Barron's Streetwise - Fuzzy Panda Attacks Globe Life

Episode Date: April 20, 2024

Plus, Tesla earnings, European stock picks, and jellied eels. Learn more about your ad choices. Visit megaphone.fm/adchoices

Calling all sellers, Salesforce is hiring account executives to join us on the cutting edge of technology. Here, innovation isn't a buzzword. It's a way of life. You'll be solving customer challenges faster with agents, winning with purpose, and showing the world what AI was meant to be. Let's create the agent-first future together. Head to salesforce.com slash careers to learn more. Earnings season is upon us. Get excited. Jackson, you're loving it, right?

I've had these dates circled on my calendar every quarter for about a month every quarter. It feels like a third of the time is earnings season. Let me set up the drama, okay? Let's talk about what's at stake. It's a pricey stock market, 21 times this year's projected earnings for the S&P 500. Not crazy, ambitious is what I would call it. And the market's been good, but it's been wobbling just lately. What'd you say it was down over the past month? It's down about 4, 4.5% over the past month and maybe a little bit more since the peak. Right.

You got nothing to complain about if you've been in the market for any amount of time. It's been doing quite well. Hasn't been doing too well. Will earnings justify these share prices? By the way, should I mention this is the Barron Streetwise podcast? I'm Jack Howe. I work at Barron's. With me, Jackson Cantrell, our audio producer.

Hey, Jackson. Hi, Jack. So the estimate is for 3% earnings growth for the S&P 500 in the first quarter. That's the consensus. That is down from over 10% last summer. So analysts start with those sky-high earnings growth projections, then they bring them down to beatable levels, then companies beat them, and we'll see where we end up. And UBS, I saw something from UBS. They say,

not to worry. Earnings are going to come in seven to 9% for the first quarter, the growth. And they say that's in keeping with their full year estimate of 9%. And they think that the S&P 500 can jump to 5,500 by the end of the year. That's a tasty game. Hold on, doing some calculating. Steady, 9.5%, right? By the end of the year, that would be great. JP Morgan is not as gung-ho. They say that, look, one thing that's worrisome is that the projections for earnings growth in the back half of the year, as the year goes on, third, fourth quarter, are much higher than the projection now. So they say they're unrealistic and those will have to come down. They also say it's been all magnificent seven. I mean, we know that. They've led the charge on gains and on growth. They say if you take those

out and you look at the less magnificent 493, I guess it is, that the earnings growth projection for the first quarter would be negative 2.6%. And that would be the fifth negative quarter in a row of declining earnings if you ignore that magnificent seven. But their point isn't even really, hey, look out for the US stock market. They actually, they put a note out recently calling attention to Europe, European stocks. Now, look, if you weren't excited before when I mentioned European stocks, come on, you're feeling jazzed, right? Oui, absolument.

Okay, look, if you've held iShares Europe, the ETF, you have underperformed the American counterpart, the iShares core S&P 500 ETF. It's true. Over the past one year, you have underperformed in Europe and three years and five and also 10 and 20. And by the way, it's been massive. And of course, the European ETF is cheaper relative to earnings, but there is a growth gap, right? I said that the S&P 500, the earnings growth there is expected to come in at positive 3% for the first quarter. That's the consensus. It's negative 11% for Europe.

But JP Morgan's point is that just as that. number might be not quite as rosy as it seems, the European one might be not as terrible as it looks. It's held down by big declines for the energy and utility sectors, some outliers. The average number is bad, yes, but what about the median number, the middle number, as they taught us in statistics class, the one that's not skewed by those big outliers. That number is 10 points higher, still negative, but it's a negative 1%. And that's not so far from where the US is. In fact, that's better than the US minus the Magnificent Seven. Yeah, I know. That's some tortured logic and rationale there for why Europe is attractive. But JP Morgan had an underperformed call on Europe relative to the U.S.

And that call has worked out well for them because Europe is underperformed by 15 percentage points since last May. And they recently removed that call. What they say is that earnings momentum in Europe is going to start to improve relative to the U.S. Let me put it in their words. They write, we believe that the period of U.S. earnings outperformance versus Eurozone might be ending. They also write better earnings delivery, meaning in Europe, could in turn drive better relative market performance. What they say is that the U.S. has gotten a bit of a goosing, you might say, in its

growth and economic activity from government spending, more so than in Europe. They also say that U.S. companies have benefited on upside sales surprises from currency exchange. They also point out that Europe is now expected to cut interest rates sooner than the US. Jackson, are you buying any of this as an argument that Europe could start to reverse this role, this lagging role, could start to have maybe better earnings momentum than the U S is any part of this convincing. I just feel like I've heard this before and, but I'll keep buying those international stocks dutifully and regretting it at the end of the year. It's been basically my entire history of investing has been white.

Why do I have this ex-US fund? Right, because you're how old? 27. 27. So if Europe has been underperforming for 20 years, that's like your whole investment life. You've never seen what it looks like. Since I was eight years old, I've been looking at those returns and saying, hey, I thought they said Europe was undervalued. Well, look, you're doing the right thing. I think you're doing the right thing.

Eating your vegetables. I tried to make up some company names in a column that I wrote recently about perceived business stodginess in Europe on the part of Americans, maybe some American haughtiness, maybe some dismissiveness on the part of European stocks. The names I came up with, tell me if you think these are fair. Bavarian Capacitor is one, right? I mean, you could say it's tech, but it's not like... They make capacitors that are 3% more efficient for 10 times the price. I feel like the margins are just okay.

The other one is called Royal Jellied Eels. Is that a food services? They just do Jellied Eels. But they're an industry leader. It can't be a real food product i've never had it but i'm pretty sure it is oh wow yeah you're googling don't you googled it didn't you how do the british make such terrible wait let me stop you let me stop you there sorry such terribly great terribly great uh interesting yeah contributions to world culture i don't know all right so look if you think that jp morgan is right i mean they they got that

under performed call right right i mean although i got that underperformed call right. I mean, although I guess if you've seen what Europe has done relative to the US over the past couple of decades, maybe that one wasn't such a stretch, but okay, maybe they're right about the turn. And so you can buy a European ETF, like the one I mentioned before, iShares Europe. The ticker there is IEV. I've got it at 14 times this year's projected earnings. What's the dividend yield, you say? Around 3.5%. Okay, so you can buy a fund.

Maybe you already have an allocation to a fund. If you're looking to buy individual stocks, J.P. Morgan has some top picks. If you want stock picks, you want individual stocks, they've got some. These are recommended by J.P. Morgan, but they're not all cheap. And to me, if you're saying, I want to get into Europe because I know it's been terrible, but I think it's going to come around. And then you go in and you're buying the ones that are like 30 times earnings. I mean, it feels a little weird, right?

You should be getting a discount. Yes? I guess it depends on the company. Let me give you some examples. Airbus. You've heard of them, right? Oh, I'm familiar. The jumbo jet business is a duopoly, two main providers, and Airbus is the one that hasn't been making headlines lately for things falling off of planes. Is that a fair way to put it? Yeah, it's fair. I'm just saying there have been a lot of, maybe people are making more of it than, I don't really know. There have been a lot of negative Boeing headlines.

So if you're Airbus, that should be a commercial advantage. But everybody is capacity constrained right now in airplanes, in jumbo jets. That's what our pal Al Root tells me. He says, everybody's booked so far out ahead. Commercially, for now, it doesn't make a ton of difference. Anyhow, that one is 24 times earnings. You know ASML, right? Yeah, the chip equipment manufacturer. That's right. ASML makes, you know, they make the machines you need to get the next level of miniaturization and circuitry on chips. And they're the only company that's a

monopoly position in that particular type of machine, which is good on chips. And they're the only company that's a monopoly position in that particular type of machine, which is good for business. And so that stock trades at 44 times earnings. And one more, Denmark's Novo Nordisk. That's a drug company, an insulin, I think. But now they're of course best known as the maker of Wegovi, which is one of those obesity medicines, which those things seem to have just open-ended potential. And so that one's 37 times earnings. So those are some pricey stocks in Europe that JP Morgan likes, but you don't want to hear about the pricey ones.

You want to hear about the cheap ones. I will give you three of those. AstraZeneca, that's another drug maker. They make drugs for diabetes and cancer and heart disease. And that goes for 17 times earnings, and it's a double-digit earnings grower. Deutsche Telekom, that one is 12 times earnings. Most of the value there comes from a stake in T-Mobile here in the US, which goes for 18 times earnings.

So there's sometimes strangeness in how the valuations of those two trade off. But free cash flow is rising very quickly at T-Mobile and at Deutsche Telekom. That company, Deutsche, that's approaching 17% in terms of the free cash flow as a percentage of its market value. And last one, UBS. You remember Credit Suisse was like, you know, it wasn't looking super thriving going back, what, more than a year ago? It wasn't looking like it was doing great. There were people concerned about it because the stock had traded so low and you start

to worry about like self-fulfilling prophecy if people think there are problems there. Anyhow, UBS bought it. Problem solved because UBS is strong. So they merged. Now you've got UBS trading at 1.3 times tangible book value recently. And if you compare it with Morgan Stanley, Morgan Stanley is much higher, 2.2 times tangible book. Its valuation has increased over the past decade.

Why? Morgan Stanley has really grown its wealth management business. People like wealth management. It's like one of the steadiest parts of the financial services industry. You just earn fees to manage money, not a lot of balance sheet risk there. And so investors reward that with a high valuation. But UBS actually has a wealth management business that's similar to the one at Morgan Stanley in terms of its contribution to company earnings. It's way into wealth management, in other words, and maybe it deserves a higher valuation. That's the argument over at J.P. Morgan. Anyhow, those are stocks it likes. That is European earnings

season. Do we have it covered? Any points we need to add? You're not still looking at photos of jellied eels, please tell me. Or are you trying to think of fake names of European companies that imply stanchiness? You might have me there. What are you working on? Let's workshop it. What do you got? I'm trying to think of a low-cost regional air carrier, maybe based in Greece or Spain. Grupo Squeeze Saver is the name. Grupo tells you, you know, maybe they've got a hub in, not Madrid, but they... Malaga, maybe?

I was going to say Valencia might have a hub. I don't know if there's an airport there. There you go. And Squeeze Saver just tells you everything you know about the business model. You will save money. It will be a squeeze. Pack lightly and show up slim and you'll be all set. I'm underweight on that one.

If you stick around after the break, let me see if I can sell you on this. I want to talk about Tesla and I want to talk about something wild that has been happening with an S&P 500 stock. I think most people might not even know that this is a stock in the S&P 500. It is the worst performer this year. Tesla is second worst. This company is worse. I'm going to talk about it after the break.

Is that too teasy? After the break. No, it's too teasy. I'm going to talk about it after the break. Is that too teasy? After the break. No, it's too teasy. I'll tell you the name. It's Globe Life. I'm going to talk about Tesla and Globe Life, a contrast in how analysts handle it when a positive call of theirs goes wrong and they decide they're sticking with the stock. That's next after this quick break.

Welcome back. Tesla reports quarterly financial results in the week ahead, and I think that investors will be looking for signs of kind of plateauing demand for electric vehicles. We've talked about that, how customer preferences shifted a little bit in favor of hybrids lately. People are holding off on the EVs. And also the look for signs of low-cost competition in EVs from China. Tesla stock has not done well. It was recently down 40% so far this year. I mean, it's done miraculously well over the long, long term, right? But you're not loving it if you bought at the beginning of this year. And I'm intrigued to read what the analyst at Wedbush has been writing about the company. He has been bullish. He's not pleased with the way things are going. You sort of feel like he's getting a little impatient with management.

A couple of weeks ago, he described news there as a, I thought he put a train wreck into a brick wall. That was the one, yeah. That was how he described one comedy development. But he had a new note this past week, still using train wreck. He said that Tesla's past two conference calls, talking about earnings coming up, have been, quote, train wreck bad comedy shows with no adult in the room. I don't know if an adult in the room would help a train wreck bad comedy shows with no adult in the room i don't know if an adult in the room

would help a train wreck i mean if it is a bad comedy show i'm gonna say it's the train wreck right you're not gonna get laughs it's not a happy situation i mean think about that you're telling jokes come on the analyst writes that what tesla to do, a bunch of things, but two important ones are explain this past week's news of big layoffs at the company. Why those layoffs now? What's going on? You know, is it just saving money or is there something that you're not going to be doing anymore? So talk to investors about that and tell them what the plan is for this Model 2. That's the cheap car that Tesla is expected to introduce.

If that car is not coming in the next 18 months, it is going to be a disaster for Tesla. But the analyst there also says he's sticking with his outperform rating on the stock, even after the bad comedy wreck Inferno. And the reason he cites is that self-driving cars, the potential for self-driving cars for Tesla has potential for, quote, massive value creation. So he's not leaving the stock just yet. What do you think, Jackson?

If you were out there with a bullish, published opinion on Tesla, and certainly no one could fault you for that, and all this stuff had gone wrong. Where do you think you'd be right now? Are you exiting or are you sticking with it? I don't know. I've been trying out the full self-driving update on our Tesla and it's kind of... Because you have a Tesla. Yeah. You just got a software update and now you were telling me the other day. Yeah. They gave everyone a free trial trial they've lowered the price to a hundred dollars a month so i guess they're trying to uh push it out

to see if people are interested and it works really well on on highways it will do all the lane shifting and everything for you but there's just been a couple of moments where it's it's kind of freaked me out on uh on neighborhood So not quite ready yet, I'd say. Were unnecessarily skittish? Unnecessarily coming to a stop too quickly. Or sometimes when it reaches to a destination, it will automatically try to pull into the driveway. I can see that causing complications if you're on a stakeout, right? If you're law enforcement, don't turn off the self-driving on your stakeouts because you don't want to pull right into the driveway, the bad guys.

You got to stay across the street. You know what? You should be in a van. I think that's the way it's supposed to work anyhow. Okay, so we'll see what earnings day brings for Tesla. Remember, we have seen recently where you've had like bad news for the company and the stock doesn't sell off that much because it had already done so poorly previously. So I don't know, maybe that provides some downside protection. We'll see. Rerouting, as they say on the GPS, back to Globe Life. Were you aware that there was a company in the S&P 500 called Globe Life? I wasn't. Do they do some sort of cartography business? Close. They do insurance. If you're not familiar with it, maybe it's because it used to be called Torchmark. They

changed their name in 2019 and it's down 47% this year, which I feel like is a big move for an insurance company. Just recently, earlier this month, it was down more than 50% in one day, and then it was up 20% the next day. And then it has had these wild wobbles since then. And the blame really comes down to Fuzzy Panda. Uh-oh. There is a short-selling firm called Fuzzy Panda. We've talked before about, we've talked with short sellers and people who, they take short positions in companies, they do research, they publish these negative reports. Remember, we talked to somebody who had done that with, what is the big rig company that they sell? Oh, Nikola. Nikola, right, right. So Fuzzy Panda is a group like that.

I don't love the name. I feel like if you want to have a descriptor for panda, put something out there that narrows the field. You can call it Red Panda, call it Giant Panda, call it Angry Panda, something that's a subset of the panda universe, Fuzzy Panda. They're all fuzzy.

So the title of this Fuzzy Panda report is dated April 11th. The title is Globe Life. Executives disregard wide-ranging insurance fraud while they received millions in undisclosed kickback schemes. The company has commented on the content of this report, and I'll tell you about that in a moment. The report says that Fuzzy Panda has uncovered, I'm going to read some bullets here,

policies written for dead and fictitious people, forged signatures, funds withdrawn from consumers' bank accounts without approval, fictitious bank accounts used to fund numerous fake policies so agents hit their bonuses. And throughout, they say that they have proof that management knows and hasn't stopped it. And there are some really grimy details here. They talk about not only financial wrongdoing like bribes and kickbacks, they talk about attacks on women at one of these agencies and bullying and cocaine use and steroid use, weirdly enough. They show a lot of these photos from guys on social media. Look, I don't want to stereotype here, but I will.

They're young men. here, but I will. They're young men. They seem to be flexing in all their photos and turning their wrists just so, so that you can see their shiny watches and they're holding cigars. And sometimes they're standing next to fancy sports cars and they're showing you that, hey, look how successful I am. So those kinds of pictures. And they're saying they got this way in the insurance business. And, you know, there's talk about retiring at 25 and this and that. One of these has a picture of a bunch of guys like leaned up against the hoods of their exotic sports cars. And it says Dubai day for driving supercars and renting out the entire top floor of the Burj Khalifa. That's that super tall building. It says, what an incredible way to end our last day in Dubai.

Now, those pictures and posts are neither here nor there in the context of the type of misdeeds that this report alleges, but they're meant to convey an image of, like, you know, young guys that are just out to make a quick buck, and they don't care who gets hurt and that sort of thing. So these are the allegations and Globe Life has responded. They issued a release. They say they reviewed the report and they say it's wildly misleading, mixing anonymous

allegations with recycled points pushed by plaintiff law firms to coerce Globe Life into settlements. They say that the short seller is motivated by short-term profit earned on the backs of the thousands of shareholders, hardworking employees, independent contractor sales agents, and customers who know and trust our brand and strong track record. They also say further down that the company has processes in place to review, investigate, and address all allegations brought to the company's attention concerning unethical business practices, sexual harassment, and inappropriate conduct,

and we do not tolerate such behavior. So that's where things stand on Globe Life, and I am sure that we will hear more about it in the weeks and months ahead, and ultimately, maybe we'll learn more about who's in the right and who's in the wrong. But I do just want to point out how JP Morgan handled this. Their analyst has an overweight rating on Globe Life. That in itself is not so remarkable. The stock had performed well for a long time. But in the wake of this huge blow up for the stock price and all these reports that are kind of jarring and concerning, the analyst has to now figure out, what do you do here? Do you cut your rating on the stock? Or do you stick with the overweight

rating? And how do you explain that? Well, the analyst is sticking with overweight. weight rating and how do you explain that? Well, the analyst is sticking with overweight. He writes that the allegations seem very severe when read in isolation, but also that most of the issues raised in recent short reports have been public for some time. Here's one line in here that I think is meant to comfort investors, but did not comfort me when I read it. It says, quote, insurance is a litigious business, and most of our coverage companies face multiple accusations of improper and fraudulent behavior. Oh, gosh. That's not a ringing endorsement for the industry. I mean, I guess these are big operations with a lot of salespeople, and that's why that

happens. If you have a lot of independent salespeople, maybe it's hard to oversee everything all the time. It says, from the outside, it is difficult for one to gauge how rampant some of the highlighted issues have been and whether management's response to various acts was appropriate and not lax. In short, J.P. Morgan writes that they think that the company and its management team are, quote, more likely to be held liable for improper supervision of its agencies, which it does

not own, of being too lenient in its actions toward accused individuals slash agencies and its public disclosure of court cases slash inquiries than being a party to the alleged acts or fostering a culture of abuse at the firm. And by agencies, you mean sales agencies that they contract out. That's right. You can start as an individual. You could start your own sales agency. You got to get licensed and then you could sell this company's products. But you're not part of the company. You're not an employee. You're independent. Got it. So JP Morgan isn't concerned. Its analyst is not saying, hey, there's nothing behind any of this.

It's saying whatever the fallout is from it, it doesn't think that it will be commensurate with the decline in the share price. So it still sees the stock as a good deal. What I am particularly interested in here is what they think the financial repercussions will be from this. And you might be amazed, as I was when I learned, that it thinks the financial consequences might be positive for the company. What? J.P. Morgan writes, and follow this thread of reasoning if you can, most of the company's earnings come from existing policies that have already been written. You have a policy outstanding, you pay premiums every year for your protection, and that's income for the company, and it earns a margin on that.

And that is 90% maybe of the company's earnings, according to JP Morgan. 90% maybe of the company's earnings, according to JP Morgan. And so even if the company had a 10% hit to sales to new business, that would only be a 1% reduction because it's not that dependent on new sales for income. And it actually gets, I hesitate to use the word better, but it actually gets more financially accommodating than that because the way this business works is the salespeople get paid up front. I mean, they don't get paid all the money on day one, but they get paid the bulk of their money in the first year of coverage, right?

So these policies are not that lucrative for insurance companies that do that in their first year. So if you have this hit to business and they write fewer new policies, that could actually improve cash flow. You're not shelling out all that money for commissions before you've recouped it in future premiums. So more cash coming in the door. Now, Globe Life is a company that has previously announced and done stock buybacks.

And the argument behind stock buybacks is, you know, we think that this is going to be accretive to future earnings. When we buy our shares, it will reduce the number of outstanding shares that will mathematically increase earnings per share, and that higher earnings per share will make remaining shares more valuable. It doesn't always happen in a one-for-one way like that. Stock buybacks don't nearly always send stock prices higher, but that is the argument for them. And it makes sense. What if you're buying back stock and your stock price falls by half, and you've been arguing all along that it's accretive to earnings, it suddenly got a lot more accretive. And what if, while that's happening, you've unlocked more cash flow, so you have more

money to devote to stock buybacks? So that's the strange math that JP Morgan calls to investors' attention here, is we need to wait and see what happens with this. We don't think it will be as bad as everyone fears. And if you're wondering about what's going to be the hit to the company's bottom line, it might not be a hit. It might be a lot more benign than you assume. It might even be favorable. The stock recently traded at $65, and JP Morgan is sticking with its price target of $136. So it predicts that the stock price will more than double. That is not, do I have to point out,

Jackson, that is not a Barron Streetwise podcast recommendation? We're not sounding the rally horn on this. I'm not saying that I find the logic convincing. I just find it notable, a little bit shocking, a little bit kind of perversely interesting about how something that sounds bad can have a not so negative effect on company income do you think we've covered globe life we got it covered thank all of you for listening jackson cantrell is our producer jackson you're going next week on a trip to japan Tell us why, but in four words. Bike. Right. Trip. Food. You're going to Japan.

It's a waste of a word, but go ahead. Food. Food. Yes. Shikoku. That's a place I take it. It's one of the four main islands. It's the smallest one.

Well, now listeners are going to know where to find you. So get ready to get high-fived on your bike trip. Can't wait. See you next week.