cars. The average electric vehicle costs some $52,000. While that is down from about $65,000 in November 2022, it’s about 20% higher than the average nonluxury car. Legions of consumers have balked at the prices.

The pricing problem will only get worse when EV models lose part, or all, of their $7,500 tax credit for buyers on Dec. 31, when new rules about the origin of batteries and battery materials go into effect. (The U.S., essentially, doesn’t want to subsidize EVs with Chinese batteries.)

Faraday Future Intelligent Electric is a case study in the perils of high-price EVs. The company makes ultraluxury, 1,000-plus horsepower cars priced around $300,000. Shares of the start-up peaked at a split-adjusted $1,660 in February 2021—and closed at 26 cents on Wednesday.

To the extent that EV prices have fallen, Tesla deserves most of the credit. It has cut prices repeatedly in 2023, partly to offset the pain of higher interest rates. In the third quarter, Tesla’s average selling price was about $44,000. Other battery-electric cars cost an average of about $64,000.

Tesla ran into a problem of its own this past week, recalling some two million of its vehicles for updates to their self-driving software systems. That, however, isn’t as ominous as it sounds: Millions of vehicles are recalled every year, and this recall is software-based and costs virtually nothing to correct. The required changes are only about driver warning signals—not the underlying technology—and aren’t technically an EV issue.

At this point, what EV makers need most is cheaper cars. What investors need are shares of auto makers that sell cheaper cars profitably. Two good bets are Chinese auto makers Li Auto and BYD.

Tesla has its attractions, too, but Li and BYD sport markedly lower valuations. Tesla trades for about 60 times estimated 2024 earnings; BYD for about 13 times. Both companies are expected to grow earnings at just under 30% a year on average for the coming three years. Li is trading for 20 times earnings. It is expected to grow earnings at 20% a year for the coming three years.

Before concluding that Li stock is overvalued, consider this: Its price-to-earnings-to-growth ratio, or PEG ratio, is one times. Tesla’s PEG ratio is about two times, as is the S&P 500’s. Li only recently got to the scale required to achieve profits. It’s shipping some 40,000 vehicles a month. It trades for about one times estimated 2024 sales. Lucid stock, by contrast, trades for about six times sales.

The average price for a BYD car was under $30,000 in the third quarter. For Li, it was about $45,000. That’s closer to something car buyers can get comfortable with.

Make no mistake: Traditional auto makers haven’t been spared from the EV pain. General Motors, Ford Motor, Stellantis, and Volkswagen have all leaned into the EV trend, announcing billions in spending on battery plants and new models. Their combined market capitalization has gone from a peak of about $425 billion to $235 billion, down 45%.

Investors looking for exposure to traditional car makers should focus on the same mix of profitability, affordability, and attractive valuation. GM stock is down 12% from the start of July, when labor issues started to weigh on investor sentiment. After a contentious strike, GM’s hourly workers got base wage increases of roughly 25% over the life of a new four-year-plus labor contract.

Investors have been worried that higher costs would crimp profitability, but GM Chief Financial Officer Paul Jacobson says his company has plans to offset all the labor cost increases in the coming year. Wall Street doesn’t buy it yet. Analysts project a 2024 operating profit margin of 6.6%, down from 7.4% expected for 2023.

If GM can manage to produce an operating profit margin of 7.4%, earnings per share should be closer to $8.25, leaving the stock trading for about four times 2024 earnings.

Beating low expectations is always a winning strategy on Wall Street, no matter what the sector.

GM is also launching a cheaper EV in the U.S. in 2024. The electric Chevy Equinox should start at around $35,000. That could be just the ticket.

Write to Al Root at allen.root@dowjones.com

Barron’s annual list of unloved stocks ranges from tech giant Alibaba to miner Barrick to auto rental stalwart Hertz Global.

The stock market is ending the year with a flourish—and so are Barron’s favorite picks for 2023.

Every December for the past 14 years, Barron’s has selected 10 stocks that are good bets to outperform the market over the next 12 months.

The 2023 group—which included Delta Air Lines and Comcast, among others—topped the market, returning 31% on average including reinvested dividends, against 24.5% for the S&P 500 . The 2022 group beat the index by 10 percentage points, while we were slightly behind the market in 2021.

To beat the market this year, you probably needed to have some exposure to the Magnificent Seven—Apple, Microsoft, Amazon.com, Alphabet , Tesla, Nvidia, and Meta Platforms. And we did. We included Amazon.com and Alphabet, which were trading cheaply a year ago, and they powered our list for 2023. But our picks, as is typical, had a value bias. The biggest winner was home builder Toll Brothers, which more than doubled, helping to offset our big loser, the aluminum miner Alcoa, which returned negative 29%.

Our list for 2024 includes a diversified mix of familiar stocks and some surprises, once again leaning toward, but not exclusively to, the value camp: Alibaba Group Holding , Alphabet, Barrick Gold, Berkshire Hathaway, BioNTech, Chevron , Hertz Global Holdings, Madison Square Garden Sports, PepsiCo, and U-Haul Holding.

Here are the stocks—and why we favor them—in alphabetical order:

Alibaba is one of the cheapest tech-oriented companies in the world—by a long shot.

After dropping 18% in 2023, Alibaba’s U.S.-listed shares trade for just eight times projected earnings in its current fiscal year ending in March. With that decline, the stock, at a recent $72, is back where it stood following its 2014 initial public offering, despite a tenfold rise in revenue and a fivefold increase in earnings. Its market cap is less than 15% of its closest American peer, Amazon.com.

The company sits on a small mountain of cash, equal to a third of its current market value of $184 billion. Adding in its core Chinese e-commerce unit, its cloud computing and logistics businesses, and a stake in Ant Financial, the sum of the company’s parts comes to about $130 a share, nearly double the current stock price, according to analysts at China Merchants Securities in Hong Kong

Alibaba isn’t risk-free. It delayed plans for an IPO of the cloud software business due to U.S. chip export restrictions, and faces growing competitive pressures in China. But headwinds from the Chinese government’s crackdown on big tech and a sluggish domestic economy are reflected in the stock, says Steve Galbraith, managing partner of Kindred Capital Advisors.

“At this price, things don’t need to go spectacularly well—or even well—for Alibaba,” he says. “They just need not to get incrementally worse.”

A bigger dividend, now 1%, or larger stock buyback could boost the stock.

Alphabet could be the best bet among the Magnificent Seven stocks that led the market higher in 2023.

It’s expected to grow as fast as Microsoft, with earnings forecast to be up 15% in 2024, three times as quickly as Apple’s 5% growth. Yet its stock trades for just 20 times earnings, a discount to both Microsoft and Apple’s 30 times, despite gaining 50% this year.

Investors have been worried about slowing growth in Alphabet’s cloud computing division, the threat that artificial intelligence poses to its search business, and antitrust scrutiny. Those issues look manageable.

The “disappointing” cloud business still grew third-quarter revenue at a 22% clip, and while the company was caught off guard by Microsoft’s AI search initiative, it quickly regrouped. As for antitrust issues, they may not go anywhere, and Alphabet might be worth more broken up, anyway.

Alphabet has over $100 billion of net cash as of Sept. 30, and the company is showing some discipline on costs. That leaves plenty of money to buy back stock, and perhaps even start paying a dividend. Alphabet could easily support a 1.5% payout, in line with the market.

“We continue to view Alphabet as one of the true leading tech franchises at a fundamental inflection point,” writes Evercore ISI analyst Mark Mahaney.

Gold-mining stocks haven’t been able to keep up with gold prices—but this may be the year that changes for Barrick Gold.

Gold miners are thought of as leveraged plays on the metal, yet Barrick shares are up just 3% this year while gold is up more than 10% to $2,036 an ounce. Blame higher costs and lower-than-expected gold production.

Barrick has several things going for it. The company has some of the world’s best mines in spots like Nevada and the Dominican Republic, and it’s the top gold producer in Africa. It aims to boost its mine output—mostly gold and some copper—by 30% by the end of the decade.

It has the industry’s most effective leader in CEO Mark Bristow, a swashbuckling South African and hands-on manager who visits each major mine at least three times a year. He also has a knack for handling delicate relations with host countries in the developing world.

“Barrick probably has the best management in the mining business, an excellent balance sheet with virtually no net debt, and a well-covered 2.3% dividend yield,” says independent analyst Keith Trauner. The stock trades for about 16 times next year’s projected earnings.

The recent death of Berkshire Vice Chairman Charlie Munger at 99 highlights the key-man risk at Berkshire, with the incomparable Warren Buffett now 93. Buffett is impossible to replace but he has positioned Berkshire to succeed without him, and the stock should do just fine with him still at the helm in 2024.

The case for Berkshire starts with what CEO Buffett calls a “Fort Knox” balance sheet, with over $150 billion in cash, or about 20% of the company’s market value. Earnings are growing too, with Berkshire’s after-tax operating profits up nearly 20% so far in 2023. They could hit $40 billion this year, powered by higher interest income on Berkshire’s cash and strong insurance underwriting results, helped by a turnaround at Geico. Berkshire’s equity portfolio, led by Apple, is having a great year.

The stock looks reasonably priced, valued at 1.4 times estimated year-end 2023 book value and about 18 times next year’s projected earnings. The Class B shares, at $356, trade at a 2% discount to the Class A stock and look like the better bet.

“Berkshire shares are attractive in an uncertain macro environment,” wrote UBS analyst Brian Meredith in a recent note. He puts intrinsic value at about $600,000 per Class A share and carries a price target of $620,000, versus a recent $545,000.

BioNTech, like all Covid-19 vaccine makers, has gotten crunched in 2023. But it has so much cash that it would have appealed to Warren Buffett’s mentor, famed value manager Benjamin Graham.

Covid vaccine plays, including BioNTech, its partner Pfizer, and competitor Moderna, have slumped amid growing doubts about demand for the jabs. Those concerns were confirmed this past week after Pfizer cut its guidance for Covid-related sales. BioNTech stock is now trading around $104, down from a peak of $447 in 2021.

The bear case is that profits from Covid vaccines, BioNTech’s only commercial product, will flag in 2024 and that the company’s drug pipeline is unexciting. Citing these factors, J.P. Morgan recently cut its rating on the stock to Underweight.

But unlike so many cash-burning biotechs, BioNTech is expected to remain profitable in 2024, and the company’s oncology-focused pipeline could prove more promising than some investors believe. BioNTech has also said it won’t blow the cash on an expensive deal.

And BioNTech has oodles of cash, more than $18 billion. That’s nearly three-quarters of its current market value of $25 billion. Investors effectively are paying just $7 billion for its Covid franchise and drug pipeline.

Graham would call that a margin of safety. We call that a stock worth owning.

Some of the sheen came off Chevron in 2023 but the company remains one of the best-run big energy companies in the world.

The stock, at around $150, is off 16.5% in 2023—worse than any of Chevron’s global supermajor peers, including Exxon Mobil, which is down 8%.

Chevron’s underperformance was deserved. Two of Chevron’s biggest oil fields in the Permian basin and in Kazakhstan had production shortfalls, and investors were unimpressed with Chevron’s $60 billion deal to buy Hess, a steep price for a company whose chief asset is a 30% stake in the huge offshore field in Guyana.

Still, the shares look inexpensive, despite the possibility that 2024 earnings estimates come up short of expectations due to recent weakness in oil and gas prices. Chevron trades at 10.7 times projected 2024 earnings and yields 4.2%, based on the company’s plan to boost its dividend by 8% in January. After the Hess deal closes, the company also plans to buy back $20 billion of stock annually, or about 6% of its shares.

Greg Buckley, an analyst at Adams Funds, says Chevron has a lower-risk growth profile than peers, trades at a 15% discount to its average cash-flow multiple, and should have a total yield—dividends plus buybacks—of about 12% after the Hess deal closes. “The valuation is compelling,” he says.

Hertz’s high-profile move into electric vehicles has proven a bust, but the stock looks cheap enough to be a winner in 2024.

Barron’s had a favorable call on Hertz when the stock traded close to $18 earlier this year, but shares have dropped almost 50%, to around $10. To put it simply, Hertz’s big bet on EVs—about 11% of its fleet against an estimated 2% for rival Avis Budget Group—went bad. Repair costs for its Tesla-heavy fleet are high, and Hertz is getting less than it had projected when the cars are sold due to deep price cuts. Customers aren’t keen on the cars either, due to charging and range issues.

The rental-car industry, though, is an oligopoly, with over 90% of the U.S. market controlled by Enterprise, Avis, and Hertz. That means pricing should stay rational. And even with cuts in profit estimates, Hertz trades cheaply at 8.6 projected 2024 earnings, while its market value of $3.1 billion is less than half that of the somewhat larger Avis. There’s also a chance that the investor group that controls Hertz with a nearly 60% stake could offer to buy out public shareholders if the stock remains cheap.

The current stock price is “overwhelmingly attractive for patient investors,” wrote Chris Woronka, a Deutsche Bank analyst.

MSG Sports owns two of the most valuable professional teams in their sports: the New York Knicks and Rangers.

According to Sportico estimates, the Knicks and Rangers are worth $7.4 billion and $2.45 billion, respectively. But the company’s current market value of just $4.2 billion, plus some $300 million of net debt, is worth less than half that. The stock, now around $173, is below where it stood five years ago.

That’s too cheap, even factoring in the “Dolan discount,” a reference to the controlling Dolan family. Chairman Jim Dolan told Barron’s in September that the company won’t entertain a full sale of either team and isn’t interested in a partial sale, either.

“The market is assigning a pretty punitive ‘Dolan discount’ to these trophy assets,” says Jonathan Boyar, president of Boyar Research.

He values the stock at more than $300 a share. He says the company should sell a minority stake in the Knicks or Rangers, buy back a lot of stock, or pay a regular dividend. The ultimate payoff would be a sale of the entire company—and there probably isn’t much downside, given the discount to asset value.

Boyar notes that the Dallas Mavericks’ Mark Cuban, who was thought to be an owner for life, recently sold a majority stake in the team to the Adelson family.

MSGS stock is languishing because investors are tired of waiting for the Dolans to do something. The wait could end in 2024.

The “Ozempic effect” and flagging investor interest in traditional consumer staples have weighed on PepsiCo stock this year. But the impact of weight-loss drugs on PepsiCo’s snack-food and beverage franchise will likely be minimal.

Though named for a soft drink, Pepsi has a best-in-class snack-food franchise in Frito-Lay, maker of Doritos, Cheetos, and Lay’s potato chips. Frito-Lay generates more than half the company’s profits, making Pepsi less dependent on sugary soda than Coca-Cola.

Fears that weight-loss drugs will curb snacking caused PepsiCo stock, at $168, to drop 7% in 2023. A confident Pepsi, though, said in October that it expects to deliver per-share earnings growth at the top of its high-single digit annual target in 2024 after a projected 13% gain this year. And the stock trades for 20.6 times next year’s projected earnings, below its five-year average. It also yields 3% and has raised its dividend for 51 straight years, including a 10% increase this past summer.

As for Ozempic, its use is far from widespread—maybe 1% of the population in 2024.

“Pepsi is the most durable business in our coverage,” wrote Jefferies analyst Kaumil Gajrawala in a recent client note.

It rarely pays to bet against the American eater.

There are few businesses with a stronger competitive position than U-Haul Holding, which dominates the do-it-yourself moving business with its nationwide fleet of trucks.

U-Haul’s rivals—including Penske and Budget—are a fraction of its size. It’s the ultimate network-effect business, given its 23,000 locations around the U.S. and Canada and nearly 200,000 rental trucks. The $12-billion company has steadily built a sizable self-storage business that now ranks third in the industry, and could be worth $8 billion alone based on comparable companies.

Given U-Haul’s market position, the nonvoting stock, which trades under the ticker UHAL.B, looks inexpensive. Even with earnings expected to slip to $4.50 this fiscal year due to reduced moving activity, shares are valued at about 14.1 times earnings at a recent $63, while the long-term outlook looks strong.

There is virtually no Wall Street coverage of U-Haul. It is run like a private company by the Shoen family, which owns about half the company.

“It’s hard to find such a dominant brand and such an extremely well and conservatively run business as U-Haul,” says Kindred Capital’s Galbraith. He says the company would be a great acquisition for Berkshire Hathaway.

Only a handful of clean-energy companies have the necessary scale to attract the attention of investors.

It has been a disastrous year for clean-energy stocks, with higher interest rates battering profits. Share prices for almost every solar, wind, and hydrogen company—and several electric-vehicle makers—have fallen by double-digits.

But clean energy’s long-term trajectory is still angled sharply upward. A new generation of companies, undaunted by the current challenges, is moving toward the public markets just as the world begins pouring real money into the energy transition—more than $1.7 trillion this year alone.

Because the transition represents a stark change with plenty of unproven technologies, these companies all come with high risks—but also potentially high returns. It isn’t often that investors can place bets on a sea change in the gargantuan world of energy. There are dozens of promising clean-energy companies, but only a handful with the necessary size for public markets.

“Just because your technology works, it’s meaningless in the energy industry,” says Gene Berdichevsky, CEO of Sila Nanotechnologies, an electric-vehicle battery company. “It’s amazing the scale that it takes just to get in the game.”

With that in mind, it’s worth considering the small group of companies—Sila among them—that have broken out of the pack and could go public in the next couple of years, most with valuations of more than $1 billion. Most were born from lab work and garage-tinkering. Now they’re the new energy unicorns.

New battery manufacturing plants are popping up all over the U.S., helped by the Inflation Reduction Act. But the materials that go into batteries are in short supply domestically, and recycling scrapped products will be a key way to replenish those materials.

Redwood Materials, based in Carson City, Nev., is a significant player in the battery-recycling industry. Redwood was founded by JB Straubel, the former chief technology officer and co-founder of Tesla. It has already inked deals with Toyota Motor, Volkswagen, and Panasonic to recycle battery materials. It even recycles some lithium-powered Amazon.com products. By 2025, the company aims to produce enough anode and cathode material to power one million electric vehicles. By 2030, its goal is to make five times that much.

edwood is a leader in the nascent industry, because it has a factory already up and running, notes TD Cowen analyst Jeffrey Osborne. That facility recycles material from the Panasonic gigafactory, which builds batteries for Tesla, and other partners. The company got a loan from the Department of Energy to expand its Nevada operations and is building a new factory in South Carolina.

Redwood plans to build “circular” factories that take used material from electric-vehicle makers and process it into parts that can be used in new cars. Toyota announced a deal in November where it will pay Redwood to take material from old electric and hybrid vehicles like the Prius and turn them into cathodes and other items for Toyota’s new EV factories. Cathodes are the most valuable part of the battery, making up about half its value. Right now, there’s almost no cathode manufacturing in the U.S., so auto makers are scrambling to secure as much domestic content as possible. Localizing the supply chain is “central to our mission,” says Jason Thompson, Redwood’s CFO.

Redwood’s business plan isn’t without risk. Competitor Li-Cycle Holdings halted work on a factory in upstate New York in October, and its stock has tumbled 85% this year. Redwood faced some supply disruptions during Covid, but otherwise its capital plan is moving forward on schedule, Thompson says. It helps that top executives worked at Tesla, and are no strangers to obstacles: “We’re fortunate to have that kind of capability on our team.”

Replacing fossil-fuel energy with cleaner alternatives will reduce carbon dioxide emissions. But even a world where every car is an electric vehicle won’t be carbon-free. To reach climate goals, it will be necessary to remove existing carbon from the air. Climeworks is focusing on that goal. “You can think of us as sort of a last-mile provider to net zero,” Climeworks CFO Andreas Aepli tells Barron’s.

Climeworks removes carbon dioxide from the air using a machine that resembles a supersize home air purifier. Fans push air through filters that capture the CO, after which it gets turned into liquid and pumped underground. Within two years, the liquid carbon solidifies into mineral form and is expected to stay there indefinitely, Aepli says. The company has a facility in Iceland, which removes 4,000 tons of carbon a year.

Climeworks isn’t the only company trying to capture carbon directly from the air. Plans have been announced for 130 plants around the world, and Occidental Petroleum agreed in August to buy Climeworks competitor Carbon Engineering for $1.1 billion. But Occidental’s plants will pump much of the carbon it captures back into oil wells to force more oil out.

Climeworks’ business model is different. It commits to storing the carbon indefinitely and sells those commitments to corporations, which are willing to pay up for verifiable carbon offsets. JPMorgan Chase, for instance, is paying Climeworks more than $20 million to remove carbon from the air as part of its plan to offset all of its operational carbon emissions by 2030. UBS, Shopify, and Microsoft are clients, too. Climeworks has presold over $100 million worth of revenue, Aepli says.

David Heikkinen, a longtime energy investor who now works at carbon-capture company Carbonvert, has evaluated Climeworks and thinks it’s a “great idea” that still might be “overhyped” given how much energy it takes to remove a single ton of carbon. Aepli acknowledges that inefficiency—he says it would take 1,200 miles of air to be pulled through a filter inlet that’s 10 feet wide to capture one ton of carbon. But there aren’t other readily available ways to reduce the world’s existing carbon emissions.

And the company is scaling up. Climeworks is expecting to add another 36,000 tons of capacity in Iceland next year. It’s also planning a facility in Louisiana that can remove one million tons of carbon—one of three “megaton” facilities it hopes to be operating by 2030. By 2050, Aepli thinks the world will need thousands of carbon-suckers of that size.

Oil is starting to go out of style, at least when it comes to transportation. But it’s much harder to replace petroleum in other areas, such as chemicals. Chemical production contributes 5% to 6% of greenhouse gas emissions, and those emissions are particularly hard to abate.

Solugen is one of the up-and-coming companies looking to solve that problem. The company’s first breakthrough came when the founders discovered an enzyme that could transform sugar into other chemicals, such as hydrogen peroxide. They built their first reactor with PVC pipes and other materials they picked up at Home Depot. Since then, they have vastly expanded the capabilities of their technique, using artificial intelligence to engineer enzymes that can make a wider array of products. The company now creates products for several industries, including household goods like detergents and cleaners. In October, Solugen announced a partnership with South African chemicals company Sasol to test Solugen’s chemicals in its consumer products.

But co-founder and CEO Gaurab Chakrabarti’s ambitions go much further. He believes that to make a significant dent in emissions, companies will need to replace fossil-fuel chemicals used in industrial applications like water treatment and construction. Solugen says it can replicate a majority of the world’s chemicals using its process. The company even sells materials to fossil fuel producers themselves—a striking role for a company looking to wean the world off its oil dependence.

“We have to live in the middle right now,” Chakrabarti said in a recent interview at Solugen’s Houston headquarters. He doubts fossil fuels are going away soon.

The company’s “bioforge” where it makes chemicals is located on the site of a former wax distillery that exploded in 2004, damaging nearby buildings. Solugen’s reactions happen at much lower temperatures than at traditional chemical plants, meaning it doesn’t rely on volatile heat sources. Outside the Houston plant, tanks of corn sugar sit near the company’s enzyme reactor, a tall metal cylinder where much of the magic happens, before the chemicals are sent to processing tanks and then into storage. Inside the plant, workers tinker with new products, monitoring Solugen’s chemicals as they slosh around in appliances like dishwashers.

To make a real dent in the pollution caused by the chemicals industry, Solugen will have to scale up quickly. The U.S. chemicals industry is a $600 billion behemoth that touches every corner of the economy, and it has proven particularly difficult to disrupt. Energy giants such as Exxon Mobil are putting more focus on chemicals and plastics as electric vehicles eat into fuel demand. Solugen’s annual revenue is nearing $100 million a year, and it is now working to scale up. The company is building a 500,000-square-foot factory in Minnesota, next to a corn complex owned by ag giant ADM, which will supply Solugen with feedstock. The success of that factory, set to open in 2025, will determine whether Solugen can clean up one of the world’s most carbon-intensive industries.

Driving-range anxiety is one of the biggest problems holding back electric-vehicle adoption. Sila Nanotechnologies says it has developed a technology that can solve it. Sila develops batteries using silicon instead of graphite in the anode, which the company says allows the battery to hold at least 20% more energy than even the best batteries in use today. That should give drivers more range and “make it much more appealing to consumers,” says Sila CEO Berdichevsky. Mercedes-Benz seems to agree. The auto maker invested in Sila in 2019, and announced a supply deal last year that’s expected to launch in the middle of the decade.

Berdichevsky is an engineer who was Tesla’s seventh employee, working on the battery for the original Roadster. He and two co-founders launched Sila in 2011 out of Georgia Tech University. EV makers have been trying to figure out how to make durable silicon batteries for years, because silicon is one of the most abundant elements on earth and is much more efficient than graphite. But it is known for expanding dramatically when it is fully charged, causing it to wear down over time. “Basically, with silicon, the cookie crumbles and gets gooey,” Tesla CEO Elon Musk once said. So Sila’s founders spent years re-engineering the material, going through 70,000 iterations to find the right material for the battery, Berdichevsky says. For the past five years, the company has been scaling that technology up.

Silicon’s unique chemical characteristics should allow auto makers to make batteries smaller without sacrificing range, Berdichevsky says. It’s also easier to obtain than graphite, which is made almost entirely in China today.

Unlike many electric-vehicle start-ups, Sila is already producing revenue, though it doesn’t disclose how much. It makes batteries for consumer electronics, including fitness trackers. But EVs are a much bigger opportunity, and Sila’s technology could be powering a line of Mercedes vehicles in two to three years. The company is now building a factory in Washington state with the help of a $100 million grant from the Department of Energy. By around 2028, Berdichevsky says it will make enough batteries to supply several million vehicles.

Oklo

Nuclear energy has been gradually declining as a share of U.S. power production, to about 18% today. But a group of entrepreneurs is working to reignite the industry, which could take on a bigger role at a time when countries need more carbon-free power. Today, most American nuclear plants are behemoths built to generate hundreds of megawatts worth of power. Building new plants can take decades, and they often run over budget. But the new wave of nuclear start-ups aims to change the timeline and the price tag.

Sunnyvale, Calif.–based Oklo is one of them. It also happens to have one of the most famous founders in Silicon Valley on its side—Sam Altman. The OpenAI CEO has been Oklo’s chairman since 2015, after founder Jake Dewitte went through the start-up accelerator YCombinator while Altman was running it. Oklo’s technology is “one of our best shots to get out of the energy crisis and get into this world of energy abundance,” Altman said in a video promoting the company.

The Nuclear Regulatory Commission rejected Oklo’s first application for a nuclear reactor last year because it hadn’t submitted enough information. But the company is working on reapplying and has made deals with other branches of the government. The Defense Department issued a notice of intent to award a contract to Oklo for power and heat at an Alaska Air Force base as part of a pilot program, and the Department of Energy gave the company a site use permit in Idaho for its first plant.

Oklo’s reactors are different from most nuclear reactors in operation today. Existing U.S. reactors use technology that slows down neutrons and cools reactors with pressurized water. Oklo’s reactors will allow for faster reactions and be cooled with liquid sodium, a process that allows the facilities to use recycled nuclear material and produce less waste. Sodium coolants have been used successfully before, but designs that used water eventually became the standard due to nuclear-physics and commercial reasons that made sense when nuclear plants were expected to provide enough power for hundreds of thousands of homes. Oklo’s commercial ambitions are different, though. It plans to sell smaller amounts of power to facilities like data centers and factories. And because its plants are much smaller—around 15 megawatts versus the 500-megawatt plants that operate today—it can build them more efficiently.

Next year, Oklo plans to go public via a special purpose acquisition company, or SPAC, by merging with a company called AltC that was co-founded and is run by Altman. Nuclear-energy experts are watching closely. Rodney Rebello, an analyst focusing on nuclear at Reaves Asset Management, said in an interview that Oklo “could be a really disruptive company. There’s a large market to capture.” But he wouldn’t invest in the company on day one, given its current lack of permits.

“There are no red flags,” he says. “But at the same time, you are years away from producing revenue.”

Large investment pools next year will have to report substantial positions in a stock much quicker.

Shares of Phillips 66 got a pop recently, but it had nothing to do with oil prices. The catalyst was hedge fund activist Paul Singer, whose firm, Elliott Investment Management, disclosed a $1 billion stake in Phillips. Elliott wants Phillips to cut costs at its refinery operation; if it works, Elliott says, the stock could rise by 75%.

Shares of Phillips 66 got a pop recently, but it had nothing to do with oil prices. The catalyst was hedge fund activist Paul Singer, whose firm, Elliott Investment Management, disclosed a $1 billion stake in Phillips. Elliott wants Phillips to cut costs at its refinery operation; if it works, Elliott says, the stock could rise by 75%.

It’s a familiar playbook on Wall Street: secretly build a stake in a stock, then capitalize when other investors find out and bid up the shares. As hedge funds see it, the pop is just the start, and everyone wins if activist pressure prevails on its target and the stock winds up higher.

Regulators, however, aren’t so enamored of the secrecy part and could make activism harder to pull off. Rules going into effect early next year will require funds, endowments, and other large investment pools to report substantial positions in a stock much quicker. More consequentially, funds may have to disclose other stakes in a company held through certain types of derivatives—revealing far more information about their true economic interest.

The rules are part of a broader push by the Securities and Exchange Commission to lift secrecy surrounding hedge funds. Other recently finalized rules force hedge funds to report data on short sales, or bets against a company’s stock. The short-sale data are anonymous to the public, but hedge funds are suing the SEC, alleging that the rules require them to divulge too much information. The SEC says it plans to “vigorously defend challenged rules in court.”

Hedge funds are trying to water down the changes related to disclosures of large positions and swaps, which they say will make activist campaigns costlier and could thwart them by tilting the playing field in favor of corporate boards. The rules “will likely have a chilling effect on shareholder rights and shareholder activism,” said the Council for Investor Rights and Corporate Accountability, a trade group representing hedge funds, including Dan Loeb’s Third Point and Elliott, in a statement to Barron’s.

The rules would chip away at activist secrecy. Starting in February, hedge funds will have to report a 5% stake in a company within five business days, down from 10 calendar days currently. The SEC also wants hedge funds to reveal economic interests in a company held through a derivative called a swap. Hedge funds previously weren’t required to publicly disclose those positions; under rules that could be finalized early next year, they would have to disclose swaps worth at least $300 million within a business day in many circumstances.

The SEC says there’s no good reason to keep ordinary investors in the dark for so long or to obfuscate funds’ true stakes in a company. An economic analysis conducted by the SEC found that most activist funds built their positions within five days, implying little impact by speeding up disclosures. Supporters of the rules point to Europe, where quicker disclosure and lower thresholds for reporting have been in effect with scant impact on activism.

Hedge funds are fighting for secrecy because it “creates greater opportunities for insiders and others to exploit the rest of the markets,” said Tyler Gellasch, head of Healthy Markets, a trade group that includes pension funds and other asset managers.

As the SEC sees it, disclosing swap positions could also help prevent financial contagion. The swaps rule came as part of the response to the 2021 collapse of Archegos Capital Management. Archegos used derivatives to make huge bets on stocks like ViacomCBS (now Paramount Global ) and Baidu . Since Archegos spread its swap positions among multiple banks, the total wasn’t known, and some banks took huge losses when Archegos had to liquidate holdings. Credit Suisse, for one, lost $5.5 billion in the debacle.

Hedge funds say that more transparency will stymie activism. Funds can take weeks to build a stake, especially in small or illiquid stocks that are more sensitive to large purchases. Since stocks usually rise once a prominent activist is known to be involved, there may be less gains for a fund in a costly and lengthy activist campaign.

Company boards may also have more time to erect roadblocks such as “poison pills” that can trigger share dilution measures, thwarting a fund from gaining control. Bryan Corbett, CEO of the Managed Funds Association, says the rules undermine activists and “discourage investor engagement that strengthens corporate governance.”

Activists are pressuring the SEC to soften its stance. Elliott has written six letters to the agency criticizing the swaps rule. Executives from Elliott and Nelson Peltz’s Trian Partners have also separately met with the SEC on the rule, according to public disclosures. Elliott escalated its campaign in November, suing the SEC for not responding to public records requests for documents related to the rules’ development. The SEC hasn’t responded to the complaint.

Hedge funds aren’t the only critics. Fund company T. Rowe Price and Harvard University’s endowment manager say the rules are burdensome and object to aspects of the swap-disclosure rule.

Corporate defense attorneys are among the biggest winners. The law firm Wachtell, Lipton, Rosen & Katz, for instance, has pushed for quicker disclosures for years. The changes would give lawyers and companies more time to build defenses against activists. Attorneys who wrote the proposals didn’t respond to requests for comment.

Behind the fight lies the question of whether activism delivers strong results for hedge funds or investors more broadly. In aggregate, the numbers don’t look great for activist hedge funds: They’re up an average 9.3% this year through November, compared with a 19% gain in the S&P 500 index, according to data firm HFR. Over the past three years, the funds have gained about 12%, compared with a 32% return for the S&P 500.

Whether activism pays off for investors may depend largely on timing. A Goldman Sachs study this year found that the median stock targeted by an activist outperformed its peers by three percentage points in the week after a campaign launch, but turned negative after six months. The researchers did find that an equal-weighted portfolio of all activist targets since 2006 would have beaten the Russell 3000 by three percentage points annually on average.

Performance aside, activism is having a resurgence. Campaigns hit a lull during the pandemic but have rebounded to 2019 levels, according to Diligent Market Intelligence. Prominent campaigns this year included Carl Icahn tackling gene-sequencing firm Illumina, Trian Partners taking on Walt Disney , and Elliott targeting Crown Castle.

Activists don’t always prevail, of course. Disney fended off Dan Loeb’s effort last year to force a sale of ESPN, though Disney has recently considered selling part of the business. Elliott has tried and largely failed to lift PayPal Holdings

stock. Activists pushing for changes at Salesforce backed off after the company posted better-than-expected results in the second quarter.

With Phillips, Elliott wants the company to add board members with refining-operations experience to help accelerate cost-cutting. If that takes hold and the company can hit its 2025 earnings goals, Elliott estimates the changes could push the stock up roughly 75% from its level before Elliott announced the campaign. Elliott’s other ideas for lifting the stock include asset sales like its European convenience stores and a chemical business.

For now, Elliott and Phillips appear to be on good terms. Elliott says it supports Phillips’ leadership. The company says that it “plans to continue a constructive dialogue” with the hedge fund. Still, Elliott has a long history of aggressive tactics when its demands are spurned, including court and proxy battles that can take years. Now that its Phillips campaign is in the open, investors should have a ringside seat if a fight breaks out.

Iliad wants to finalise JV proposal for Vodafone Italy by end-January -sources

LONDON/MILAN (Reuters) - French telecoms group Iliad wants to finalise a proposal to Vodafone Italy to combine their Italian operations in a joint venture by the end of January, two sources briefed on the matter said.

Vodafone CEO Margherita Della Valle, under pressure to improve profitability, said last month the British group was reviewing options for its Italian operation, the last of three troubled European markets she had said need to be fixed.

Total revenue in the Italian market has fallen by 21% in the last decade to 27.1 billion euros ($29.6 billion), according to trade association Asstel, amid cut-throat price competition.

Della Valle said in November that no operator was delivering returns above the cost of capital. Iliad offered 11.25 billion euros to buy Vodafone Italy last year, but was rebuffed.

It is now exploring a joint venture, the sources said, adding that the French company is working to finalise a proposal by the end of January.

French billionaire Xavier Niel, founder and majority owner of Iliad, bought a 2.5% stake in Vodafone last year through an investment vehicle.

Iliad and Vodafone declined to comment. While Vodafone has been considering options including a straight sale or a joint venture, it might prefer to remain in Italy, one of the people and another source said, cautioning deliberations are ongoing.

Recent media reports say that Vodafone is also evaluating a potential combination of its assets with those of Swisscom's Italian unit Fastweb. A deal with Fastweb would create Italy's second largest fixed-line broadband operator, with a strong footprint in the prized business segment.

A spokesperson for Swisscom declined to comment. Della Valle told reporters last month after its first-half results that Vodafone was exploring consolidation opportunities in Italy, where it had a "very strong" company, but there was no timeline for any decision.

She said its position in Italy was "very different" from that in Spain, where it agreed to sell its business to Zegona Communications in October, with a "strong" brand and network. Any deal will need to be cleared by EU antitrust regulators, who have previously taken a tough approach towards mergers that shrink the number of players in a country from four to three.

But with Fastweb emerging effectively as the fifth nationwide mobile network operator, a deal could be easier to get antitrust clearance in Italy than in other regions, Citi analysts said in a note this month.