Barron's : Tech Stocks Sell Off, but Future Looks Brighter

Tech Stocks Sell Off, but Future Looks Brighter
Trump’s victory batters technology stocks, but companies like Temenos, SAP, and Legrand are long-term plays with promising prospects.

Technology stocks have fallen out of favor in Europe in recent weeks, but the sector still offers value for long-term investors.

The Stoxx Europe 600 technology stocks have dropped about 7% since early October, pushing the sector into the red for the year with a net return of minus 1.5%. That’s still better than the performance of the Stoxx Europe 600 index, which is down 7.2% in 2016.

A selloff in technology issues is the flip side of investors’ rotation into banks, exacerbated by Donald J. Trump’s election win earlier this month. The president-elect is expected to be a bit softer on banks, which will be comforting for European players that have been penalized for regulatory shortcomings in recent years.

Global investors are raising their interest in European equities. Allocations to euro-zone stocks improved last month to a five-month high of 8% overweight, according to a monthly survey by Bank of America Merrill Lynch. “Europe seems placed for contrarians,” says Merrill’s European equity quantitative strategist Manish Kabra.

George Evans, chief investment officer for equities at Oppenheimer Funds and lead portfolio manager for the Oppenheimer International Growth fund (ticker: OIGAX), has put a big bet on what he terms the “data deluge,” which, he explains, is “predicated on the idea that digital traffic is growing at a rate of 35% to 40% a year.”

Growth could be sustained at that level for at least the next 15 years, says Evans, although traditional methods to assess gross domestic product aren’t designed to accurately record growth in the digital economy. “It is very difficult to measure the productivity of the digital world if productivity isn’t measured by a Google or Amazon,” Evans says.

He’s putting his money where his mouth is: About 20% of his strategy is invested in companies with exposure to the digital economy with names such as SAP (SAP.Germany), Temenos (TEMN.Switzerland), and Legrand (LR.France).

Evans’ fund typically holds stocks for 10 years, so he isn’t put off by expensive price/earnings ratios.

For example, Temenos, a leading developer of software systems for banks, trades for more than 28 times estimated 2017 earnings. That’s substantially higher than its historical average of 20 times. “We think this is fully justified in light of the company’s medium-term growth opportunity and recent strong deal wins,” notes Credit Suisse analysts Felix Remmers and Jan-Thomas Schöps.

Despite Trump’s anticipated easier stance on banks, many still need to modernize IT infrastructure to comply with regulations, which is good news for Geneva-based Temenos. Its software consists of components that can be sold individually and easily installed, so it has a massive opportunity to sell into its existing base.

The company has more than $1 billion in cash, equivalent to more than 20% of its market capitalization, but it has failed to find suitable acquisition targets, so this month it announced a $100 million share buyback.

Temenos shares closed Friday at 68.10 Swiss francs ($67.35), but they could climb to CHF75 in the next 12 months, a potential upside of about 10%.

STOCK BUYBACKS COULD BE ON THE CARDS at SAP, too. The Walldorf, Germany–based developer of enterprise-application software is showing good earnings momentum, and by the second half of next year it could be generating excess cash that could be returned to shareholders.

Analysts expect the company’s licensing of Internet cloud-based software to decline in 2016, but results could defy those projections. More than 40% of licenses are sold in the fourth quarter, and Berenberg analyst Gal Munda calculates that SAP could report flat sales even if fourth-quarter licensing declined 6.5% year on year.

But management’s upbeat comments about its improved pipeline and visibility are cause for optimism, which could lead to the revision of forecasts for next year and beyond.

At Friday’s close of 78.29 euros ($82.90), SAP’s shares trade for 18.4 times estimated 2017 earnings. On a sum-of-the-parts basis, Munda reckons SAP is worth 94 euros per share ($99.52), or 20% above the latest price.

Legrand, a specialist in electrical and digital building infrastructures, trades at a relatively pricey multiple of 20.8 times next year’s earnings, even though its shares have been essentially flat in 2016. They closed Friday at €51.88, but could be worth €60 in 12 months’ time.

Investors may be willing to pay a premium for Limoges, France–based Legrand because it has stellar growth prospects. A recovery in European end markets can drive 2.5% to 3% organic growth while it has a track record over the past decade of adding about 3% annually through acquisitions and boosting operating margin from 17% to 20%.

Its outlook—and a 2.2% dividend yield—makes Legrand very tempting.

WSJ : Iran Oil Minister Says OPEC Production-Curb Deal Is ‘Highly Likely’

Iran Oil Minister Says OPEC Production-Curb Deal Is ‘Highly Likely’
The 14-nation cartel is meeting to decide on output reductions aimed at boosting oil prices

OPEC is “highly likely” to reach a final agreement to curb oil production later this month, Iran’s oil minister said Saturday, in the latest sign that the cartel is moving closer to resolve its differences.

Iran and Iraq have seemed to be the most reluctant members of the Organization of the Petroleum Exporting Countries to agree on reining production ahead of a Nov. 30 gathering in Vienna. The 14-nation cartel is meeting to decide on output reductions aimed at boosting oil prices. International crude remains down more than 60% since mid-2014, closing at $46.76 a barrel on Friday.

The group—which controls over a third of global oil production—agreed in September to reduce output to help draw down a glut of supplies weighing down on prices. But the pact left the details of how to cut roughly 2% to 4% of its output for later.

But speaking after a meeting with OPEC’s secretary general Mohamed Barkindo in Tehran, Iran’s oil minister Bijan Zangeneh said “it is highly likely that oil and energy ministers of the member countries of the Organization of the Petroleum Exporting Countries will reach an agreement” on Nov 30. If producers manage to cooperate, oil prices could rebound to $55 to $60 a barrel, the level OPEC members deem appropriate for producers and consumers, the ministry’s news agency, Shana, quoted him as saying.

Though Mr. Zanganeh didn’t say how Iran would participate in the deal, an Iranian oil official reiterated the Islamic Republic still wanted to reach its pre-sanctions market share of about 4 million barrels a day but was now close to that level. “We are almost there,” the official said. Iran said it produced 3.92 million barrels a day on average in October but several oil projects have since come on stream.

Iran’s continuous output increase since sanctions were lifted in January has turned into a contentious issue with its Persian Gulf neighbors who said they are not ready to cut their output unless Tehran reins its production.

The positive noises out of Tehran come after Iraq, which has disputed numbers used by OPEC to assess its production, showed willingness to compromise in recent days. In an interview with the Wall Street Journal on Friday, Iraq oil minister Jabbar al-Luaibi said Baghdad was narrowing differences with independent analysts used by the cartel. He also said he had hashed out some of those problems during a recent meeting with OPEC’s Mr. Barkindo.

The optimistic signals by Iraq and Iran come after a flurry of diplomacy inside and outside the cartel to seal the production-cut deal. On Friday, oil officials from nine OPEC members—including Saudi Arabia’s energy minister Khalid al-Falih--met with two non-OPEC producers, Russia and Oman, to discuss production.

Russian Energy Minister Alexander Novak said the talks had proved “positive,” according to Interfax news agency.

FT : Hundreds of sports stars, financiers and celebrities are braced for bills r

Film investors face ‘life-changing’ bills for tax avoidance
Sports stars, financiers and celebrities caught out by Eclipse 35 investment scheme

Hundreds of sports stars, financiers and celebrities are braced for bills running into millions of pounds as Revenue & Customs prepares to send out tax demands linked to a failed avoidance scheme.

Investors — including Sir Alex Ferguson, the former Manchester United manager, and former England manager Sven-Göran Eriksson — are expected to be issued shortly with demands for tax payments that will far exceed their original investment in Eclipse 35, a film investment scheme.

The move follows April’s decision by the Supreme Court in favour of HMRC. While the Eclipse partnership argued it was trading film rights, HMRC said it was in reality a tax avoidance scheme. It said its victory protected an estimated £635m in tax.

Nick Wood, an adviser for hundreds of investors in the Eclipse 35 partnership, told The Times that it was ‘highly likely’ that up to 600-700 of the 780 people in the scheme would go bankrupt. Despite the claims, there was no evidence that any named investors were in financial difficulties, the paper said.

HMRC said it recognised that some people would face “life-changing bills”. It said it took its duty of care very seriously and it had briefed its teams on the support available to people who were worried or anxious.

It said: “HMRC has made clear that, if people consider they will have problems in meeting their tax bills, they should talk to us as soon as possible. We will discuss with people, in light of their individual circumstances, whether payment arrangements may be appropriate.

“HMRC works closely with individuals caught up in avoidance schemes to help them resolve their tax affairs. Where people face genuine hardship we will always discuss payment arrangements to make the settling process more manageable.”

The members of Eclipse 35 claimed tax relief on interest on loans they took out to buy distribution rights to two Disney films, Enchanted and Underdog. The company swiftly leased the film rights back to the film producer for a payment spread over a 20-year period.

HMRC argued that Eclipse 35 never carried on a trade — a pre-requisite for investors to qualify for tax reliefs — and “merely organised a sophisticated financial model involving licensing and distribution rights” in relation to the films.

It said that in reality, the borrowed money simply earned interest, which was then filtered through the partnerships to investors to cover the interest on their loans. This was dressed up as a trading transaction in order to enable the partners to claim tax reliefs.

HMRC said: “Avoidance schemes are often highly contrived and almost invariably fall flat when trying to deliver a tax advantage never intended by Parliament. The fact is the majority of schemes simply don’t work and can put avoidance users in a significantly worse financial position than if they had never used the scheme in the first place.”

For the last two years, HMRC has had the power to make people pay disputed tax up front. Over that period it has collected more than £3bn from users of avoidance schemes. It had agreed to over 95 per cent of request for payment arrangements when people could not immediately pay the amount due.

>>> Mediaset drops court action to seize 3.5% stake in Vivendi

Mediaset drops court action to seize 3.5% stake in Vivendi

Mediaset [MS:MI] notes that while its suit against Vivendi [VIV:EN] will continue with the timetable foreseen, the urgent action regarding the precautionary seizure of part of the French group's treasury stock is no longer deemed necessary after Mediaset received assurances in documents filed by Vivendi with the court.
Such documentation shows that a large proportion of the company's shares are held as treasury stock for a period of time compatible with the expected legal proceedings.
Consequently, Mediaset has decided to withdraw its application for urgent action, as it no longer considers existing the danger that its contractual rights be jeopardised by the duration of the suit whose judicial requests remain confirmed
As previously reported, Mediaset had launched the court action after Vivendi refused to go through with a purchase of Mediaset Premium, Mediaset's pay-TV arm, agreed earlier this year.
According to the report, Mediaset was to receive a 3.5% stake in Vivendi worth EUR 820m as part of the deal.

Weekly update

Weekly Market Update: Post-Election Reflation Trade Continues


The post US election money flows largely extended into a second week, but moderation was seen across various sectors and asset classes. The Trump reflation trade continued to push interest rates higher and was aided by economic data and Federal Reserve commentary that essentially clinched a rate hike is coming at next month's monetary policy meeting. Outside of the chatter surrounding the President-elect's rumored cabinet picks, the question markets shifted most of their focus onto was just how many more hikes could follow in 2017. Against that backdrop the US benchmark 10-year yield rose above 2.3% for the first time since ealry 2015. The spread over the comparable German 10-year yield widened to levels not seen since the late 1980's. The US Dollar continued to surge, particularly against emerging market currencies, including another 1% move against the Chinese Yuan this week. Currency traders prepared for seasonal FX liquidity to ebb which could allow for further aggressive moves. The Euro is within striking distance of the post financial crisis low of 1.0460 and after that potentially parity. Japan's Nikkei touched a fresh 10-month high powered by the USD/JPY which rose to a level not seen since June. WTI crude futures bounced 6% off a Monday low to surpass $46 as producers met in Doha on Friday and by most accounts remained adamant an output deal will be reached by the November 30th meeting.

The Dow Jones Industrial average largely traded sideways, consolidating the outsized move into banks and financials since the election. Transports have traded up 15 of the last 18 sessions, emboldening bullishness by Dow theorists. The rotation into small caps continued, exhibited by the Russell 2000 which bumped up against lifetime highs at 1313. The NASDAQ saw money slosh back to many of the large cap tech names that so severely underperformed in the wake of the Trump victory and thus the overall index played a bit of catch up. The S&P encountered some resistance just below new all-time highs as traders try to handicap just how much and how fast Trump's pro-growth agenda can be enacted. Corporate bond issuance picked up to the most active levels in a couple weeks spurred by the move up in rates along with the calendar. For the week, the DJIA gained 0.1%, the S&P500 rose 0.8%, and the Nasdaq added 1.6%.

The last of the major quarterly earnings reports continued to paint a mixed picture. Cisco Systems reported solid results but shares dropped 5% after guiding next quarter down on lower spending by service provider customers. Shares of Home Depot and Lowe's fell after their earnings reports and Lowe's cuts its guidance for the year. Discount retailer TJX beat expectations and raised guidance, sending shares to their best level in two months. On the M&A front, Samsung jumped into the automotive technology segment with the $8 billion acquisition of Harman International.

SUNDAY 11/13
(JP) JAPAN Q3 PRELIMINARY GDP Q/Q: 0.5% (matches 6-quarter high) V 0.2%E; ANNUALIZED GDP Q/Q: 2.2% (6-quarter high) V 0.8%E

MONDAY 11/14
HAR: To be acquired by Samsung Electronics for $112/shr cash; deal valued at $8.0B
(RU) Kremlin spokesperson: Russia President Putin and President-elect Trump agree on phone call that Russia-US relations are unsatisfactory, aim to normalize relationship - Russia press

TUESDAY 11/15
(UK) Govt said to have no common Brexit strategy due to divisions within Cabinet - financial press (DE) GERMANY Q3 PRELIMINARY GDP Q/Q: 0.2% V 0.3%E; Y/Y: 1.7% V 1.8%E; GDP NSA Y/Y: 1.5% V 1.6%E
VOD.UK: Reports H1 EBITDA €7.91B v €8.04B y/y, Rev €27.1B v €28.2B y/y, Organic Service Revenue Growth: +2.4% y/y
(UK) OCT PPI INPUT M/M: 4.6% V 2.0%E; Y/Y: 12.2% V 9.3%E
(EU) EURO ZONE Q3 PRELIMINARY GDP Q/Q: 0.3% V 0.3%E; Y/Y: 1.6% V 1.6%E (2nd reading of data)
(DE) GERMANY NOV ZEW CURRENT SITUATION SURVEY: 58.8 V 61.6E; EXPECTATIONS SURVEY: 13.8 V 8.1E
HD: Reports Q3 $1.60 v $1.58e, R$23.2B v $23.0Be
(US) OCT IMPORT PRICE INDEX M/M: 0.5% V 0.4%E; Y/Y: -0.2% V -0.3%E
(US) OCT ADVANCE RETAIL SALES M/M: 0.8% V 0.6%E ; RETAIL SALES EX AUTO M/M: 0.8% V 0.5%E
TJX: Reports Q3 $0.91 v $0.87e, R$8.29B v $8.27Be
(US) Atlanta Fed GDPNow: raises Q4 GDP forecast to 3.3% from 3.1% on Nov 9th

WEDNESDAY 11/16
700.HK: Reports Q3 Net CNY10.6B v CNY10.7Be, Rev CNY40.4B v CNY26.6B y/y
(UK) SEPT ILO UNEMPLOYMENT RATE 3M/3M: 4.8% V 4.9%E
(UK) OCT JOBLESS CLAIMS CHANGE: 9.8K V +2.0KE; CLAIMANT COUNT RATE: 2.3% V 2.3%E
(US) OCT PPI FINAL DEMAND M/M: 0.0% V 0.3%E; Y/Y: 0.8% V 1.2%E
(US) OCT INDUSTRIAL PRODUCTION M/M: 0.0% V 0.2%E; CAPACITY UTILIZATION: 75.3% V 75.5%E
(US) NOV NAHB HOUSING MARKET INDEX: 63 V 63E
(US) Association of American Railroads weekly rail traffic report for week ending Nov 12th: 541.1K carloads and intermodal units, -0.5% y/y
CSCO: Reports Q1 $0.61 v $0.59e, R$12.4B v $12.3Be
(JP) BOJ CONDUCTS FIXED-RATE JGB PURCHASE OPERATION (1st time under new policy framework) FOR JGBs WITH 1-5 YEAR MATURITIES

THURSDAY 11/17
(ID) INDONESIA CENTRAL BANK (BI) LEAVES 7-DAY REVERSE REPO UNCHANGED AT 4.75%, AS EXPECTED
(UK) OCT RETAIL SALES EX AUTO FUEL M/M: 2.0% V 0.4%E; Y/Y: 7.6% V 5.4%E
(UK) OCT RETAIL SALES INC AUTO FUEL M/M: 1.9% V 0.5%E; Y/Y: 7.4% V 5.3%E (highest annual pace since 2002)
(EU) EURO ZONE OCT CPI M/M: 0.2% V 0.3%E; Y/Y (FINAL): 0.5% V 0.5%E; CPI CORE Y/Y (FINAL): 0.8% V 0.8%E
BBY: Reports Q3 $0.62 v $0.47e, R$8.95B v $8.84Be
(US) OCT CPI M/M: 0.4% V 0.4%E; CPI EX FOOD AND ENERGY M/M: 0.1% V 0.2%E; CPI NSA INDEX: 241.729 V 241.785E
(US) INITIAL JOBLESS CLAIMS: 235K (lowest since 1973) V 257KE; CONTINUING CLAIMS: 1.98M V 2.03ME (lowest since 2000)
(US) OCT HOUSING STARTS: 1.323M V 1.156ME; BUILDING PERMITS: 1.229M V 1.193ME
(US) NOV PHILADELPHIA FED BUSINESS OUTLOOK: 7.6 V 7.8E
(US) Atlanta Fed GDPNow: raises Q4 GDP forecast to 3.6% from 3.3% on Nov 15th
(MX) MEXICO CENTRAL BANK (BANXICO) RAISES OVERNIGHT RATE BY 50BPS TO 5.25%; AS EXPECTED
(CL) CHILE CENTRAL BANK (BCCH) LEAVES OVERNIGHT RATE TARGET UNCHANGED AT 3.50%; AS EXPECTED
AMAT: Reports Q4 $0.66 v $0.66e, R$3.30B v $3.31Be
CRM: Reports Q3 $0.24 v $0.21e, R$2.14B v $2.12Be
GPS: Reports Q3 $0.60 v $0.59e, R$3.80B v $3.77Be
(CN) CHINA OCT PROPERTY PRICES M/M: RISE IN 62 OUT OF 70 CITIES VS 63 PRIOR; Y/Y: RISE IN 65 OUT OF 70 CITIES V 64 PRIOR

FRIDAY 11/18
(IR) Iran OPEC Gov Kazempour: Remains optimistic for an OPEC deal after talks with Russia
(IQ) Iraq Oil Min Luaibi: optimistic OPEC will clinch output deal; differences are narrowing over OPEC output data - press
(US) New York Fed Nowcast: raises Q4 GDP forecast to 2.4% from 1.6% on 11/4

>>> US Close Dow -0.19% S&P-0.24% Nasdaq -0.23% Russell +0.47%


Closing Market Summary: Stocks Inch Lower at the End of an Upbeat Week

The stock market ended an upbeat week on a modestly lower note as the major averages consolidated after an impressive post-election run. The S&P 500 lost 0.2%, narrowing its weekly gain to 0.8%. Separately, the Russell 2000 (+0.5%) and the Nasdaq Composite (-0.2%) outperformed, rising a respective 2.6% and 1.6% this week.

The major averages jumped out of the gate as the S&P 500 (-0.2%) and the Nasdaq Composite (-0.2%) each zeroed in on their respective all-time highs. The tech-heavy index notched a new all-time intraday high (5346.80), but was unable to establish a new closing high. The benchmark index, however, reversed just below the 2190 price level.

Equities were unable to regain their footing as investors assessed whether the broader market has risen too far, too fast. An appreciating US Dollar Index (101.28, +0.39, +0.39%), rising market rates, and volatility from the oil pit also worked to keep the broader market in check.

The long-end of the yield curve has been on the rise in recent days as investors mull rising inflation concerns and improving economic data. The combination has prompted an exodus from longer-dated issues. The yield on the benchmark 10-yr note increased four basis points to 2.34%, leaving the yield up 51 basis points since the end of October. An improving rate hike outlook has also dampened buying interest in the bond market.

Per the CME's FedWatch Tool, the implied probability of an interest rate hike at the December FOMC meeting has increased to 95.4% from yesterday's 90.6%. A number of Federal Reserve speakers contributed to the uptick, indicating that the FOMC will likely go ahead with its next rate hike in December.

The benchmark index finished just below its flat line with seven sectors ending in negative territory. The health care (-1.1%) space outpaced today's losses in the broader market while energy (+0.5%), telecom services (+0.5%), and financials (+0.1%) finished at the top of the sector leaderboard.

Biotechnology demonstrated relative weakness in the health care space (-1.1%), evidenced by the 1.3% loss in the iShares Nasdaq Biotechnology ETF (IBB 284.72, -3.80). The industry group has narrowed its gain in recent days as investors walk back their post-election reaction. Mylan (MYL 36.47, -1.09) ended lower by 2.9% after Mizuho trimmed its price target from $49 to $47. The broader sector lost 1.2% this week, but remains up 3.2% in November.

In the consumer discretionary space (-0.3%), Gap (GPS 25.61, -5.10, -16.6%) and Abercrombie & Fitch (ANF 14.60, -2.33, -13.8%) weighed on the broader retail sub-group. The two demonstrated relative weakness after disappointing participants with their quarterly results and guidance. Conversely, casual restaurant names outperformed after Yum! Brands (YUM 62.36, +1.60, +2.6%) added $2 billion to its share repurchase program.

The financial (+0.1%) group extended its recent winning streak as banking names continued to outperform. The industry group has surged in the aftermath of the election as steepening in the yield curve boosted the earnings prospects for the group. The SPDR S&P Bank ETF (KBE 40.41, +0.24) gained 0.6%, extending its November gain to 16.6%. This compares to a gain of 12.1% in the broader sector.

The commodity-sensitive energy sector (+0.5%) led the pack as investors reevaluated the likelihood of an OPEC supply cap agreement. WTI crude finished the day higher by 1.0% ($46.38/bbl; +$0.45). 

Today's trading volume was below the recent average of one billion as fewer than 926 million shares changed hands at the NYSE floor.

Today's economic data was limited to Leading Indicators for October:

  • The Conference Board's Leading Economic Index increased 0.1% in October after increasing 0.2% in September.
    • It was noted by the Conference Board that the six-month growth rate has moderated, but that the index still points to the economy continuing to expand into early 2017.

Investors will not receive any noteworthy data on Monday.

  • Russell 2000: +15.9% YTD
  • Dow Jones: +8.3% YTD
  • S&P 500: +6.8% YTD
  • Nasdaq Composite: +6.3% YTD