>>> Barron’s Weekend Summary

Barron’s Weekend Summary: Municipal bonds have surged during the pandemic, but yields are small and many cities face challenges; Tech IPOs are hot again

* Cover story: Municipal bonds have surged during the pandemic, even as city and state governments falter because of a host of problems, and yields are at their lowest levels since the 1950s, yet the rally seems unlikely to stop even as some professional bond investors are turning cautious on the market; Small yields may not be enough to compensate investors for the risks some cities face because of massive holes in their budgets, businesses closing, people working from home, and sales and income tax revenue down substantially.

* Tech Trader: The column looks at key drivers of the current tech IPO boom: Investors are ravenous, the supply is deep, the cloud is thriving and creating a host of new opportunities, startups are experiencing growth (though perhaps not profits), direct listings are back, SPACs are growing more popular, and auction pricing models are on the rise.

* Trader: Unlike almost any other asset class, holding stocks for the long run increases the odds of making money in the market, says Bank of America Securities strategist Savita Subramanian, and with stocks trading at such lofty valuations, the S&P 500 could offer a four percent annual price gain plus a two percent dividend; Positive on SBUX: The coffee giant has been hit hard by the pandemic, but Stifel analyst Chris O’Cull says efforts such as curbside pickup are helping, though he’s most impressed with the company’s ability to adapt on the fly; Positive on MSFT, WMT: Jefferies analyst Christohper Mandeville thinks a deal for TikTok could be transformative, especially if it can match what Tencent achieved with WeChat, and it “could complete the digital ecosystem puzzle in the coming years.”

* Profile: Damon Ficklin and Jeff Mueller, co-managers of the Polen Global Growth fund, adhere to the firm’s high conviction, low turnover strategy developed three decades ago by founder David Polen, and they seek to compound wealth over time by investing in high-quality, growing businesses (top 10 holdings: MSFT, ADBE, GOOGL, Tencent Holdings, BABA, MA, SAP, FB, V, ADSK).

* Interview: Brian Tolles and Patrick Fortier, money managers at Jackson Square Partners, discuss the growth drivers, business models, and potential for industry disruption of some of the stocks they own, including superstar companies V and MA as well as up-and-comers such as WIX and BILI.

* Features: 1) Positive on DHI, LEN, MTH, PHM, TOL, TMHC: Demographic trends, ultralow interest rates, and urban flight spurred by the pandemic are boosting home sales, and a tighter-than-usual supply of existing homes and chronic underbuilding of new ones has led to bidding wars, rising prices, and a run-up in home-builder stocks; 2) Positive on MGA: The Canadian auto parts giant is a major supplier, and its Steyr division engineers and assembles complete vehicles for global auto makers, from major players to smaller electric-car makers, a combination that makes the stock a winner; 3) Positive on MCD: During the pandemic McDonald’s changed menus, added safety procedures, and improved drive-through times, and its restaurants are doing well even as independent rivals stumble; Despite questions about the previous chief executive’s behavior, the company is “built to succeed in an environment like today’s” and should be a portfolio staple; 4) Positive on VNO, SLG, ESRT: While the share prices of New York City’s largest commercial landlords have taken a hit during the pandemic, based on free cash flow they all trade cheaply, and they “amount to a speculative bet on a postpandemic recovery, because a successful vaccine would be sure to give a big lift to the city’s economy”; 5) Cautious on ABBV, MRNA, PFE, BNTX, NVAX, JNJ: With a possible Covid-19 vaccine on the horizon, more than $100B in investors’ money is riding on the outcome—that estimate roughly reflects the value the stock market is placing on the Covid-19 vaccines now in development, says Geoffrey Porges at SVB Leerink; For now, nobody knows which among the leading companies will come out ahead, making the stocks volatile because so much is at stake.

- European Trader: Cautious on Coca-Cola Hellenic Bottling: The shutdown of restaurants and closure of cinemas has dented sales at the company, which produces and distributes carbonated and still drinks, but analysts think the stock has room to rise as the company adjusts package sizes from larger lower-margin two litre bottles to smaller higher-margin single serve bottles and cans.

- Emerging Markets: Positive on Saudi Aramco: The company is the second largest in the world by market capitalization, and shares have gained nine percent since its IPO last December, but it falls beneath most investors’ radar because 98.5 percent of the company is in state hands, with the rest of the shares mostly owned by other Saudis—though the Kingdom seems to be running the company to their benefit.

- Commodities: “Gasoline has likely experienced the most price-steady summer in at least a decade. And recent Atlantic storm-related refinery snags and the expected seasonal slowdown in fuel consumption may do little to shake things up for long.”

- Streetwise: Columnist Jack Hough says he views “an ugly election as a big risk confined to a short, knowable time period, and the costs of containing that risk seem low, because stock prices look high.”

FT : Veolia moves on Suez to try to forge new global player

Veolia moves on Suez to try to forge new global player
French infrastructure group’s €2.9bn bid for stake held by Engie is prelude to a full offer


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Veolia, the French water, waste management and energy group, said it was offering to buy 29.9 per cent of Suez held by utility group Engie for €2.91bn as a prelude to launching a full bid for its rival.

“Our aim is to bring together and merge these two companies,” Antoine Frérot, chief executive, told the FT on Sunday night. 

“Size is crucial In the global market that is being built up and developed right now,” he said.

A full merger of Veolia and Suez would create a global company with annual turnover of some €40bn, a combination Mr Frérot likened to a football merger of Manchester United and Manchester City.

“It’s with this combined size that we’ll be able to invest in the installations needed, and finance and eventually amortise our innovation and research and development costs,” he added.

The first stage of the planned takeover is the bid for 29.9 per cent of Suez held by Engie, which is just below the threshold requiring a full public offer. Engie owns a total of 32 per cent of Suez and said at the end of July it was changing its stance on the stake and was now looking at its options instead of hanging on as Suez’s main shareholder.

Veolia is offering €15.58 per Suez share in cash, a premium of 50 per cent over the price the day before the Engie announcement. 

Engie’s change of tune was “a historic chance” for Veolia to pursue its plan to create “the global super-champion of ecological transformation”, Mr Frérot said.

“It’s now or never,” Mr Frérot added, noting that many countries and regions — including the EU with its “green new deal” — were developing plans to help their economies recover from the coronavirus-induced recession by harnessing environmentally friendly policies. 

A full merger, which Veolia said it envisaged within 12-18 months after regulatory clearances, would require the sale for competition reasons of Suez’s French water operations because the duo are the main businesses in the country selling their services to municipalities and industries.

Veolia said it had a binding commitment from Meridiam to buy Suez’s French water business. 

In the rest of the world, with a few minor exceptions, Suez and Veolia had highly complementary businesses, Mr Frérot said. The company said the operation would create value from its first year for Veolia shareholders, largely as a result of operational and purchasing synergies estimated at €500m. 

Veolia said it was particularly strong in central and eastern Europe and the UK, while Suez’s traditional markets included Spain and northern Europe. A merger would reinforce a combined group’s positions in South America, North America, Asia and Australia. 

Advisers to Veolia included Messier Maris and Perella Weinberg and law firm Cleary Gottlieb, while the company’s board was advised by Citi and French law firm Gide.

Barron's : A Disputed Election Could Sink the Stock Market. How to Protect Your

A Disputed Election Could Sink the Stock Market. How to Protect Your Portfolio.

I cut my stock exposure this past week because I’m worried that a disputed U.S. election could take prices lower.

Hopefully, I’m overthinking it. I’ll miss out on a smidgen of upside, and blame the whole episode on hysteria brought on by too much working from home.

Entering the year, I had what I described here as a Benjamin Button portfolio, with a stock allocation more appropriate for a much older investor. After the crash, I shifted money to stocks. The plan wasn’t to try to time the market, but to start acting my age. Now I’m back to a Button-esque mix.

It’s not about prices. Sure, the S&P 500 index is hitting new highs after delivering five years worth of returns in the space of about six months since hitting its pandemic low. Wondrous gains abound. Tesla (ticker: TSLA) has multiplied more than 10 times in price in a year.

But look: The S&P 500 trades at 21 times last year’s record earnings, which means that if we ignore this year’s earnings collapse, I’m only overpaying for stocks by about 40%, historically speaking.

And if we adjust for the degree to which the bond market is overcharging me, stocks are a relative treat. Over the next decade, I reckon they’ll average mid-single-digit yearly returns.

In the short term, valuations have little predictive power. Stock returns from now until year’s end are anyone’s guess. Always guess up, I like to say. But in the back of my head I also say that if you think you might panic, try to do it before anyone else. The lull between the party conventions and the debates is as good a time as any to quietly freak out over Election Day.

It’s not that I’m worried about who will win. There’s no reliable relationship between presidential election outcomes and stock returns. The sample size—about 20 presidents during the era of modern econometrics—is too small for purposes of drawing conclusions.

Also, parties change. Presidents don’t always match their parties. Some are more effective than others at getting their way. And markets adjust ahead of time for expected election outcomes.

I’m worried about a dispute over who won. That happened in 2000, when George W. Bush ran against Al Gore. The matter came down to a Florida recount. There was much chafing over chads, or punched-out paper fragments, whether dimpled, pregnant, swinging, or hanging.

Civil unrest was thankfully limited to the so-called Brooks Brothers riot, when a handful of party activists feigned spontaneous outrage at a Miami-Dade election office, resulting in multiple counts of wrinkled khakis and strained credulity. A Broward County judge, eyes bulging behind a magnifying glass as he held up ballot after ballot to the light, answered the nation’s call for newspaper photos that livened up the recount coverage.

In the end, the Supreme Court halted the recount and Gore conceded on Dec. 13, about five weeks after Election Day. In hindsight, calm held, but the stock market didn’t love it. The S&P 500 fell 5% between Election Day and the concession, with most of the decline coming in the first days.

Disputed elections shouldn’t happen, yet the chances of one seem high now. The pandemic will create a sharp rise in mail-in voting. The president says that will open the door to widespread fraud. Critics say there is no evidence for that claim. What is less controversial is that mail-in voting is likely to create delays in counting.

My concern is that America’s toxic politics will turn any delay into a dispute. I’m worried the fallout this time won’t look much like the Brooks Brothers riot.

In 2016, the electoral result wasn’t close, and the popular vote was irrelevant. So when President Trump said he wouldn’t have lost the latter by three million votes if not for illegal ballots, it was a sideshow. In July, Fox News’ Chris Wallace asked the president if he would accept the election results, and Trump said, “I have to see.”

There was a kerfuffle, but I took it to mean that the president wants to reserve judgment until he sees that the count is fair.

There is a fight now over whether the new postmaster general has taken steps that will hinder mail-in voting. That claim lacks proof, too, but it has my attention, because it’s one more thing for the nation to disagree about.

In the end, most of my worry comes down to a thought experiment. I try to picture the president saying anything close to, ”Well, we gave it our best shot, and we came up a little short,” but I can’t see it. It’s also difficult to picture a disputed result where Joe Biden concedes in Gore-like fashion for the sake of preserving institutions. I’m not even sure what the Supreme Court’s input would mean.

This is one reason I don’t do party politics, by the way.

A disputed election is not, as they say on Wall Street, my base case. It’s likely that the president will win or lose by a large enough margin to render disagreement futile. It’s also possible that the vote will be close, and that we’ll surprise ourselves with our decency, patience, and reason.

But I view an ugly election as a big risk confined to a short, knowable time period, and the costs of containing that risk seem low, because stock prices look high. Or maybe that’s just mumbo-jumbo to make me feel better about chickening out for a few months.

Whatever the case, I rein in my folly by following Benjamin Graham’s advice to never go below a 25% stock allocation, or above 75%, except that I shift the whole thing up by 10 points: 35% to 85%.

Right now I’m in the bottom half of that range, whereas before I was in the top.

My hope is that the election will go smoothly, the economy will continue healing, the stock market will plug along, and that all of you will laugh at me come November.

If so, I plan to write a letter to the editor complaining about me giving myself such weak-kneed advice.

Barron's : Activists May Focus on Energy and Health Care Next Year

Activists May Focus on Energy and Health Care Next Year

It may feel like 2021 is eons away, but activist investors are laying the groundwork for next year’s campaigns.

It’s a challenging time for activist investors. The market drop in March provided a few opportunities, but few wanted to pounce, fearing the optics. With the swift rebound in most sectors, many of those opportunities dissipated.

There’s also a contentious presidential election cycle, which at this point obscures the investment outlook for the next year.

But two themes for 2021 are emerging: energy and health care, according to one activist advisor Barron’s spoke with.

The potential plays make sense. Power and energy bets accounted for 16% of activist dollars deployed last year, but only 6% for the first half of this year, Lazard data show. But there are signs of activism and deal making in the sector.

Chevron’s (ticker: CVX) deal to buy Noble Energy (NBL), announced in July, raised eyebrows but wasn’t expected to cause a surge of M&A just yet. Marathon Petroleum (MPC) just sold its Speedway division following activist prodding. Activists could push for changes or sales at weaker energy companies.

In health care, biotechs have had a mixed performance. Covid-19 vaccines and therapeutics drive headlines and stocks, but companies also have to prove they have a strong drug pipeline. Health-care stocks accounted for 4% of activist dollars last year.

Despite disruptions, the appetite for deal making looks robust, according to recent talks with Goldman Sachs bankers. The new year is already shaping up to be interesting.

Barron's : Coca-Cola Bottler’s Pandemic Pain May Be Subsiding. Watch for the Sto

Coca-Cola Bottler’s Pandemic Pain May Be Subsiding. Watch for the Stock to Pop.

The shutdown of restaurants and closure of cinemas has taken some of the fizz out of sales for Coca-Cola Hellenic Bottling, which produces and distributes carbonated and still drinks.

Shares in the London-listed FTSE 100 stock, which is the third-largest bottler in the Coca-Cola (KO) network, have tumbled about 28% in the past six months as out-of-home sales—which comprise bars, cafes and movie theaters—fell between 70% and 90%.

This part of the business contributes about 40% of annual revenues. Sales of bottled water and tea were hit as stuck-at-home consumers drank from the tap and brewed their own kettles. But as some of the 28 countries Coca-Cola HBC (ticker: CCH.UK) serves restart their economies, out-of-home sales decline narrowed to a range of 10% to 40% in July.

The shares, which fell to 1,494 pence ($19.70) in March, have risen about 9% in the past three months to 2,032 pence. Analysts think the stock has room to rise as the company adjusts pack sizes from larger lower-margin 2-litre bottles to smaller higher-margin single serve bottles and cans.

Ed Mundy, an analyst at investment bank Jeffries, wrote in an August note that the single serve “is resonating given it is more hygienic.” It is also more profitable given the higher revenue per case, he said. Mundy has a Buy rating and a target price of 2,500 pence.

Lower marketing costs have helped deliver €61 million ($72.1 million) cost savings over the first half and the risk of a second wave of coronavirus could trigger further savings.

The company, which is based in Zug, Switzerland, employs 28,000 and has a market value of £7.3 billion. It fetches 17.7 times this year’s expected earnings and is valued at a 10% discount to its peers.

In February it posted pretax profit of €661.2 million for the year to Dec. 31, an increase from €610.9 million the year before. The 2019 sales were €7 billion.

After posting a drop in first-half profit, CEO Zoran Bogdanovic told Barron’s: “We are a well-positioned and resilient business. We entered the Covid-19 crisis from a position of strength, in terms of our portfolio, market execution focus, our customer relationships, our partnerships with the Coca-Cola Company and beyond.

“We have spent years building and investing in the capabilities that will power us through this period, and while the crisis will have a temporary impact on our earnings and cash flow, our strong balance sheet is more than adequate to see us through to the opportunities that await.” He cited investments in sustainable packaging, recycling technologies and waste infrastructures.

The business was formed through acquisitions, and traces its roots to the Nigerian Bottling Co. in 1951. It eventually became part of the Hellenic Bottling Company. In 2000, Hellenic Bottling Company acquired Coca-Cola Beverages to form Coca-Cola Hellenic Bottling Company. Coca-Cola retains a 23.2% stake.

The company has shown agility adapting its pack sizes, and there is potential growth through Coca-Cola’s acquisition of Costa Coffee from Whitbread. The sale of Costa products through Coca-Cola HBC’s vending machines has shown early success.

Alicia Forry, an analyst at broker Investec, thinks acquisitions are likely over the medium-term. “A top 3 Coke bottler by volume, CCH is well positioned to participate in consolidation of the Coke bottler network,” she said.

There’s the prospect of taxes for the use of plastics, and for the health effects of obesity from the impact of sugary drinks. Coca-Cola Hellenic may be a defensive stock during these uncertain times, but it comes with some risks.

FT : Airline analysts warn ‘the hardest part’ is yet to come

Airline analysts warn ‘the hardest part’ is yet to come
Uncertainty is jarring to an industry that thrives on predicting demand with mathematical precision

Airlines are struggling through their worst crisis since the first commercial service began flying passengers just over 100 years ago.

In the past week alone, US carrier American Airlines said it would cut 19,000 jobs, Australian airline Qantas announced it would shed thousands more jobs and Norwegian Air Shuttle warned it needed another rescue package — only months after securing a bailout.

Analysts warn worse is yet to come as the prospect of second waves of infection and tough government rules on quarantine cripple airlines’ ability to forecast demand. The uncertainty is jarring to an industry that thrives on being able to predict long-term passenger demand with mathematical precision and adjust its schedules accordingly.

“You are getting airlines going from zero to 70 per cent capacity in the blink of an eye then having to ramp back down,” said Mark Manduca, an aviation analyst at Citi.


Domestic passenger numbers in some markets have slowly started to recover from lockdown lows, especially in Asia. Air travel in China has fully returned from its pre-Covid-19 levels, with about 15m seats scheduled in the week to August 30, illustrating the pace of the country’s economic rebound.

Japan too has resumed normal service. Domestic travel is not subject to the same level of restrictions as cross-border flights, leaving it well positioned to lead any recovery, analysts at Moody’s said this week.

Yet international travel remains adrift, with many markets operating well below the levels they enjoyed before the pandemic. The US has scheduled only a fifth of the seats used at the start of the year, while Vietnam — after a new coronavirus outbreak — has reduced capacity by 90 per cent.

This is a particularly thorny issue for Europe’s airlines as they have the challenge of navigating a patchwork of government regulations, including quarantine restrictions in its main markets.

“Europe’s legacy carriers have the challenge of rebuilding both demand against a backdrop of damaged consumer confidence and sudden knee-jerk travel restrictions. In addition, low-cost airlines face the threat of travellers opting for private cars which for many is seen as safer and more flexible,” says John Grant of OAG, the aviation consultancy. 


Ryanair has reduced its flight schedule for September and October, blaming a resurgence of virus cases in some parts of Europe for a “notable” weakening in forward bookings.

For the moment airlines fortunes are hanging in the balance. 

“This hybrid world we are living in is actually the most painful,” Mr Manduca said. “When you put costs into place and you have to unwind the business again and bring certain routes into hibernation is the moment when you get the worst cash burn.”

FT : BT lands on KKR’s radar after share price tumble

BT lands on KKR’s radar after share price tumble
US private equity firm monitoring UK telecoms group as rival firms decide not to consider a bid

A plunge in BT Group’s share price this year has catapulted the UK telecoms company on to the radar of US private equity group KKR, according to people familiar with the matter.

KKR’s dealmakers are monitoring Britain’s former phone monopoly, whose shares have almost halved in 2020, and could ultimately decide to make a move, one of the people said.

The US private equity firm, which has been the industry’s most acquisitive since the pandemic erupted, has not drawn up any concrete plans or invested resources in detailed work on the company, the person added. No approach to BT has been made and the firm’s interest may not lead to a bid.

However, it comes as senior figures from several large rival private equity firms told the Financial Times they had decided not to consider a move for BT, one of the UK’s best-known companies, because of its large pension deficit and the potential size of a deal. Any bid for BT would likely require a consortium, according to multiple industry advisers.

Even if no bid were to emerge, the fact that BT is being contemplated as a takeover target highlights the difficulties facing the UK group as well as the increasing ability of PE firms to take aim at bigger targets.

In May, BT cancelled its dividend for the first time since it floated in 1984 amid a wave of privatisations under Margaret Thatcher’s government, to help pay for upgrading its fibre optic network. Last month, the company warned the pandemic would lead to a sharp drop in revenue and earnings this year.

BT holds several attractions for potential buyers. One possible option for an acquirer would be to try to carve out and sell BT’s Openreach division, which analysts value at more than £20bn, more than double BT’s current market value. Openreach maintains the UK’s national broadband network and is BT’s most profitable division. The reliable cash flows of fibre optic networks are also appealing.

KKR is an active investor in European telecoms and already owns a majority stake in Hyperoptic, a small challenger to BT, in the UK. It is also set to buy a stake in Telecom Italia’s separated network arm FiberCorp in a signal it is keen on larger telecoms assets.

BT’s £10.7bn market capitalisation puts it within the reach of some larger buyout groups, though analysts have previously said any offer would probably need to be worth more than £15bn based on other deals in the telecoms sector.

BT’s shares have fallen 47 per cent since the beginning of 2020 to £1.05.

KKR and BT declined to comment.

However, there would be several substantial obstacles to any deal. BT, which also has £18bn of debt, has the UK’s largest company pension scheme, with more than £50bn of liabilities. It has kicked off a new valuation of its pension scheme that will not be complete until next year, with analysts predicting a deficit of between £8bn and £9bn. Any sale of the company or any of its assets would also require consultation with the company’s pension trustees.

The government could veto any potential deal to take BT private given the company controls the largest broadband network in the country, deemed to be critical national infrastructure, as well as the EE mobile phone network. BT, via Openreach, is also finalising its strategy to invest £12bn in upgrading its fibre optic network to cover 20m homes. 

Delivering gigabit speed broadband to the entire country is a key policy of the Boris Johnson government although any potential buyer could pledge to bankroll the fibre upgrade outside the glare of the public markets. 

European telecoms companies, which trade at depressed valuations compared with US peers, have long been seen as potential targets for infrastructure funds and private equity although deals have tended to be limited to assets like masts or smaller players looking for investment.

KKR is one of a handful of mostly US-based private equity groups that have struck a large number of deals during the pandemic. Its co-president and co-chief operating officer Joe Bae said in June that it was intentionally “capitalising on the unprecedented level of volatility and dislocation” to strike deals at “attractive prices.”