Investors worked up an appetite for Just Eat after analysts said the takeaway company could be a possible takeover target.
The upstart jumped 2.2 per cent, or 17.6p, to 819.4p after RBC Capital said its sophisticated data software could prove attractive to Dutch rival Takeaway and give it greater influence to compete with Delivery Hero in Germany.
STOCK WATCH - EASYHOTEL
Budget chain Easyhotel closed higher after revealing plans to open an £8.7million hotel in Milton Keynes.
Boss Guy Parsons said the acquisition of the 124-bedroom building is part of its strategy to offer affordable tourist and business accommodation in key locations.
He said: ‘Milton Keynes is home to many international businesses and boasts an impressive range of shopping and leisure facilities.’
Shares crept up 0.9 per cent, or 1p, to 109p.
The note, which considered the most likely internet merger- and-acquisition scenarios, also mulled the possibility of a takeover of Ocado and Asos.
It said Asos, Ocado and German fashion website Zalando were the 'most likely take-out candidates' in its coverage and lifted their price targets to 8100p from 7400p, 525p from 320p and €41 from €35 respectively.
Ocado has been plagued with takeover speculation, with American grocery giant Walmart rumoured to be mulling an bid for the online grocer.
RBC said its new price target reflects its anticipation for a deal being signed.
It said Asos and Zalando could be a target for Vera Moda owner Bestseller, which already owns 29.5 per cent of Asos shares and 10 per cent of Zalando's shares – citing Richemont's bid for control of Yoox Net-a-Porter earlier this week as precedent for such a deal.
It said: 'For the same reason that Richemont acquired Yoox Net-a-Porter, Bestseller could hypothetically seek to strengthen its efforts in ecommerce by taking full control of either group.'
RBC however, did also open up the possibility of a third party bidder such as Amazon swooping in on the websites to bolster its fashion business.
It said the move could force Asos and Zalando to consider a merger of their own in order to fend off the threat.
The comments sent Asos up 5.5 per cent, or 390p, to 7470p but Ocado dipped 4.7pc, or 24.2p, to 494.8p.
Time to Get Selective on Consumer Staples
Consumer-staples stocks have been good to investors over the past decade. The Consumer Staples Select Sector SPDR exchange-traded fund, which tracks that group, has an annual return of nearly 11.1%, versus 10.2% for the Standard & Poor’s 500 index.
In a low-interest-rate environment, like that of much of the past decade, these stocks frequently are winners, offering steady growth and dividends.
Now, though, rates are moving higher, and the sector requires more selectivity when it comes to stock-picking. That holds true for income-seeking investors, as well. “At a macro level, there’s a lot of more pressure on consumer-staples companies to differentiate their products,” says Sarat Sethi, managing partner at Douglas C. Lane & Associates, which oversees about $5.3 billion of assets.
The firm is underweight staples. The sectors it prefers include industrials, financials, and consumer discretionary. “I would rather own companies that grow their margins and top line, and that have organic growth,” he observes.
For sure, Procter & Gamble (ticker: PG), Kimberly-Clark(KMB), and other signature consumer-staples producers face a challenging sales environment, in no small part owing to the growing influence of online retailing giant Amazon.com (AMZN).
The group’s performance has trailed the market’s recently. Its S&P 500 members gained 2.5% in January, placing them eighth among that index’s 11 sectors. Consumer staples were outpacing only utilities, real estate, and telecom—all in the red this year.
Sethi says it will be much harder for these stocks to work as bond substitutes—one of their attractions when interest rates are low—now that rates are rising. The 10-year U.S. Treasury yielded 2.64% and change late last week, up from just over 2% early last September. “With rates moving up and investors moving out of slower-growth companies, the potential for consumer-staples companies to get hurt is greater,” warns Sethi.
LINDSEY BELL, AN INVESTMENT STRATEGIST at research firm CFRA, points out that rising rates don’t provide the most favorable backdrop for the sector. “Higher rates are a concern,” she says. “There is a high correlation. As rates go up, this sector tends to do poorly.”
Another concern is higher inflation, something that hasn’t been a worry for a long time. “If inflation is too high, then these companies usually can’t raise their price quickly enough to keep up, which hurts profitability” says Bell.
But investors shouldn’t give up on the sector, even though it seems to be a popular underweight. “There are some opportunities within consumer staples,” says Bell.
Coca-Cola (KO) yields 3.1% and has returned 17.3% over the past 12 months—compared with nearly 26% for the S&P. CFRA’s staples analyst, Joseph Agnese, has a Strong Buy on Coke, PepsiCo (PEP), Altria Group (MO), Walmart (WMT), and Constellation Brands (STZ), three of which are in the table below. All of the stocks with a strong Buy rating, Agnese says, “provide a dividend to help support total shareholder return, which may be attractive to fixed-income investors seeking greater risk.”
Even though Douglas C. Lane’s Sethi is underweight the sector, he hasn’t abandoned it. His firm’s weighting was recently 4.4%, well below the S&P 500’s 8.2%.
One of Sethi’s holdings is Diageo (DGE.UK), which makes Johnnie Walker whiskey, Smirnoff vodka, and other alcoholic beverages, including Guinness beer. The stock was yielding 2.5% recently. “You are getting a global leader in premium beverage spirits,” he says. “That is an area where you will see demand and not as much margin pressure.”
In market capitalization, Walmart topped our list. Its yield was 1.9%, a little above the S&P 500’s about 1.8%. The retailing giant’s stock has returned 61% in the past year, testament to improving results and the progress it has made in selling goods online. The consensus estimate for the company’s fiscal year that ends in January 2019 is for a dividend of $2.20 a share, up 7% from the $2.05 expected in the current fiscal year, according to FactSet.
Tobacco behemoth Altria was yielding 3.7%, the highest among companies on our list. The stock, however, has returned just 2% over the past year amid concerns about declining U.S. cigarette volumes and potential restrictions on nicotine by the Food and Drug Administration.
Still, analysts are looking for the company to make $3.84 a share this year, up from $3.28 in 2017. The consensus forecast calls for the dividend to hit $2.93, up 15% from $2.56 last year. Altria also owns a valuable stake in Anheuser-Busch InBev (BUD).
Like Altria, CVS Health (CVS) has seen its shares struggle; they’ve returned only 1.5% in the past year.
The company, which owns pharmacies and is a major player in the drug benefit-management business, is trying to buy Aetna (AET), a large health insurer, for roughly $77 billion, including the assumption of debt. To close the deal, CVS will have to ratchet up its debt load. Just don’t expect a dividend increase in the short term.
The company’s chief financial officer, David Denton, told analysts late last year that as CVS pays down debt, it would suspend its share-repurchase program, “maintain our current dividend per share, and forgo any large-scale” mergers and acquisitions.
Still, a 2.5% yield isn’t shabby.
Closing Market Summary: Health Care, Technology Shares Lead Friday RallyThe equity market soared to new records on Friday, locking in its fourth consecutive week of gains.
The Nasdaq Composite jumped 1.3% to 7505.77 (a new record), the S&P 500 climbed 1.2% to 2872.87 (a new record), and the Dow Jones Industrial Average advanced 0.9% to 26616.71 (a new record). For the week, the major indices added between 2.1% and 2.3% and now hold year-to-date gains between 7.5% and 8.7%.
Stocks opened Friday modestly higher and steadily extended their gains throughout the session, finishing at their best marks of the day.
11 of 11 sectors advanced on Friday, with the heavily-weighted health care group (+2.2%) setting the pace. Biotech giant AbbVie (ABBV 123.21, +14.91) spiked 13.8% to a new all-time high after reporting better-than-expected earnings and revenues for the fourth quarter and issuing upbeat profit guidance for fiscal year 2018.
Meanwhile, the top-weighted technology sector (+1.6%) also had a positive showing, thanks in large part to Dow component Intel (INTC 50.08, +4.78), which jumped 10.6% to its best level in nearly two decades after reporting above-consensus earnings and revenues for the fourth quarter. The chipmaker also noted that it doesn't expect any material impact from the Meltdown and Spectre security concerns that were reported earlier this month.
On the downside, Starbucks (SBUX 57.99, -2.56) and Colgate-Palmolive (CL 73.56, -3.75) tumbled 4.2% and 4.9%, respectively, after missing Q4 sales estimates. The companies' respective sectors--consumer discretionary (+1.0%) and consumer staples (+0.6%)--finished behind the broader market. However, the rate-sensitive utilities sector was the weakest group, adding just 0.1%, as a sell off in the Treasury market pushed yields to multi-year highs.
The yield on the benchmark 10-yr Treasury note jumped four basis points to 2.66%--its best level since mid-2014--while the 2-yr yield also climbed four basis points, settling at 2.12%--its best level since 2008. For the week, the 2yr-10yr spread decreased to 54 basis points from 59 basis points.
In other corporate news, Twitter (TWTR 24.27, +2.11) had a solid showing, adding 9.5%, amid renewed takeover chatter, while Wynn Resorts (WYNN 180.29, -20.31) dropped 10.1% following a Wall Street Journal story filled with sexual misconduct allegations against founder and CEO Steve Wynn.
Elsewhere, President Trump spoke at the World Economic Forum in Davos, Switzerland on Friday morning, pitching the U.S. as a great place for international companies to invest. The president also reiterated that the U.S. supports free trade, but it must be "fair and reciprocal."
On a related note, reports indicate that President Trump is seeking $716 billion for defense spending in 2019, a 13% increase from the 2017 budget of $637 billion.
Reviewing Friday's batch of economic data, which included the advance estimate of fourth quarter GDP, Durable Orders for December, and advance International Trade in Goods and Wholesale Inventories for December:
- Advance fourth quarter GDP pointed to an expansion of 2.6%, while the consensus expected a reading of 2.9%.
- The key takeaway from the report is that consumer spending, which accounts for roughly 70% of GDP, was alive and well in the fourth quarter, increasing 3.8%--the fastest growth rate since the first quarter of 2015. Moreover, business spending also increased, with spending on equipment increasing 11.4%--the strongest since the third quarter of 2014.
- December durable goods orders rose 2.9%, which is more than the 0.9% increase expected by the consensus. The prior month's reading was revised to +1.7% (from +1.3%). Excluding transportation, durable orders increased 0.6% (consensus +0.7%) to follow the prior month's revised uptick of 0.3% (from -0.1%).
- The key takeaway from the report is that the pickup in durable goods orders is a reflection of an improving economy.
- The advance report for International Trade in Goods for December showed a deficit of $71.6 billion (consensus -$68.5 billion), up from a revised deficit of $70.0 billion in November (from -$69.7 billion). The advance report for Wholesale Inventories for December showed an increase of 0.2% (consensus +0.3%). The prior month's reading was left unrevised at +0.7%.
On Monday, investors will receive the PCE Price Index for December, the core PCE Price Index for December, Personal Income for December, and Personal Spending for December. All data is set to be released at 8:30 AM ET.
- Nasdaq Composite: +8.7% YTD
- Dow Jones Industrial Average: +7.7% YTD
- S&P 500: +7.5% YTD
- Russell 2000: +4.7% YTD
Rémy Cointreau Profits From the Pricey Hard Stuff
U.S. investors, especially those who are bon vivants, tend to know all about Diageo, the big British drinks company behind Johnnie Walker scotch, Captain Morgan rum, and other brand-name alcoholic products.
But a smaller European spirits seller might also be worth a taste these days.
Rémy Cointreau (ticker: RCO.France) is a good way to play the “premiumization” trend in the liquor industry, according to the bulls. That push to embrace top-shelf spirits was underscored last week when privately held Bacardi made a foray into the premium-tequila market with its $5 billion acquisition of the maker of Patrón tequila.
The higher-end hard stuff is viewed as a bright spot for an industry grappling with declining volumes. For its part, Rémy is aiming to get 60% to 65% of its revenue from spirits priced at $50 a bottle in about two years, up from those products delivering 51% of revenue in its last fiscal year.
Shares in the producer of Rémy Martin cognac and Mount Gay rum aren’t cheap, but paying up for them makes sense, notes a JPMorgan analyst team led by Komal Dhillon. The bank has an Overweight rating on the stock and a price target of 116 euros ($145), implying a rally of 12% from its recent print around €104.
Rémy Cointreau Profits From the Pricey Hard Stuff
“Rémy has always traded at a premium to the European beverages sector,” Dhillon says. It’s changing hands at about 29 times estimated earnings for calendar 2019 versus its sector’s price/earnings ratio of 20, which is around midrange in terms of its historical premium, she says.
Beyond the French company’s focus on higher-end spirits, the JPMorgan team likes that Rémy has adopted a more balanced approach with its Rémy Martin Louis XIII cognac. Sales of the miniature bottles of cognac selling for around $600 had been hit in recent years by the Chinese government’s anticorruption crackdown, which led to a drop in sponsored banquets and gift-giving. China is back to showing sales growth. But as some analysts warn that Beijing’s antigraft efforts could continue to bite, Rémy has made changes in other markets.
“Since the clampdown on conspicuous consumption in China, the company really has taken the view that the Louis XIII brand should be pushed and the penetration should be higher in a lot of other markets, particularly the U.S.,” says Dhillon, who is the bank’s London-based head of European beverages equity research.
The U.S. provides 29% of Rémy’s revenue, and China serves up 12%, while Japan, Germany, and the United Kingdom each deliver between 4% and 6%, according to FactSet data. Annual sales were down in the fiscal years ended in March 2014 and March 2015, but they rose 8% and 4% over the next two years. They’re expected to increase 4% in the current fiscal year that wraps up in two months, and analysts forecast that sales will grow by 6% and 7% in the next two years. The company has been reducing its long-term debt as sales ramp up, Dhillon says.
“Because of all these trends at the top line, and the margin impact of high-end China growing well, you’ve got Rémy de-gearing quite nicely,” she says. One ratio—long-term debt to earnings before interest, taxes, depreciation, and amortization, or Ebitda—has dropped to 1.6 from 3.4 about four years ago, according to FactSet data.
Rémy’s stock has pulled back by about 10% this month, retreating from a December all-time high near €120 and cutting the 12-month gain to 21%. The slump came as the Cognac, France–based company, which was put back in the Stoxx Europe 600 index last month after a two-year absence, posted a decline in third-quarter sales. That was in large part due to China’s Lunar New Year coming a bit late in 2018, pushing gift-giving later in the year. Third-quarter trends “can be attributed to a high basis of comparison and to the late timing of the 2018 Chinese New Year,” Rémy said in a Jan. 19 statement. “Adjusted for this one-off effect, organic growth for the quarter would have been around 6%.”
The company looks on track for reasonable growth in the long run, JPMorgan’s Dhillon reckons. She gives some credit to the Heriard Dubreuil family that controls the company, whose brands also include Cointreau liqueur and Bruichladdich scotch.
“They’re making the right decisions in terms of getting 7% or so organic top-line growth and then low-teens organic EBIT growth,” the analyst says, adding that the family control is a positive because it helps foster a longer-term view.
Diageo (DGE.UK) also scores an Overweight rating from the JPMorgan analysts, who praise the recovery in the company’s scotch business and the potential for growth in India. Diageo boasts about $17 billion in annual revenue versus Remy’s $1.4 billion.
IN EUROPEAN MARKETS last week, the Stoxx Europe 600 was little changed, held back in part by a rally for the euro. The shared currency jumped as U.S. Treasury Secretary Steven Mnuchin spoke favorably about a weaker dollar, and as European Central Bank President Mario Draghi described the euro zone’s economic recovery as robust.
The Ticking Time Bomb in the Municipal-Bond Market
There’s a looming disaster in the market for municipal debt. Every market participant knows about it, and there isn’t much any of them can do about it.
Many state and local governments, even more than corporations, have promised generous pensions they can’t afford. The promises may have looked plausible in the past, especially during the dot-com boom, when money that pension funds put in the markets was doubling.
When the market crashed, so did their returns—and, a few years later, the global financial crisis took out another substantial chunk. And with interest rates at historic lows, bonds have failed to deliver the income the funds relied on.
While governments delay dealing with the problem as long as they can, analysts and researchers are wondering if we have reached the point of no return. For investors in municipal bonds, it could mean future defaults and losses.
“We are increasingly wary of high pension exposure, especially among state and local credits,” the Barclays muni-research team wrote this month, citing “inflated return targets, low funded ratios, growing obligations, perhaps heavy allocations to equities and compressed tax revenues make for especially adverse conditions.” What’s more, “short-term investment gains won’t be sufficient to plug liability gaps.”
Yet many pensions still assume they will be able to generate the returns they saw in the past. New Jersey’s pension and the California Public Employees’ Retirement System have lowered their assumed rate of return to 7%. But with the 30-year Treasury yielding less than 3% and stocks already at record highs, it’s unclear how public markets can generate 7%—which is why many pensions have turned to higher-risk, lower-liquidity strategies, such as private equity.
Muni investors, for their part, are increasingly sensitive to pensions’ widening gap. After the financial crisis and the ensuing recession, they suddenly became interested in pension finances.
A report late last year by the Center for Retirement Research at Boston College found that, as pension liabilities grew, spreads between state and local municipal bonds and Treasuries also increased. When such issuers came to issue new debt, they discovered the market was charging them more to borrow. “Pensions have become increasingly relevant to the municipal bond markets and can have a meaningful impact on the borrowing costs of a municipality,” the report says.
CONSIDER NEW JERSEY. Standard & Poor’s has estimated that the state’s pension is funded at just 30% of what will be needed.
“New Jersey’s pension system may have already reached an unfixable tipping point,” noted a report issued this month by the right-leaning Manhattan Institute. “The system is now missing so much money that even when it achieves its investment goals, it falls far short of the money it needs to remain solvent over time.”
New Jersey’s new 7% return assumption is better than the old 7.9%—but still higher than the consensus forecast of well below 5%. The state will probably come up short and will either need to pour in more from tax revenues, take on more debt—or default.
None of those outcomes is good for bondholders. If borrowing costs increase, the relative value of existing munis will fall and hurt investors hoping to trade their bonds, and muni-fund shares will most likely take a hit. In the event of a default, as in Detroit, bondholders could find themselves with far less than they were promised.
Investors should carefully consider their time horizons and favor strong local economies with flourishing businesses and happy (enough) taxpayers. The Barclays researchers recommend looking for issuers with relatively well-managed pensions, like Washington state, New York, or Los Angeles.
Billionaire Dan Loeb is ‘closely watching’ these 4 key risks that can stop the market rally
* Third Point's Dan Loeb shares his key concerns for the market in a note to clients Monday.
* "Although we do not fear a recession now, 'event risks' need to be considered," he writes.
The best hedge fund managers are always looking out for potential downside when they put together a portfolio. Third Point's Dan Loeb, who nearly doubled the S&P 500's return for more than two decades, shared his key concerns for the market in a note to clients Monday.
"While we remain optimistic about the trajectory of the economy and markets, we have weighed our positioning with an acute awareness of the risks," Loeb wrote. "Although we do not fear a recession now, 'event risks' need to be considered."
Unlike many of his well-known hedge fund peers, Loeb was able to generate strong returns last year.
Loeb's hedge fund,Third Point Offshore, was up 18.1 percent in 2017 compared with the S&P 500's 21.8 percent gain, according to an investor letter. From inception in 1995 to 2017, the fund generated annual returns of 15.8 percent versus the market's 8.2 percent.
But the hedge fund manager said he is wary of four potential issues for the market he is "closely watching:"
Loeb said his fund's portfolio is "well-positioned" even under these risks due to its bets against stocks through short-selling and the "event-driven" nature of his investments.