Barrons weekend summary: positive on large US financials, select EU names oversold on Brexit, LUV, THS
Cover story: In the upcoming elections, Democrats seem well-positioned to reclaim the Senate from the GOP, and a net gain of just four seats would give them the 50 necessary to take control, assuming a Democratic vice president is there as a tie-breaker; Regardless of who takes the White House, individual tax rates arent likely to go up, and legislative gridlock should ease.
Tech Trader: In a tech market dominated by giants such as AMZN and FB, smaller companies that arent likely to grow will increasingly consolidate or sell themselves, as seen by prominent deals such as MSFTs acquisition of LNKD and GCIs bid for RLOC.
Trader: Near-term, the market will look for any potential Europe-derived fallout in U.S. corporate earnings, according to David Donabedian of Atlantic Trust; Positive on AXLL, CVT, LNKD, QLIK, RDEN, VA: Companies are being acquired in all-cash deals, but their stock prices are significantly below the offer prices, offering investors an attractive annualized yield; Positive on UTHR: Shares of biotech are down 40% over the past year, but the company has a strong balance sheet and is improving of some of its treatments; now could be a good entry point for investors.
Profile: Scott Davis, manager, Columbia Dividend Income fund, looks for A-rated-or-better balance sheets, consistent cash flow from operations, and yield (top 10 holdings: MSFT, XOM, JNJ, JPM, MRK, HD, PM, CMCSA, VZ, PFE).
Interview: Harry Nimmo, manager, Standard Life Investments UK Smaller Companies fund, one of Britains top-performing small-cap funds (picks: Fevertree Drinks, First Derivatives, Fuchs Petrolub, Hota Industrial Manufacturing, Jungheinrich, Rational, Rightmove, Ted Baker, Voltronic Power Technology).
Features:
1) Positive on GS, C, JPM, BAC, MS: Despite a rally in the financial services sector, shares of large firms are down an average of 20% so far this year, making banks and asset managers one of the best values in the market;
2) Positive on Ryanair, GSK, SAP, Abertis Infraestructuras, Rexel, ARMH, Persimmon, Howden Joinery: Companies are among those in Europe that took a hit following the Brexit vote, but investors have overreacted, making these particular shares a bargain;
3) Positive on LUV: Carrier operates almost exclusively in the U.S., and though it faces challenges because of higher oil prices and slackening demand, it has little exposure to the U.K. and Europe and the share price could rise by 35%;
4) Positive on Safran: French aerospace and defense contractor is likely to benefit from the airline industrys long-term outlook, which looks bright as a growing middle class embraces air travel.
Small Caps: A look at the best- and worst-performing stocks from this column during the past 12 months (Best: CFX, PETN, MTW, MPW, TOWN, RAVN, CIR, ENR, DRII, FELE; Worst: PAH, ESL, PICO, DSW, HMHC, JLL, FLWS, PB, CUB, VSI).
Follow-Up: Positive on Volkswagen: If the troubled automaker shows signs of serious cost-cutting and the global auto market doesnt collapse, shares could rise by about €150 in a year; Positive on THS: Companys $2.7B purchase of CAGs Ralcorp business made it the leader in private-label food, while doubling its sales and boosting earnings powerand shares could rise by 17%.
European Trader: Rob Bartenstein of Kestra Private Wealth Services says that in the wake of the Brexit vote, internationally diversified British companies are likely to do well in the coming months, and that continued downward pressure on the British pound will be a short-term boon for some U.K. companies.
Asian Trader: A stronger dollar, propelled by Brexit, is putting downward pressure on the yuan, says John Woods of CS, and the fall will likely become a subject of debate this summer, which wont be good for stocks.
Emerging Markets: Not even Brexit could keep the emerging markets down this year; the best-performing emerging markets in the first half include Peru, Brazil, and Colombia; the worst-performing include Greece, Poland, China, and Egypt.
Commodities: Gasoline prices look set to trade in a sideways range over the summer, but there are profits to be made for investors willing to play the options market, which will require them to take significant risk selling rather than buying them.
Streetwise: Columnist Ben Levisohn says Britain might never invoke Article 50 of the Treaty of Lisbon and leave the European Union, while the EU might undertake structural changes that lead to improvements; As long as policy makers prevent the current political crisis from becoming a financial one, there is no reason for a repeat of previous instances when the U.S. Economic Policy Uncertainty Index surged to peak levels.
