Barron’s Weekend Summary: Barron’s featured a second 2022 Roundtable installment. David Giroux of T. Rowe Price highlights six stocks that, to his mind, have been unfairly punished.
Cover Story:
-This week, Barron’s features a second 2022 Roundtable installment. David Giroux of T. Rowe Price highlights six stocks that, to his mind, have been unfairly punished. He’s joined by Gamco’s Mario Gabelli, Henry Ellenbogen of Durable Capital, and Abby Joseph Cohen, formerly of Goldman Sachs and now a professor of business at Columbia University’s Graduate School of Business, all of whom present their own best bets for the year ahead.
Tech Trader:
-Eric Savitz has been bullish on Netflix. Despite last week’s collapse over lower than expected subscription numbers, Savitz writes that “it seems a little late in the game to turn bearish now. Over the past two years, Netflix has still added nearly 55 million subscribers, increasing the total by nearly 33%. The company has said it expects to be profitable this year and going forward, and that it plans to be back in the market, repurchasing stock before long.”
The Trader:
-There are reasons to remain optimistic about stock performance despite the recent slide. Fundstrat global portfolio strategy head Brian Rauscher notes that rising inflation has been one of the biggest factors in the market’s decline this year, so a reversal would be a tailwind for stocks. And that’s just what he thinks will happen. “Inflation is going to peak and roll over during [the first half of] 2022,” he says. He recommends that investors play offense by buying sectors like technology, consumer discretionary, financials, and energy.
-A bad start to 2022 just got a whole lot worse. The Dow Jones Industrial Average declined 1646.44 points, or 4.6%, this past week. That looked stellar next to the S&P 500, which fell 5.7%, and the Nasdaq Composite, which dropped 7.6% and is now down 14% from its all-time high, hit back in November. All three suffered their worst weeks since 2020.
Features:
-Economist Wade Pfau has been thinking about retirement since he was in 20s. But not just his own retirement. Pfau started studying Social Security for his dissertation while getting his Ph.D. at Princeton University in the early 2000s. At the time, Republicans wanted to divert part of the Social Security payroll tax into a 401(k)-style savings plan. Pfau concluded it might supply sufficient retirement income for retirees—but only if markets cooperated.
-Activist hedge fund Starboard Value is behind a group that made a $9 billion bid for department-store operator Kohl’s , according to a report.
The bidding group is led by Starboard-backed Acacia Research, which told Kohl’s that it was assured by bankers that it could get financing for a bid that values the retailer at $64 per share, The Wall Street Journal reported. Kohl’s shares recently traded around $47 apiece.
-The Fed outlined its thinking on a central bank digital currency, or CBDC, in a highly anticipated report on Thursday. While the report doesn’t make policy recommendations, it lays out a blueprint for transforming the dollar into a digital asset. The report also requests public comment on a CBDC and says that the Fed won’t proceed without “clear support” from the White House and Congress, ideally in the form of legislation.
European Trader:
-The world’s largest shipping container company, A.P. Møller-Maersk A/S, has been carting ocean freight for more than 100 years. The company was a big winner in 2021, as world economies ramped up production when pandemic restrictions were lifted. Now, Maersk is expanding to include road, rail, and air services that are connected by a high-tech platform with real-time tracking information. The shift could help power Maersk’s shares higher.
Emerging Markets:
-Overall, the damage to emerging market stocks has been significant over the past 12 months. The iShares MSCI Emerging Markets Exchange-Traded Fund (EEM) has dived 12.4% in the past year, compared with the S&P 500‘s 15.3% rise over the same span. That economic picture could change, however, as China’s central bank takes measure to spur economic growth.
- China’s export machine is in strong longer-term health, though, and evolving. Labor-intensive, low-margin apparel is down to 5% of exports. The dominant categories are phones, computers and integrated circuits. A next technological generation—electric vehicle batteries, medical devices, pharmaceuticals—is gathering momentum fast.
Commodities:
-Last winter, natural-gas shortages sent short-term prices rising in Europe and Asia, lifting stocks of gas producers like EQT and Range Resources . This year, energy consultant Wood Mackenzie is predicting that high overseas demand will continue, as gas buyers rush to lock in longer-term contracts at higher prices. That has benefited Cheniere Energy, the largest U.S. producer of liquefied natural gas, or LNG.
Streetwise:
Jack Hough suggests investing in good old-fashioned oil. “The new darling of Wall Street isn’t into robocars, crypto mining, or the metaverse. It’s an Oklahoma City oil driller with a favorable position in West Texas shale. Devon Energy stock has returned 181% in a year, making it the single best performer in the S&P 500. You couldn’t script a bigger turn of events on Netflix—whose 20% plunge on Friday, by the way, makes it one of the index’s worst three-month performers.
Weekend Papers Summary
NEW YORK TIMES
-Gunman Kills 22-Year-Old NYPD. Officer and Wounds Another in Harlem
Officer Jason Rivera, who joined the department in November 2020, was killed when he responded to a domestic disturbance between a woman and her adult son.
The second officer and the suspect were in critical condition. Mayor Eric Adams called the shooting “an attack on the city of New York.”
The police said the gun that was used was reported stolen in Baltimore in 2017 and had a high-capacity magazine.
-How Xi Jinping Is Staging the Olympics on His Terms
From Beijing’s unexpected bid to the coronavirus pandemic, China has managed to fulfill its promises and cow its critics.
-China Holds the Line on ‘Zero Covid,’ but Some Wonder for How Long
More people are being caught up in the country’s virus-control dragnet. Some think the no-tolerance policy is unsustainable.
-Ireland has eased restrictions ahead of the March holiday. The United States expanded the use of remdesivir, an antiviral medication that had previously only been used in hospitals.
-On Abortion Law, the U.S. Is Unusual. Without Roe, It Would Be, Too.
Many rich democracies have earlier cutoffs for abortion, but allow it later for a variety of reasons. And around the world, most countries are expanding access.
-Ukraine has initiated a defensive strategy for the Chernobyl Exclusion Zone, one of the most radioactive places on Earth, which lies on the shortest path between Russia and Ukraine’s capital, Kyiv.
-US and Russia Take More Measured Stance in Ukraine Talks
The conciliatory tone and absence of ultimatums suggested that both sides were trying to keep tensions in check and give diplomacy time.
-Was Dorothy Day Too Left-Wing to Be a Catholic Saint? The Archdiocese of New York has asked the Vatican to consider the activist and journalist for sainthood. Church leaders are not entirely comfortable with her politics.
-A preponderance of boulder tracks on the red planet may be evidence of recent seismic activity.
THE FINANCIAL TIMES
-Germany and Ukraine have become embroiled in a diplomatic row after a video emerged of the head of the German navy saying Russia only “wants?respect” and that Ukraine would never regain Crimea.
Vice-Admiral Kay-Achim Schönbach’s comments, made at a think-tank in India, drew a furious response from the Ukrainian foreign minister Dmytro Kuleba, who said they were part of a pattern of unhelpful behaviour by German officials.
-The US is holding talks with Qatar and other large gas exporters to plan contingency measures in case a Russian invasion of Ukraine disrupts supplies to Europe.
-Microsoft’s audacious $75B move on games publisher Activision Blizzard has detonated a bomb under the games industry. Along with the proposed deal’s sheer size, the prospect of a tech giant worth more than $2T making a grab for games industry leadership has prompted breathless speculation about whether it will precipitate a wider industry realignment.
-Like other pillars of the banking establishment these days, Jamie Dimon is making fateful decisions about how to respond to a new generation of fintech competitors — and explaining his technology spending to outsiders is proving tricky.
-Former CIA Director Robert Gates comments on the Ukraine situation. He claims that “Putin’s problem is that, as dictators are wont to do, he has overplayed his hand. His aggressive threats against Ukraine have galvanized NATO and reaffirmed its clarity of purpose. His menacing policies have made Ukrainians even more anti-Russian and driven the country further into the arms of the west.”
-Cathie Wood’s flagship Ark fund is on the cusp of being overtaken by Warren Buffett’s Berkshire Hathaway in the post-pandemic performance table, reflecting a dramatic shift in fortunes between the two prominent investors.
-Qatar Airways has escalated a dispute with Airbus by releasing a video showing apparent damage to its aircraft, the latest salvo in a growing quarrel after the jet maker scrapped a separate $6B order.
-China’s state broadcaster has implicated Jack Ma’s Ant Group in a corruption scandal, ratcheting up pressure on the billionaire following a crackdown that has wiped billions of dollars from his internet empire.
-Washington has suggested Lithuania consider changing the name of Taiwan’s representative office in the capital Vilnius in an effort to help ease tensions between the Baltic state and China since the mission was established.
-Bitcoin dropped to a six-month low on Saturday, extending a steep fall recorded in the previous session as the cryptocurrency market was swept up in a powerful shift by investors out of speculative assets.
-Although Peloton shares have lurched violently in the past six months, spending on virtual or online fitness has been turbo-charged by the pandemic and is expected to grow tenfold from $6B in 2019 to $60B by 2027.
-Speaking on Friday at the virtual World Economic Forum held instead of the normal in-person gathering at Davos, Kristalina Georgieva warned that the outlook for the global economy this year would be far from smooth. “2022 is like navigating an obstacle course,” the fund’s managing director said. “We anticipate the [global] recovery to continue but it is losing some momentum and it is faced with the renewal of [Covid-19] infections?.?.?.?much more persistent than anticipated inflation and?.?.?.?record high debt levels.”
-A year after the end of the Brexit transition period, EU citizens in the UK, British citizens in the EU and those with families spanning both sides of the Channel are all adjusting to their new status and loss of freedoms. Cross-border movement has become more complicated with a points-based immigration system; and access to finance and healthcare has also become tougher for those buying homes abroad.
-More blank-cheque companies are abandoning their hunt for deals before it has even begun, in another sign that momentum is slowing in the once-brisk SPAC market.
-After targeted campaigns helped narrow a racial divide in US vaccination rates last autumn, that gap has reopened for booster shots.
Advocates say that distrust in public health systems, problems with access, and staff shortages have hindered black and Hispanic residents from receiving boosters in the same proportions as their white peers.
-British Prime Minister Boris Johnson will spend this weekend seeking to shore up his support among Conservative MPs, as allies of the UK prime minister expressed concern he will soon face a no-confidence vote as a result of the “partygate” scandal.
-Peaceful protests over fuel price rises brought thousands to the streets across Kazakhstan. But in Almaty, the former capital, protests quickly turned violent — the demonstrations co-opted, many participants and witnesses believe, by armed criminals, coup plotters or both.
-For a brief period, investors were being paid to buy debt issued by Germany, the famously prudent government borrower. What witchcraft is this?
This is some of the safest debt on the planet — so attractive to global investors that demand had pushed benchmark 10-year yields into negative territory since 2019. That meant investors effectively had to pay to hold German government bonds.
INVESTORPLACE
-Google has built a quantum computer that is about 158 million times faster than the world’s fastest supercomputer. Imagine the possibilities if we could broadly create a new set of quantum computers 158 million times faster than even today’s fastest computers…
THE NEW YORK POST
-“After making political hay by attacking the NYPD and pushing to defund the department – some of the city’s most vocal progressive Democrats are praising cops in the wake of Friday night’s tragic police shooting.”
-Retail crime has been rising throughout the US for the past five years, with organized criminal rings targeting stores everywhere from Woonsocket (Rhode Island) to Greensboro (North Carolina) to Grafton (Wisconsin). The National Retail Federation reported that store losses mounted from $453,940 per $1 billion in sales in 2015 to $719,458 in 2020.
-New Yorkers placed a record-shattering $603 million in bets during the launch of mobile sports gambling, according to initial figures released by the state Gaming Commission on Friday.
-General Motors said it will spend $154 million to refurbish a plant near Buffalo where the automaker manufacturers a key part of the motor used in electric vehicles.
Dark Side Of Metaverse Exposed: Why Your Kids Need To Stay Away From VRChat
Parents who bought their children the Oculus Quest 2 for Christmas could be in for a surprise as there have been several instances of child grooming within one of the virtual reality headset's most popular chatroom services VRChat.
VRChat is an online virtual world platform where users get their first taste of the metaverse and use full-body avatars to conceal their identity. There have been instances of child abuse, harassment, racism, and pornography on the popular chatroom service.
One clip shared by the YouTuber "VSF Studios" shares several instances of a massive problem in VRChat: child exploitation and sexualization.
VSF Studios said VRChat is "not a place for children."
The first example that "really shook" the YouTuber was seeing an underaged girl in a 12yo's body dancing for a 40yo Japanese man. He said it was "disgusting, to say the least."
Maybe there's a dark side to the metaverse that needs to be discussed, and that is how easily it connects users to predators.
It’s Time to Bargain Hunt. 27 Picks to Beat the Stock Market From Barron’s Roundtable Experts.
Ocean Freight Shipper Maersk Continues to Expand. The Stock Could Sail to New Highs.
The world’s largest shipping container company, A.P. Møller-Maersk A/S , has been carting ocean freight for more than 100 years.
Now the Danish company is expanding to include road, rail, and air services that are connected by a high-tech platform with real-time tracking information. The shift could help power Maersk’s shares (ticker: MAERSK.B.Denmark) higher.
Maersk was a big winner in 2021, as world economies ramped up production when pandemic restrictions were lifted. While port congestion caused its third-quarter container volumes to fall 4% compared with the year-ago period, the company mitigated this by hiking freight prices for customers desperate to move goods amid ongoing supply chain snafus.
The Copenhagen-based Maersk is expected to post the biggest annual profit ever by a Danish-listed company when it reports next month. It already raised its earnings and sales targets for 2021.
Maersk has been on the acquisition trail in order to achieve its transformation. In December it announced a deal to buy Hong Kong’s LF Logistics for $3.6 billion. The purchase will bring 223 warehouses in Asia into the fold—a move that helps Maersk expand into transporting goods from ports to warehouses.
Maersk in November also said it agreed to purchase German freight-forwarder Senator International, and is expanding its air freighter fleet. And last year Maersk bought two e-commerce logistics companies in the U.S. and the Netherlands.
The stock has risen 67.2% to 23,700 Danish Krone ($3,632) over the past 12 months. Andy Chu, an analyst at Deutsche Bank, has a 26,400 Krone price target and reiterated a Buy recommendation in a January note. He wrote that the LF Logistics deal makes “total strategic sense and will provide Maersk with significant growth opportunities and in our view will help make the business less volatile longer term.”
Chu estimates annual earnings before interest and tax could now reach US$24 billion for 2021, up from US$3.6 billion in 2020. “Expect strong earnings momentum in the stock as consensus forecasts for 2022 look far too conservative,” he wrote.
He wrote in a December note that the LF Logistics deal “is not blowing away the company’s cash pile. Given the company’s strong free cash flow generation, we would expect more deals.”
Upside from the potential transformation is not the only catalyst for growth. Freight prices could remain at record levels as supply chain issues drag on well into 2022, although prices are likely to fall at some point as the impact of the Omicron variant subsides and the urgency to ship products wanes.
“Right now we still see very strong demand as well as supply chain bottlenecks in Los Angeles and parts of China where we cannot discharge containers as fast as we would like,” CEO Søren Skou said in a statement provided by the company. “So with the visibility that we have right now, we do not expect any drop-off in the first quarter of this year.”
Maersk has a market value of 449.8 billion Krone and employs 95,000 workers. It fetches a multiple of 4.3 times this year’s expected earnings, a 10% discount to its peers.
For the full year 2020, the company posted $3.3 billion in pre-tax profit, up from $967 million the previous year. Revenue at $39.7 billion was fairly flat from the $38.8 billion posted in 2019. For its 2021 revised guidance, Maersk now expects earnings before interest, taxes, depreciation, and amortization of $24 billion, up from a range of $22 billion to $23 billion.
Microsoft’s Activision Merger Is History’s Biggest Tech Deal. The Stocks to Play It.
It was a wild week in tech, with Netflix missing earnings, Peloton Interactive teetering, and the Nasdaq Composite entering correction territory. But those events overshadowed the week’s most important tech news: Microsoft ’s Tuesday announcement that it had agreed to buy Activision Blizzard in an all-cash deal valued at nearly $69 billion. It would supplant Dell’s $67 billion acquisition of EMC in 2016 as the biggest technology deal in history. If it happens.
The transaction, which has widespread ramifications for the videogame industry, will pose a substantial test of the Biden administration’s increasingly tough stance on mergers and acquisitions, and tech transactions in particular.
From a Microsoft perspective, the deal looks brilliant. The company’s stock rose on the news, despite the large outlay of cash involved. The price tag represents less than 3% of Microsoft’s $2.3 trillion market value. As Moody’s pointed out this past week, Microsoft has $137 billion in cash on its balance sheet and is likely to generate $50 billion in free cash flow in the current fiscal year.
The deal won’t require financing, it won’t affect Microsoft’s stock repurchase program, and it won’t come close to endangering the company’s nearly 1% dividend yield. Also, Wall Street isn’t worried about the price, at less than seven times Activision’s forward sales, well below Microsoft’s own price-to-sales multiple of 12 times. Lastly, the $95-per-share cost is still well below Activision’s year-ago high of $104.
Microsoft said the deal, expected to close before June 2023, would provide an immediate boost to adjusted profits.
For Activision Blizzard investors, Microsoft’s offer is a lifeline. The company, and stock, have been mired in a sexual harassment scandal that triggered calls for CEO Bobby Kotick to resign. While Kotick will stay on as Activision’s chief through the close of the deal, it has been widely reported that he is likely to step down after that, a key step in cleaning up the issue. Microsoft declined to comment on Kotick’s future.
And yet Activision shareholders haven’t quite embraced the deal. At a recent $82, Activision shares are trading at a 14% discount to Microsoft’s offer. That implies just a 60% chance of the deal going through, Barron’s calculates, thanks to the inevitable scrutiny from regulators in Washington.
The merger would make Microsoft the world’s third-largest gaming company by revenue, trailing just Sony Group (SONY) and China’s Tencent Holdings (700.Hong Kong). Sony makes the PlayStation console, the primary rival to Microsoft’s Xbox.
The acquisition is, in part, Microsoft’s effort to gain ground on Sony in the console battle. With Activision, Microsoft would get control of the hugely popular Call of Duty first-person shooter franchise, which accounted for two of the three best-selling games on PlayStation in 2021, according to research firm NPD Group.
Microsoft also gets World of Warcraft, the proto-metaverse sword-and-sorcery multiplayer game, the role-playing game Diablo, and the multiplayer first-person shooter Overwatch. It also brings Candy Crush, still one of the most popular mobile games. (Activision bought Candy Crush publisher King Digital for $5.9 billion in 2016.)
Ultimately, the deal ticks every box for Microsoft: It enhances its position in mobile games, expands its already formidable position in the still-emerging metaverse, provides new games to include in its Xbox Game Pass subscription program, and gives it the option to pull popular games away from rival PlayStation.
All reasons for investors to like the deal—and for regulators to take a close look. App store platforms are already getting tough treatment from regulators across the world, and Microsoft could find itself in a similar position if it were to remove Call of Duty or other Activision games from the PlayStation.
Exclusives have long helped to sell consoles, and Microsoft and Sony keep some of their best games in-house. Even so, Microsoft might be forced to defuse potential antitrust issues by committing to keep Activision games on the PlayStation.
The company declined to comment on the exclusivity issue.
The bigger risk for Microsoft is if the federal government decides to make an example of the merger on the grounds that tech giants are big enough and shouldn’t be allowed to get bigger. If the government goes that route, Microsoft would have to decide whether to defend the linkup in court, as AT&T (T) and Time Warner did successfully in 2017.
Investors already see the competitive risk to Microsoft’s rivals. Sony shares tumbled 11% last week after the Activision move was announced. If Sony’s business is pressured, it could, in turn, be forced to make a deal of its own.
That speculation sparked a rally in shares of Electronic Arts (EA) Take-Two Interactive (TTWO), Paris-based Ubisoft (UBI.France) and Japan-based publishers Capcom (9697.Japan) and Square Enix Holdings (9684.Japan). They all rose on the week, despite the broad selloff in tech stocks.
For investors, there are multiple ways to play the merger. Anyone convinced the deal will go through can buy Activision shares. But there’s plenty of risk, and the potential reward is capped by the deal price, limiting upside to about 15%. That trade is best left to the risk arbitrageurs.
Investors can also bet on the potential of additional consolidation by buying shares of takeover candidates like EA, Take-Two, and the other game publishers that rallied this past week. Shares of mobile videogame maker Zynga (ZNGA) soared earlier this month after Take-Two said it was buying the company for $12.7 billion.
But the better, less speculative bet is Microsoft itself. The stock has been a laggard over the past few months, but seems well-positioned for double-digit earnings growth as far as the eye can see.
Sony also looks attractive here—the gaming industry is on fire, the stock has been discounted, and the threat to its business from a Microsoft-Activision merger seems a little overblown.
Meanwhile, all eyes are on how Washington reacts to the deal. For President Biden, the Federal Trade Commission, and the Justice Department, it’s game on.