Barrons weekend summary: positive on TSCO and GS
Cover story: Shock waves from the Brexit are likely to rattle markets and economies around the globe for some time; Felix Zulauf of Zulauf Asset Management says the Brexit isn't an isolated happening, but a swing against the political establishment and probably the beginning of the disintegration of the EU; "Whatever central banks do or don't do, global markets face a prolonged stretch of political and economic uncertainty, which will tend to reinforce each other."
Features: 1) The drop in U.S. stock indexes following the Brexit vote doesn't signal the end of the bull market, since U.S. stocks remain more insulated from global developments than those in any other major equity market; 2) "For investors bullish on Puerto Rico's prospects, the best bet is its $12.7B of general-obligation bonds, plus some $5.7B of less-liquid commonwealth-guaranteed debt"; 3) Positive on TSCO: Company is one of this year's most successful retailers because two megatrends-aging baby boomers and the craze for organic food-has led to a boom in hobbyist farming; 4) Positive on GS: Firm's ability to cut costs, along with a with a strong balance sheet, should help it in the current downturn, and its reasonably priced shares could gain 30%.
Tech Trader: Positive on AMZN, GOOGL, MSFT: Cloud computing will continue to make these tech giants increasingly powerful, while FB will benefit from the shift in ad dollars from TV, radio, and print to online; Cautious on FIT: Company's step trackers and smartwatches face fierce competition from AAPL, GRMN, and Samsung.
Trader: The Brexit will favor North American financial stocks over European ones, says Brian Belski of BMO Capital Markets; Positive on UNF: Along with WFM, company is one of the few sizeable pure plays in organic food; a turnaround focused on faster-growing and higher-margin foods make the stock attractive.
Retirement Investing: Barron's list of the Top 50 Annuities for 2016 looks at how new rules, lower interest rates, and longer lives are set to affect the sector.
Profile: Marcus Hughes of the LHC Capital Australia High Conviction fund; the firm owns just 10 stocks and has average annual gains of more than 23%.
Interview: Bruce Geller of New York money manager Dalton Greiner Hartman Maher looks for stocks that have been forgotten because they're too small or their performance and potential is hidden for some reason.
Small Caps: Positive on AFI: Company may not be as strong as rival AWI, but with leading market share in most hardwood floors and management working to turn around the business, shares have upside.
European Trader: The U.K. may end up paying a heavy price for its departure from the EU, as foreign direct investment slows, unemployment rises, and consumer spending falls.
Asian Trader: With the departure of SoftBank Group president Nikesh Arora and the decision of Masayoshi Son to remain as CEO, the Japanese company "increasingly looks like a debt-fueled venture capital firm that's reluctant to sell its investments."
Emerging Markets: Among the countries hardest hit by the global selloff following the Brexit were the volatile developing nations of Greece, Poland, South Africa, and Turkey.
Commodities: A global shortage of zinc has sent prices up, making it one of this year's best performing metals.
Streetwise: "Bigger dividends and stock buybacks won't solve banks' profitability problem, but at least it eases the pain while investors await a solution."
LSE/DB merger faces mounting German opposition; LSE CEO digs heels in over London HQ while Germany considers full takeover
The proposed merger of Deutsche Boerse (ETR:DB1) and the London Stock Exchange (LON:LSE) is facing increasing opposition from politicians in Germany following the UK’s vote for Brexit, The Sunday Times reported.
Michael Fuchs and Ulrich Caspar, members of the ruling CDU party, are among politicians who believe it would be impossible for the merged group to have its headquarters outside of Europe and should be governed from Frankfurt, the report said, noting the current plan is for London to be the base.
Caspar questioned whether possible changes to trading rules and regulations might result in incompatibilities between the UK and the EU, leaving some European financial products in breach of British law, the item reported.
According to people with close links to the deal, the LSE’s chief executive, Xavier Rolet, would not contemplate a move of HQ to Frankfurt, the item reported. A banking source close to the London bourse stated it would not be possible to arrange a relocation of the HQ without nixing the merger deal already agreed and drawing up a new transaction, the report said.
According to people close to the German exchange, the Anglo-German referendum committee set up by the two groups to consider the implications of Brexit will this week look at whether Deutsche Boerse might be able to transact a full takeover of the LSE rather than the merger of equals proposed.
A person close to Intercontinental Exchange (NYSE:ICE), which last month withdrew from bidding for the LSE, hinted the US exchange might return with a new bid, stating that the prospect should not be categorically ruled out, the report said.
Both the LSE and Deutsche Boerse announced their commitment to the GBP 20bn merger after the results of the UK’s EU referendum were made public this week, the item noted. The deal is to be put to the companies’ shareholders next month.
In the wake of the Brexit vote shares in the LSE dropped 10.5% and in Deutsche Boerse fell 9.26%, the report said.
Weekly Update
Dow -1.55% S&P -1.63% NAsdaq -1.92% Russell -1.50% Nikkei -4.15% Hang Seng +0.44% CSI -1.07% Shanghai -1.07% EuroStoxx -2.56% Dax -2.08% FTSE +1.95% CAC -2.08% Dax-0.77% Ibex -6.87% MIB -7.09% SMI +0.44%
On Friday, the UK voted to quit the European Union after more than four decades of membership, upending global markets and sending the pound to its weakest levels since the mid 1980s. The stunning rejection of Europe's political and economic order prompted Prime Minister Cameron to resign, and global central banks were scrambling to ensure markets continue functioning normally. Asian equity markets cratered, with the Nikkei closing down nearly 8% on Friday and the yen surged, with USD/JPY briefly dipping below 100 for the first time in three years. The CAC fell nearly 8% and the DAX declined nearly 7%, while in the UK the FTSE was only off 2.2% as the surge in gold prices helped hold up the index - where many of the largest global gold miners trade. Gold surged to two-year highs around $1,325. The 10-year Bund yield dipped as low as -0.17%, while the German 30-year yield nearly went negative. The reaction in the States was a bit less harsh, but nonetheless share prices plunged and Treasury prices surged along with the US Dollar. For the week the Dow closed down 1.6%, Nasdaq -1.9%, and the S&P lost 1.6% to finish at a three month low.
Macro :
- Italy’s Padoan Says ‘Time to Think the Unthinkable’: Corriere
- Dijsselbloem Says U.K. Shouldn’t Be Punished for Leaving EU
- EU Bank Policy Can Be More Ambitious After Brexit, Giegold Says
- U.K.’s Jonathan Hill Resigns as EU Commssioner After Brexit Vote
- Austria Cut by Moody’s, Citing Weakness in Growth Prospects
- European Union’s Aaa Rating Affirmed by Moody’s; Outlook Stable
- United Kingdom Outlook to Negative by Moody’s; Ratings Affirmed
- Investor George Soros calls for reconstruction of EU after 'Brexit' vote http://reut.rs/28Ua8Tw
- Japan considering unilateral Yen intervention after UK votes for a 'Brexit' - Nikkei
Keep an eye on :
- AAL LN : Anglo American Said to Close Coal Mines Sale Within Weeks: FT
- CABK SM : CaixaBank Takes EU24.3b in ECB TLTRO-II; Net New Borrowing EU6b
- DBK GY : Deutsche Bank’s Sewing Sees U.K. Banks Hit Hardest by Vote: FAS
- EDF FP : EDF confirms commitment to Hinkley Point despite UK’s vote for Brexit; CEO eager for decision after 4 July union consultation - http://reut.rs/28Ufh2z
- FRE GY : Fresenius Said Near Deal to Buy Pfizer Device Unit: Marketwatch
- FRE GY : Fresenius Names Stephan Sturm as New Chief Executive Officer
- INTC US : Intel weighs sale of cyber security business - FT
- KU2 GY : Midea Offering Kuka Long-Term Guarantees: Frankfurter Allgemeine
- LLOY LN :Government shelves plans to sell RBS and Lloyds shares - http://on.ft.com/28TgW3G
- RBS LN : UK government may retain stakes in Lloyds and RBS for years following vote for Brexit - FT
- RCS IM : RCS BoD rules that improved Cairo Communications public offer still not adequate for shareholders
- RCS IM : RCS public offer by International Media Holding increased from EUR 0.7 to EUR 0.8 per share
- SNH GY : Woolworths' Big W business attracts Steinhoff International
- STL NO : Statoil Economist Says Brexit May Lead to Higher Oil Demand: DN
- TEF SM : Telefonica denies Brexit will delay decisions on Telxius and O2 - http://reut.rs/28TjwXy
- TIT IM : Oi Aiming for 50% Debt Haircut If New Investor Joins: Folha
- VOLVB SS : Volvo Sets Aside Extra EU250m to Cover EU Truck Cartel Fine
- WDI GY : Alipay Said in Talks to Buy Up to 25% Stake in Wirecard: BamS
Intel weighs sale of cyber security business
Intel is looking at options for Intel Security, including potentially selling the antivirus software maker formerly known as McAfee which it bought for $7.7bn almost six years ago.
The Silicon Valley chipmaker has been talking to bankers about the future of its cyber security unit in a deal that would be one of the largest in the sector, according to people close to the discussions.
Intel declined to comment.
Private equity buyers are increasingly interested in cyber security companies, anticipating strong cash flow as corporate customers become increasingly worried about protecting their business from cyber attacks. A group of PE firms might club together to buy Intel Security if it is sold for the same price or higher than the $7.7bn Intel originally paid for it.
Earlier this month, Bain Capital sold Blue Coat Security to Symantec for almost twice what it paid the cyber defence company last year. Vista Equity Partners also bought Ping Identity, an authentication service, which had been planning an initial public offering at the start of June.
Venture capital flooded into the highly fragmented cyber security industry in 2014 and 2015, as the old stalwarts appeared unable to protect against newer, more sophisticated attacks. Now, as fundraisings slow and in some cases valuations come down, many in the industry expect consolidation as small start-ups are bought for their technology or their sought-after cyber security engineers.
Intel has been restructuring its business after it was hit by the declining PC market, announcing plans this year to cut 12,000 jobs in its largest workforce reduction in a decade. The company is trying to refocus around selling chips for cloud computing rather than PCs, which still contribute 60 per cent of sales and 40 per cent of profits.
The chipmaker bought McAfee in 2010 intending to embed its cyber security functionality on to chips, promising the ability to detect threats at a deeper level. Under this plan, device manufacturers would still have to decide to activate this option.
But almost six years later Intel has not yet completed this plan. David DeWalt, the chief executive who helped engineer the sale, left to lead FireEye, a next generation security company and his replacement, Mike DeCesare, left in 2014 and now runs another security company called ForeScout. Intel Security is led by Chris Young, a former Cisco senior vice-president.
Intel renamed the company Intel Security but maintained the McAfee brand for some of its products.
Investor George Soros calls for reconstruction of EU after 'Brexit' vote http://reut.rs/28Ua8Tw
Billionaire investor George Soros on Saturday called for thorough reconstruction of the European Union in order to save it, even though he warned that Britain's vote to leave the bloc makes "disintegration of the EU practically irreversible."
Soros, who warned of financial meltdown if Britain voted to leave the EU before Thursday's referendum, also said the effects of the decision will likely damage Britain.
"Britain eventually may or may not be relatively better off than other countries by leaving the EU, but its economy and people stand to suffer significantly in the short to medium term," he wrote in a commentary on the website Project Syndicate.
Soros made huge profits in 1992 by betting against the British pound as it crashed below the preset level and had to be withdrawn from the European Exchange Rate Mechanism.
He warned of a similar meltdown earlier this week, before the vote, predicting a Brexit victory would send the pound down by at least 15 percent, and perhaps more than 20 percent, to go below $1.15, in an article in British newspaper The Guardian.
In the event, sterling fell around 10 percent on Friday, hitting a 31-year low, but never went below $1.32. It is not known if Soros bet against the pound. A Soros spokesman declined to comment on whether the investor made money on bets placed on Brexit.
"Now the catastrophic scenario that many feared has materialized, making the disintegration of the EU practically irreversible," wrote Soros. "The financial markets worldwide are likely to remain in turmoil as the long, complicated process of political and economic divorce from the EU is negotiated."
He said the consequences for the real economy would be comparable to the financial crisis of 2007-2008.
Soros said the EU had broken down and ceased to satisfy its citizens’ needs and aspirations. Nevertheless, he called for support to reconstruct it.
"After Brexit, all of us who believe in the values and principles that the EU was designed to uphold must band together to save it by thoroughly reconstructing it," he wrote. "I am convinced that as the consequences of Brexit unfold in the weeks and months ahead, more and more people will join us."
U.K. Economy Will Suffer Due to Brexit Vote
Consumer spending and foreign investment may fall, but British bank stocks may be worth a look.
The United Kingdom voted Thursday to leave the European Union, a decision that sparked massive upheaval in financial markets and has profound implications for the future of the U.K. and Europe.
The 51.9%-to-48.1% vote fueled fears that antiestablishment parties in the euro zone will push for more referenda on EU membership or the euro, further threatening European unity and destabilizing an already fragile economy. British Prime Minister David Cameron, who instigated the referendum as an election pledge and led the campaign to remain in the EU, announced on Friday that he will step down in October.
World markets had rallied in the days leading up to the vote, in anticipation that the U.K. would opt to remain in the EU. On Friday the Stoxx Europe 600 index plummeted 7%, to 322, its worst one-day drop since 2008. Deutsche Bank analysts predict it could fall to 295, suggesting further downside of more than 8%.
Britain’s benchmark FTSE 100 index, home to numerous multinational companies that generate about 75% of their revenue outside the U.K., initially tumbled 8.7% when markets opened on Friday. But the index later recovered to post a loss of 3.15%, to 6,138 on the day. The broader FTSE 250, which has far greater exposure to the domestic economy, sank some 7.2%. In the U.S., the Standard & Poor’s 500 fell 3.6%, to 2037, while Japan’s Nikkei 225 lost 7.92%.
THE U.K. COULD PAY a heavy price for its departure, as foreign direct investment slows, unemployment rises, and consumer spending falls. Deutsche Bank Chief Economist Mark Wall forecasts U.K. gross-domestic-product growth of only 0.9% in 2017, down from an expected 2.1% if British voters had stuck with Europe. He sees euro-zone growth of 1.1% next year, versus a prior expectation of 1.5%. Wall also trimmed his forecast for the global economy to 3.4% from 3.6%.
The British pound, which reached a 2016 high above $1.50 Thursday, plunged as it became apparent that investors got the vote spectacularly wrong. Sterling sank Friday to $1.32, its lowest level since 1985, before rebounding somewhat. It ended the session at $1.37, down 9%, while the euro gave up 1.4% to $1.11.
The British currency’s decline could be far from over. Analysts predict a continued descent to $1.20 or even $1.15 by the end of the year, as economic fundamentals deteriorate. That would represent a decline of at least 12% from Friday’s close.
Economists expect the Bank of England to trim interest rates as it focuses on low economic growth rather than a sterling-induced spike in inflation as prices of imported goods rise. Britain’s base interest rate is 0.5%.
“MARKETS DO TEND TO OVERREACT,” says Rory Bateman, head of U.K. and European equities at Schroders in London. “This may well be one of those occasions.”
In other words, U.S. and U.K. investors would do well to update their shopping lists, even as they survey the carnage across world markets.
Peter Garnry, head of equity strategy at Saxo Bank, the Danish investment bank, recommends buying Daimler (ticker: DAI.Germany), which could benefit from a weaker euro. Based on Friday’s close of 55.06 euros, the maker of Mercedes-Benz cars trades for just 6.5 times estimated 2017 earnings and offers a dividend yield of 5.9%.
There could be opportunities in the banking sector, too. U.K. bank stocks were particularly hard hit as investors worried that the banks will lose business if the country becomes an offshore financial center for Europe.
Barclays (BARC.UK), Lloyds Banking Group (LLOY.UK), and Royal Bank of Scotland Group (RBS.UK) each ended the day down more than 17%. HSBC Holdings (HSBA.UK), which has greater global exposure, fared little better, with a loss of 16.5%.
The indiscriminate selling has created compelling values, says Ben Ritchie, senior investment manager at Aberdeen Asset Management in London, who calls Barclays’ valuation, in particular, “pretty modest right now.” Ritchie notes that “the U.K. is an important part of its business, but it is not the only part.”
At Friday’s close of £1.54, Barclays trades for just seven times estimated 2017 earnings, and 0.5 times tangible book value, a measure preferred by many investors in assessing banks’ values.
Higher inflation could boost regulated assets, according to HSBC analyst Verity Mitchell, who argues that Brexit could have a positive impact on regulated British utilities whose revenue and dividends are indexed to inflation. Among her recommendations is gas and electricity distributor National Grid (NG.UK), which trades for some 15.6 times projected 2017 earnings and offers a 4.4% dividend yield.
On Friday, the UK voted to quit the European Union after more than four decades of membership, upending global markets and sending the pound to its weakest levels since the mid 1980s. The stunning rejection of Europe's political and economic order prompted Prime Minister Cameron to resign, and global central banks were scrambling to ensure markets continue functioning normally. Asian equity markets cratered, with the Nikkei closing down nearly 8% on Friday and the yen surged, with USD/JPY briefly dipping below 100 for the first time in three years. The CAC fell nearly 8% and the DAX declined nearly 7%, while in the UK the FTSE was only off 2.2% as the surge in gold prices helped hold up the index - where many of the largest global gold miners trade. Gold surged to two-year highs around $1,325. The 10-year Bund yield dipped as low as -0.17%, while the German 30-year yield nearly went negative. The reaction in the States was a bit less harsh, but nonetheless share prices plunged and Treasury prices surged along with the US Dollar. For the week the Dow closed down 1.6%, Nasdaq -1.9%, and the S&P lost 1.6% to finish at a three month low.
The final results of the UK referendum show 51.9% voted to leave the EU versus 48.1% to stay in the union, with London and urban areas strongly favoring 'stay' and northern and more rural areas voting 'leave'. PM Cameron will step down within three months, saying the UK needs fresh leadership. "We should have a new prime minister in place by the Conservative party conference in October," said Cameron. Boris Johnson, former Conservative mayor of London and a leader of the 'leave' camp, appears to be in the front running to lead a new government. The framework of the UK's new relationship with the EU, including trade agreements, will be negotiated over a period of years. Scottish nationalist leader Nicola Sturgeon has said that the Scottish National Party will begin to prepare legislation to allow a new Scotland referendum to take place before the UK leaves the EU. Scotland decisively voted to remain in the EU with 62% voting for 'stay' compared to 38% for 'leave'.
Leading central banks firmly repeated their commitments to strongly support the normal functioning of financial markets. The Fed and other said they would activate existing swap lines to provide adequate liquidity in all cases. Bank of England Governor Carney said the BoE was ready to provide up to £250B of extra funds and foreign currency to stabilize markets and would consider additional policy action in coming weeks. The ECB warned of contagion risks and loss of confidence, with a potential spread to the banking system. The Fed and BoJ both face involuntary policy tightening as funds flee to the greenback and the yen. There is little hope that the Fed will be able to raise rates more than once this year, with a September hike looking less possible and even December a real question. With the yen dropping to parity with the dollar, the Bank of Japan will likely intervene in FX markets ahead of new monetary easing measures, even after Japan Finance Minister Aso said the threshold for an intervention remains very high.
There was little market-moving news beyond the Brexit vote this week. Fed Chair Yellen gave her semi-annual monetary policy testimony before Congress. Yellen offered very cautious remarks, warning that considerable uncertainty about economic outlook remains and that the Fed is concerned that slower productivity growth could continue for some time. Some analysts detect an even softer tone in Yellen's remarks, noting that she seemed to suggest the Fed is looking to see whether there is more improvement in the US economy, not when improvement may arrive. "Proceeding cautiously in raising the federal funds rate will allow us to keep the monetary support to economic growth in place while we assess whether growth is returning to a moderate pace, whether the labor market will strengthen further, and whether inflation will continue to make progress toward our 2 percent objective," Yellen said.
In the US, the June Markit Manufacturing PMI report suggested the healing has begun for the manufacturing industry. The May reading of 50.7 was the lowest in 6.5 years, making June's relatively anemic figure of 51.4 look pretty good. The annualized rate of May existing home sales rose to the highest level in nearly a decade. Strong sales contrasted with lower inventories and higher prices. May new home sales were slightly below the April rate, which was revised lower. Nevertheless, both the April and May reports show rapid growth in sales, with the latest three-month average of 553K up at an annual rate of +19% from the previous three months (Dec through Feb) and up 11% from the same period a year ago.
A spectrum of transport names offered guidance ahead of the June quarter earnings season. Canadian Pacific warned that revenue had declined 12% y/y in its second quarter due to lower-than-anticipated volumes in bulk commodities, such as grain and potash, the unexpected and devastating wildfires in northern Alberta and a strengthening Canadian dollar. United Airlines slightly improved its passenger unit revenue outlook for its second quarter. Executives also hinted that prior capacity reductions had reduced the airline's market share. Southwest reaffirmed its outlook for very modest RASM growth in its second quarter, but warned that RASM would face challenges in the second half of the year. Trucking names Werner Enterprises and Covenant Transportation both offered very soft earnings guidance, citing sluggish demand and higher labor costs.
Elon Musk confounded Wall Street once again and launched a bid for Tesla to acquire SolarCity. Tesla offered to buy SolarCity for 0.122-0.131 shares per share, in a deal valued at $26.50-28.50/shr or $2.5-3.0B in total. The premium was 20-30% over SolarCity's closing price, although it's worth keeping in mind that shares of SCTY have plummeted by 60% over the last year. Musk said he would like to build Tesla into a one-stop shop for electric cars, solar panels and home batteries. The rationale behind the deal would be for SolarCity to save big on sales and marketing costs, and gain access to new customers as part of Tesla, although analysts suggest the plan is nothing more than a bailout of SolarCity's sinking fortunes. Citron Research's Andrew Left warned that if the Tesla deal doesn't go through than shares of SolarCity would go to zero. Investors will scrutinize the deal very closely: Solar City CEO Lyndon Rive and Musk are cousins, and Musk is the biggest shareholder in both SolarCity (22.2% stake) and Tesla (26.5% stake).
Spain's Telefonica sticks to 2016 targets despite Brexit http://reut.rs/28TjwXy
Spain's telecoms group Telefonica on Friday said it was sticking to its 2016 targets despite the decision from Britain to leave the European Union, which could potentially hit its business in the country and the group's balance sheet.
"Telefonica maintains its objectives," the company said in an email to Reuters. "The sterling is holding well and we had currency coverage in place so from a balance sheet point of view, Telefonica is protected."
The firm, which is considering a partial or total sale of its telecoms masts unit Telxius and British business O2, said it was in no rush to make a decision on any of them.
"We want to extract value from Telxius but no decision has been made, no internal or external schedule has been set and there has been no decision from the board," it said. "On O2, we are under no pressure to make a decision."