Barron’s Weekend Summary: Disney has been plagued by its own missteps. It is spending big on streaming, where profits remain elusive
Cover Story:
-Disney has been plagued by its own missteps. It is spending big on streaming, where profits remain elusive, while cable revenue continues to deteriorate. Its recent films, like Elemental and Indiana Jones and the Dial of Destiny, fell short of the mark set by Barbie, Oppenheimer, and even The Super Mario Bros. Movie. To repair the damage, Bob Iger, who had stepped down in 2020, returned as CEO, taking over from Robert Chapek.
Interview:
-Barron’s has spoken to Cathie Wood in mid-July, founder and CEO of ARK Investment Management. She is famous for her unwavering conviction in disruptive innovation and the companies behind it. The firm’s ARK funds gained prominence, and legions of investors, in 2020 as interest rates plummeted and growth stocks lifted off, although gains turned to losses in the next two years as the companies stumbled and rates rose. This year, ARK is benefiting from huge gains in stocks such as Tesla, Coinbase Global, and Roku. The firm’s flagship ARK Innovation exchange-traded fund (ARKK), with about $8B of assets, gained 54.5% through July 26, compared with a 19% increase in the S&P 500 index. ARK’s other funds, which invest in themes such as the genomic revolution, autonomous tech and robotics, and financial-technology innovation, similarly are outpacing the broad stock market, although they are still well below their early-2021 peaks.
Tech Trader:
-Tech stocks were flying in the year’s first half, with the NASADQ Composite up 32% as the sector’s largest players posted huge gains. There were at least three contributing factors to the rally: the emergence of generative artificial-intelligence applications, a “year of efficiency” focus on cost cuts and profitability, and growing confidence that the Federal Reserve’s tightening cycle was nearing completion. The missing ingredient was earnings and revenue growth, but now there are signs of optimism there, too. The past week brought earnings reports from three of tech’s most important players, Microsoft, Alphabet, and Meta Platforms. Next week, Apple and Amazon.com follow.
The Trader:
-It’s impossible to miss the headlines about possible work stoppages, massive wage increases, and other worker-related issues. Screenwriters and actors are striking, while UPS just reached a five-year labor deal with the International Brotherhood of Teamsters that would raise wages by roughly 30% cumulative over five years. Now General Motors GM is in the crosshairs as it negotiates with the United Auto Workers. Both the possibility of a strike and reaching a deal can create problems for stocks as investors first ignore the possibility of a work stoppage, then worry about one happening, and then worry about the higher costs of a new contract. There isn’t a lot of positivity surrounding labor negotiations.
-Wall Street has a strong dislike for Alcoa stock. The shares have been downgraded three times in July, twice to Hold from Buy and once from Hold to Sell. After those cuts, 14.3% of analysts covering the aluminum miner have Sell ratings or the equivalent on the stock, above the average of 6% for all stocks in the S&P 500, while just 36% have Buy ratings or the equivalent, well below the average of 55%. Alcoa is out of favor on Wall Street, and it’s getting worse. A year ago, 57% of analysts covering the stock rated shares Buy and none rated shares Sell. Alcoa stock, though, has slid right along with sentiment. Shares are down about 30% over the past 12 months, while the S&P 500 is up 13%. Being disliked by analysts, of course, doesn’t guarantee trading profits, though it does help investors in their quest to buy low and sell high. And there’s a fundamental case for Alcoa as well.
Features:
-China’s marriage rate steadily increased until hitting a peak in 2013, when 13.5M marriages were recorded. By the end of that year, a precipitous decline began—one that continues. Last year the marriage rate hit half its 2013 level, at 6.8M, according to China’s Ministry of Civil Affairs. The factors complicating the Chinese young adults’ romantic pursuits are manifold. They are either drained of energy or pressed for time, or their potential suitors are. A spouse must own a home and ideally a car or other investments, or come from a rich family. Both the causes and effects of the marriage falloff are being widely discussed in China. For one, the rising unemployment rate for the youth cohort has broken record after record each of the past few years. Joblessness for this group, aged 16 to 24, hit a record high of 21.3% in June. By comparison, the rate for the same age group in the U.S. was 7.5% in June, according to the U.S. Bureau of Labor Statistics.
-Intel shares rallied on Friday July 28 after the chip maker reported better-than-expected second-quarter earnings. But there is an underlying risk to the company’s outlook that shouldn’t be underestimated: how the artificial intelligence trend is going affect technology spending? Some analysts are growing concerned that Intel may face near term pressures as customers prioritize buying AI-related chips instead of traditional Intel processors. Intel CEO Patrick Gelsinger admitted as much. “We do think that the next quarter, at least, will show some softness [for the data center business],” he said on the earnings conference call.
Europe:
-The European Central Bank raised interest rates by a quarter-point as expected, but left the door open to keeping rates steady at its next meeting to set monetary policy. The ECB took its main refinancing rate for the 20 countries sharing the euro to 4.25% from 4.0% following the Federal Reserve’s quarter-point rate hike on Wednesday. The U.S. central bank moved rates to their highest level in 22 years, but offered little in the way of guidance for future meetings. ECB President Christine Lagarde said in a press conference following the decision that the increase was in response to inflation remaining “too high for too long” but that the central bank had an open mind about future decisions.
Emerging Markets:
No updates this week
Commodities:
-Prices at the gasoline pump hit an eight-month high and extended their monthlong gains, with signs that prices could keep rising during peak summer driving season. The average US retail gasoline price rose to $3.7137 a gallon on Thursday, the highest since Nov. 17, 2022, according to Oil Price Information Service. The move higher is a blow to efforts by the Biden administration to keep retail gasoline prices low and alleviate pain for household budgets. Thursday’s average is still about 59 cents a gallon cheaper than last year’s average of $4.30 a gallon, according to AAA, and below June 2022’s peak price of $5.02 a gallon, AAA said. But gasoline prices have risen about 4% in the past month. The rise could be linked to refinery outages, according to Patrick De Haan, GasBuddy’s head of petroleum analysis. Heat-related and other issues have affected refinery operations in Texas and Louisiana, which De Haan said is typical for summer, when the plants run nearly full-tilt.
Streetwise:
-Jack Hough says that investors looking for the next powerful return driver beyond artificial intelligence might want to check out ball bearings and slushies. Small companies are due for a lift—maybe a yearslong one. Below are some top picks from a pair of money managers. It has been a suspiciously good year for an uncomfortably narrow group. The S&P 500 index is up 18% year to date, and trades at 21 times this year’s projected earnings. Gains have overwhelmingly come from tech behemoths with early AI leads. Three have more than doubled this year: Nvidia, Meta Platforms, and Tesla. The rally should be broadening about now. But investors seem to have passed over sturdy, small companies and gone straight for a Star Wars cantina of market oddities. Among companies up more than 300% this year are Carvana, known for its dozens of car vending machines and zero years of profitability, crypto mining concerns Riot Platforms and Marathon Digital Holdings, and Upstart Holdings, an AI-driven lender.