Ideas from Barron’s

Here are some ideas from Barron’s that worth further research,

1. 07/06/2018 – Betting on Banks Rebounding, The big banks kick off earnings season on Friday. Are they set to stage a comeback?Kinahan recommends so-called out-of-the-money options—those priced lower than the current stock price—pegged to shares falling some 10% by August for long-term investors. These options have a low probability of being exercised, because they are far from the stock’s current level.

   For example, an investor could sell a put option on Citigroup (C) tied to the stock hitting $60 in August, about 9% below Thursday’s price. These would earn roughly $5 for each contract sold. If an investor sold 10 contracts, he or she would earn $50. Each contract controls 100 shares of Citi.

   If the shares fall below $60 by expiration, the options could be exercised and the investor would have to buy them at that level, coughing up $60,000. If the shares go up, the investor retains the income.

   Traders are expecting big swings ahead for the group, which could make selling put options more profitable. As volatility ticks higher, options prices rise.

2. 07/06/2018 – Where to Go for Double-Digit Yields, These instruments are collateralized loan obligations, or CLOs. For individual investors, they’re mainly the province of a few closed-end funds, or CEFs, and used sparingly in a handful of open-end mutual funds. A CLO is a credit derivative, made up of loans from leveraged companies, making them first cousins to junk bonds. But leveraged loans have less risk than those bonds on two fronts. First, from a credit standpoint, because loans are paid before bonds and equity, but also from an interest-rate perspective, because loans generally carry floating rates and therefore don’t decline in price when rates rise, as fixed-rate bonds do. The yield is double digit, but the fee can be 50% of the yield. Two closed-end funds, Eagle Point Credit (ticker: ECC) and Oxford Lane Capital (OXLC), emphasize equity CLOs, the riskiest but highest-yielding tranches, with yields up to 15%. XAI Octagon Floating Rate & Alternative Income Term Trust (XFLT) is more conservative, using CLO debt and equity as part of an overall loan portfolio, with a lower yield around 9%.
3. 07/01/2018 – 5 Stocks That Can Prosper Amid a Debt Crunch, Mstrong balance sheet, can be good defense stocks, A (Master Card), GGG (Graco Inc), EQC (Equity Commonwealth), EA (Electronic Arts), VZ (Verizon Communications).Companies have binged on debt, capitalizing on record-low interest rates to add about $14 trillion of obligations to their balance sheets since the 2008-09 global financial crisis—using some of it to buy back $5 trillion in stock, according to Bank of America Merrill Lynch.The debt of nonfinancial companies sits at a record 74% of gross domestic product. Even more concerning to credit analysts is that the figure has grown faster than earnings, with corporate leverage now 20% higher than it was before the crisis, according to Moody’s Investors Service.As interest rates rise and the economic cycle matures, that debt will get costlier—something that bears scrutiny. Goldman Sachs said in a recent research note that a portfolio of S&P 500 members with stronger balance sheets—based on their Altman Z-score, which uses a composite of five financial ratios to predict the likelihood of bankruptcy—had outpaced companies with weaker ones by eight percentage points this year through mid-June.
4. 06/27/2018 – 4 ETFs That Will Prosper in a Trade War -Investors concerned about tariffs should stick with domestic small-cap stocks that are less vulnerable to trade friction than multinationals. The Schwab U.S. Small-Cap exchange-traded fund (SCHA) offers “well-diversified exposure” to the small-cap universe, says Morningstar. It charges a rock-bottom annual expense ratio of 0.05%.U.S. financial stocks are “a screaming buy,” says Levine. The financial sector has sold off due to concerns about the flattening yield curve (the difference in yields between 2- and 10-year Treasuries). A flatter curve implies that banks’ net interest profit margins on loans will shrink. And it’s the bond market’s way of signaling that inflation and growth may be weaker than expected, possibly resulting in a recession sooner than expected.Yet bank revenues and profits look robust. The firms have built stronger capital cushions, and they’re likely to keep raising dividends and buybacks. Looser regulations on trading and other financial services may also help profits.Investors can gain exposure through ETFs such as the Financial Select Sector SPDR ETF (XLF). The fund holds a mix of banks, insurance companies, and other financial firms, including giants such as Berkshire Hathaway (BRK.B) and JPMorgan Chase (JPM). It’s down 3.6% for the year. It charges annual expenses of 0.13%.A better bet for domestic exposure would be the SPDR S&P Regional Banking ETF (KRE). It’s been a top performer, gaining about 8% this year, led by holdings such as Popular (BPOP), SVB Financial Group (SIVB), and TCF Financial (TCF). It charges annual expenses of 0.35%.Levine also likes small U.S. industrial companies, calling them the “forgotten part of the market.” Wall Street hardly covers the stocks anymore, she says, and they should prosper as the economy expands. The Invesco S&P SmallCap Industrials ETF (PSCI) holds 100 stocks in the sector with an average market-cap of $1.9 billion, including names such as ASGN (ASGN), John Bean Technologies (JBT), and Trex (TREX). It has gained 5% this year, outpacing the S&P 500. It charges annual expenses of 0.35%.

   But China’s selloff may be creating opportunities, especially in internet companies such as Alibaba Group Holding (BABA) and Tencent Holdings (0700.Hong Kong). The stocks are well off their 52-week highs—Alibaba is down about 10%, and Tencent is off 20%. Chinese internet companies “are the wave of the future,” says Levine (who doesn’t specifically recommend these stocks). They have access to a population of 1.4 billion people—a society rapidly going cashless and becoming more digitally savvy. And they’re investing in other emerging markets, such as India, where the digital economy is booming.

5. How Batteries Will Change the Power Business – Whether renewable power is the horse and batteries are the cart, or the other way around, is debatable, but both appear poised for rapid growth. For investors looking for exposure, some of the obvious choices come with downsides. Electronics company Panasonic (6752.Japan) is a key supplier of lithium-ion batteries, but collects more of its revenue from appliances. LG Chem, another battery leader, comes with plenty of exposure to petrochemicals. Lithium miners have been hot— Sociedad Química y Minerade Chile (SQM) stock has tripled in price in three years—but as new supply comes on-line to meet demand, returns there could be volatile. Tesla’s battery business comes with a car maker on the side. There’s an exchange-traded fund that lumps together the whole motley bunch and more, Global X Lithium & Battery Tech (LIT). Yearly expenses: 0.75%.
6. Altaba’s Alibaba Opportunity – Altaba moved last week to monetize about 25% of its Alibaba stake through a $16 billion tender offer for up to 195 million Altaba shares. Under terms of the deal, Altaba holders can receive 0.35 Alibaba share plus cash equal to 0.05 Alibaba share for each Altaba share. That package was worth about $82 a share on Friday, a roughly 2% premium to the Altaba share price. If fully subscribed, the tender offer—which expires on July 11—would reduce the number of Altaba shares outstanding by 24% to some 605 million. The discount to NAV on Altaba shares narrowed slightly, to 25% from 26%. The downside of this strategy is that the tender is taxable to both Altaba and to participating shareholders. Altaba plans to sell Alibaba shares to pay the tax bill. Altaba continues to offer a good play on Alibaba, with the potential kicker of a favorable deal with Alibaba.
7. Cloud computing company – As this column has pointed out recently, investors love to credit cloud computing software vendors, even projecting results far into the future (“The Rewards–and Perils–of Software Subscriptions,” June 2). The bellwether, Salesforce.com (CRM), has seen its shares surge 31% this year, and it now trades for 7.7 times projected revenue for 2018, versus 6 times at the beginning of the year. Some of the support for cloud valuations, at least for smaller, younger companies such as MongoDB (MDB), Zuora (ZUO), or Zscaler (ZS), is the perpetual promise that they could be acquisition targets. Microsoft (MSFT) announced last week that it would buy a 10-year-old cloud software company called GitHub of San Francisco, for $7.5 billion in stock. That values the company at nearly 40 times trailing annual revenue, based on news reports.As one analyst, Richard Davis of Canaccord Genuity, wrote of MongoDB last week, at a price-to-sales multiple of 12.8 times, “We cannot construct any scenario in which we can sensibly assert that MDB’s valuation is anything but expensive.” But, he added, recommending the stock, “Investors have gone all-in on software this year, so valuations of pretty much everything is expensive.” MongoDB stock, he believes, will “grow into its valuation.”
8. Fintech companies – Dutch fintech upstart Adyen (ADYEN.Netherlands) stormed out of the IPO gate on Wednesday, surging nearly 90% in its first day of trading in one of Europe’s biggest tech offerings in years.The payment-processing company—whose customers include Neftlix (NFLX), Spotify Technology (SPOT), Uber Technologies, and Facebook (FB)—finished the trading day in Amsterdam with a market valuation of $15.8 billion.Fintech has wowed investors this year, with solid IPOs from GreenSky (GSKY) and Cardlytics (CDLX), and PayPal’s $2.2 billion acquisition of iZettle in May.