Barron's Streetwise - Jack Does Davos

Episode Date: January 21, 2023

Notes from a Barron’s chat with the CEOs of BorgWarner, Thermo Fisher, Blackstone, and Nasdaq. Plus fashion tips. Learn more about your ad choices. Visit megaphone.fm/adchoices

Hey Spotify, this is Javi. My biggest passion is music, and it's not just sounds and instruments, it's more than that to me. It's a world full of harmonies with chillers. From streaming to shopping, it's on Prime. It's because we own all this wonderful stuff in the right places, and most REITs own what you would call real estate, which is sort of like everything. And so we were up last year, 8%. Hello and welcome. Oh boy, my voice is way up there, huh? I started too high. Where are you going to go from there if you get excited? I can't go any higher.

I'm going to bring it down here, give myself a little more room to maneuver. Hello and welcome to the Barron Streetwise podcast. I'm Jack Howe and the voice you just heard, that's Stephen Swartzman. He's the co-founder of Blackstone and he's a past guest on this podcast. He was talking there with Barron's in Davos, Switzerland about the Blackstone Real Estate Income Trust, which Barron's has written about somewhat critically. We'll hear briefly from Steve about that in a moment, and from the CEOs of BorgWarner, Thermo Fisher Scientific, and NASDAQ on this very special

Davos episode. Jackson, our Davos music. You got it. This is not the official music of the World Economic Forum. I'm going to guess it's what came up when Jackson ran a search for yodeling in public domain. If I'm warm, hit the alphorn once. Hi, Jackson. Hey, Jack. Let's just have an unscripted chat here. You can ask me any questions that you'd like about my time in Davos. I'm not just saying that because I've been on the go all week and I haven't had a chance to prepare anything.

Go. Was it like facing your demons? What do you mean, Davos demons? Well, a couple of years ago, completely uh lampooned davos in one of your columns and and you know three years later you're there i mean i had a few laughs um but you know the the purpose of the thing is a focus on social issues and you know sustainability and the environment and inequality and all these sorts of things. Private jets. Well, yeah, there are some contrasts because it's largely rich people going to the Alps in January

to talk about global warming and inequality. So there are opportunities. If you want to be a person who just writes a column taking shots like that, you can be that person. Guess what? I'm not that person anymore because the boss told me to go and I went. So now I'm on board. Was it better than ski butternut?

Because I had proposed an alternate economic forum for people who weren't important enough to get invited to Davos and I was going to have it at butternut in Massachusetts. Yeah, it was not like butternut. And it was not. I didn't even get invited to butternut. I'm going to send you an invitation. I did see some things I could poke fun out if I wanted to, but I also had some substantive conversations with business leaders at a, at a Barron's event, which we'll talk about in a moment. But yeah, I mean, a lot of like the local shops are taken over and rebranded for the week by different groups doing Davos-y things. So like you see a place called

the Equality Lounge and it's just, it's a menu of like gourmet drinks. And I don't know who you have to know to get in, but I'm pretty sure I wasn't on the list. I had a discussion with my wife before I went about what to wear because I had this picture in my head that at Davos, everyone wears kind of these very stylish black coats that I guess kind of, you know, waist length or whatever. And what I have is just this monstrous insulated trench coat thing for a person who just says, I'm done with cold weather. But I thought this is going to make me look like I'm someone who's not self-aware at Davos. So my wife said, you should wear your giant furry hat too.

And it was actually a great idea because the coat alone, you look like someone who might not know any better, but the coat and the hat, that's basically announcing to people passing by. This was no accident and I'm making the rules here. Does it have ear flaps? It does. It's got the biggest flaps I've ever seen. But I didn't bring either one because I ended up just, I found a good deal on an insulated puffy coat.

It was nice and light to carry through airports. So that's what I wore. And none of it mattered anyhow because one thing I can tell you about Davos is they take a pretty casual approach to clearing ice off paths, which means that everyone walking around Davos is looking down at the ground. You do not go there, by the way, in dress shoes or anything close. You need big, clompy boots. You must maintain your footing. It's a big challenge everywhere you go, not slipping. What does it look like? Is it, are you on like a ski slope? I like, I have no idea. Yeah. It's a lovely ski village that, like I said, a lot of it gets taken over for the week and sort of their entire structures that get built up quickly for all the people coming through. But you know, there's a, there's a shortage of food,

not a shortage, but since many of the places are taken over and rebranded by companies, there just aren't a lot of little restaurants handy. You can go for a while without finding food. So you've got to really scarf down the hors d'oeuvres at events. You've got to like... Sounds like college. Pick a central spot where the servers are passing by and just kind of go at it with both hands. Because you might not see anywhere for a while on the way back. Who's there? Is it like all CEOs? Are they?

There were business leaders, but also politicians. The president of Poland was there. From the US, President Biden did not go. Senators Joe Manchin and Kyrsten Sinema were there. There might've been others. Yeah. So tell me about the Barron's event. Yeah, we had a stage event with four CEOs. It was in this place called Journal House, which is, you know, Barron's is part of Dow Jones along with the Wall Street Journal. So they were there and some other folks from the company. And it was just huge turnout. That place was packed every time I was there.

So the events were very well attended. And I went for the Barron's event with our editor, Dave Cho. And we sort of took turns interviewing some CEOs. Did you meet any fans of the podcast? Not a gosh darn one, to be honest. And it's very hurtful. But three of the four CEOs that we interviewed on stage happened been on the podcast in the past, so that's something. Usually, I meet at least someone who tells me, oh, I listen with my dog. I think we have as many dog listeners as people listeners. So first up was Frederick Lasald, who runs BorgWarner. What did he have to say?

Well, Dave spoke with him, and he talked about this recent decision by the company to split into two parts. So there's going to be what they're calling a new co and that's going to get fuel injectors. I should mention that BorgWarner makes components for cars, probably figured that out when I said fuel injectors. But they're going to get that and other components that are really tied to gasoline and diesel vehicles. The rest of the company will still be called Borg Warner, and that's going to be the components that go for electric vehicles. And it'll also keep drivetrains, which are the propulsion systems for gasoline and diesel cars. The technology there kind of informs what will be the battery propulsion systems of future cars. So it's going to basically be these two companies that will really cater to

investors who want the cash flows of the older technology and the growth of the newer technology. And the company says it'll get 45% of its revenue from electric vehicles by the end of the decade. get 45% of its revenue from electric vehicles by the end of the decade. And Fred made the point that it's spending half of its revenue from battery electric vehicles now. A lot of companies are doing that. And he said, it's tough to make money when you're spending half of the revenue there on research and development, but that won't be forever. That's to produce more revenue in coming years. So that will start to pay off. Wall Street predicts that the company's earnings per share will double over the next five years. And that stock goes for about nine times earnings. You want to play a clip from Fred?

Yeah, sure. I think you're going to see a lot of customers launching a lot of new products. And you're going to see also infrastructure being put in place in all those countries. We've actually announced one acquisition in the U.S. and we've also announced the signing of an acquisition in China for DC fast charging. So we're also moving, being an enabler of the electrification also, having an impact on stationary charging and an impact on the grid.

That's where we see the market evolving. So next up, you interviewed Mark Casper, who's the CEO of Thermo Fisher Scientific. First, what do they do and what did he say? Mass spectrometers, you're going to tell me you don't follow closely the mass spectrometer industry. I asked Mark to explain that to me on stage and he did. And it's a tough one to get your head around.

You can tell on a very detailed level what stuff is in other stuff is about what I got out of it. Thermo Fisher Scientific makes everything you would use in a lab, including these very high-end machines, but also like beakers and shakers and stuff like that. So it has this huge catalog. I was blown away when I looked at, first of all, I looked at the market value of the company. I hadn't looked in a little while and I thought maybe there was a mistake.

I had to do a double take. It's a $230 billion company. It's bigger than Walt Disney. It's bigger than McDonald's. And a lot of people, like you just say, a lot of people don't even know what they do. The value has gotten that high because since Mark took over in 2009, the stock's up close to 1,200%. So there's just been a lot of demand, particularly from

the drug industry for machines and supplies. And Thermo Fisher did something interesting recently. And Thermo Fisher did something interesting recently. It made a big acquisition of a company that is a provider of drug research services. So if you're a drug developer and you want to run clinical trials, you can hire a company like this one to do those for you. So now Thermo Fisher is in this business. This is the kind of company that would have been a customer. Now they're doing this kind of work themselves. And Mark explains that, hey, look, he calls this coming decade a golden era for biology.

And he says, you're going to need to bring down drug costs for people, but you're also going to need to find a way for the innovators to earn a return on their work. So one way you can do that is by speeding up trials and reducing the cost of them. And he feels that Thermo Fisher is going to be in a good position to do that because it can not only run these trials itself now, but it also makes the machines. So it knows just what it needs and it can use that expertise itself. I'm very bullish on how the science has progressed. I think you'll see populations live healthier lives. There's going to be great progress on cancer. Cancer is very complicated in many ways, but there is great movement in the understanding of the disease and the cures and medicines to slow progression.

I'm very optimistic about that. medicines to slow progression. I'm very optimistic about that. Just so I have this for my notes, is the stock going to go up another 1,200% from here? Not 1,200, no. Let me just do some quick math. That would make it worth $11-discajillion, which I think is an unreasonable expectation. But the company is, when you get beyond this year, it's expected by Wall Street to grow its earnings per share at a mid-teens rate. It does have a premium valuation, the stock, but it's by no means a nutty valuation. So I think there's every chance that it could continue to perform with good growth from here. What did you hear from Blackstone?

I know Barron's has been writing a lot about their real estate fund limiting investor withdrawals. How'd that conversation go? It went well. It was our pal Andrew Barry at Barron's has written about, I don't know whether you say B-REIT or BREIT, but it's the Blackstone Real Estate Income Trust, and it's a non-traded REIT. In other words, it owns real estate and it makes money off the gains and the income from the real estate. And it doesn't trade like a regular REIT with a ticker symbol. You buy into it and you have to hold it for a certain amount of time. And what happened last year was regular traded REITs got crushed and the BREIT posted a positive return of 8% and change. And when you value real estate in a non-traded portfolio, you have to make judgments about the money the real estate produces and that sort of thing. Andrew basically said, given the sell-off

in traded REITs, this is a good opportunity to shift money there because you're getting these discounts. He wrote that in August of last year. And there were really elevated redemptions. At one point, Blackstone put some caps or controls on the redemptions. There was also a big high-profile investment. The University of California stepped in this month with a $4 billion investment. So a vote of confidence there. So Barron's editor, Dave Cho, spoke with Steve about this. And he said, basically, yeah, the REIT was up 8% and changed last year. It's because cash flow was up 13%. He said, the reason that cash flow has done so well is because Blackstone has favored the pockets of real estate that have really performed well, especially warehouses and apartment buildings.

And it has had less exposure to ones that have struggled, like office buildings. He also said that the fund hedged 90 percent of its portfolio against interest rates. So he said in his words, as interest rates go up, other types of real estate get hurt. Ours keeps making more and more money, was the way he put it. So, you know, I was grateful that he stopped by and made the case there. And we asked him more broadly about the economy and what he thinks will happen. He said that during the pandemic, savings really ballooned. People weren't out spending, so they had a lot of money stored up, and they have begun spending it, and they spent about half of it,

which has helped certain parts of the economy. The Federal Reserve has been raising interest rates, which you would think would slow the economy. And they say they're going to keep rates high for a prolonged period. And in Steve's words, he says, They want to see what happens when the consumers run out of money. And then I think you should have a dip. I don't know what to make about Blackstone stock.

I wrote about it in Barron's close to six years ago. A favorable story. It was $29 then. It shot up to $140 near the end of 2021. Now, last I saw it, it was $84 because of this sort of broad investment weakness and some of the redemptions at the B REIT. So where it goes from here is less clear. I can tell you for sure that Steve's right about one thing today. When he was on stage, he showed up with a jacket, tie,

and these big clompy boots. That's what you need. That's when you're a Davos veteran, that's what you wear. It's a mark of a true deal maker. This episode is brought to you by RBC Student Banking. Here's an RBC student offer that turns a feel-good moment into a feel-great moment. Students, get $100 when you open a no monthly fee RBC Advantage Banking account, and we'll give another $100 to a charity of your choice. This great perk and more, only at RBC. Visit rbc.com slash get 100, give 100. Conditions apply. Ends January 31st, 2025. Complete conditions apply ends january 31st 2025 complete offer eligibility criteria by march 31st 2025 choose one of five eligible charities up to

500 000 in total contributions hey guys back at the playground again huh yep you know what this playground could use a wine country heck. Heck yeah. And some waves. So we could go surfing. Oh, yeah. Ah, love that. A redwood forest would be cool.

I'm in. Ah, ski slopes. Let's do it. Um, can a girl go shopping? Yeah, baby. Wait. Did we just invent

California? Discover why California is the ultimate playground at visitcalifornia.com. All right. So last you talked to Adina Friedman, CEO of NASDAQ. Yeah. NASDAQ has gotten to the point.

Adina has been on the podcast before. They've gotten to the point where when you think of NASDAQ, what do you think of? You think of people saying, hey, what's NASDAQ doing? They want to know what tech stocks are doing. So the index. People say, hey, what's NASDAQ doing? They want to know what tech stocks are doing. So the index.

You think of a stock market and so a lot of transaction revenue and revenue must go up a lot during good times and come down quickly. And they have a listings business, right? Companies paid a list there. NASDAQ has gotten to the point where three quarters of that company's revenue is recurring. So my conversation with Adina, it sounded like I might have been talking with a Silicon Valley chief because there's a lot of talk about SaaS, right? Software as a service. The company's basically figured out ways to make money on its marketplace technology, on its data and analytics, on all these different things. And so they're coming up with new

businesses, basically. One of those is anti-financial crime. Adina says there's $4 trillion a year of laundered money in the financial system, and that only 1% of it is detected successfully. But you can take this data from banks and everywhere else, and you can analyze it, and you can look for patterns when you're getting the data all together. And so NASDAQ is performing this service and selling it to financial institutions who really want to figure this stuff out, because they don't want to be on the hook for these sorts of problems going forward. They're also doing a business with ESG investing. We've talked about this, environmental, social, and governance factors. So you buy an index fund and the index fund selects

only these companies that are doing the right kinds of things in terms of their behavior or who are not doing the wrong things. And that has become a wildly popular type of investing. A lot of money is poured into there. And so companies have to report these ESG factors. They have to say what they're doing. But there's not really a good standard for doing it. So NASDAQ has another business where they will advise companies on their ESG reporting. So we said, OK, let's start at least advising them on how to manage their ESG programs, establish those programs, disclose their information the right way, get investors to understand it. And then we've actually added in now some reporting tools that really help them

bring it all into one place. We normalize it. We send it out to all their different rating agencies and metrics providers, and we do it in a way that makes it easier for them. And they get to then store all their ESG related information and they can refer back to it and look at trends. They want to become basically the gatekeeper of this new type of investing that's become so popular about how companies do the reporting on these factors. What do you think that stock looks like? And is NASDAQ listed on the NASDAQ? What do you think that stock looks like? And is NASDAQ listed on the NASDAQ? NASDAQ is listed on the NASDAQ. I think the stock looks like it's gone up a heck of a lot since Adina took over as CEO in 2017. It's up a little over 200%. So it's done twice as well as the market. And that's after backing off a little bit. A lot of things have

backed off with NASDAQ. Even though three quarters of that revenue is recurring, there's still that quarter that depends on transaction volumes. And there's concern out there about the economy and about transaction volumes. So, you know, the stock has sold off a little bit. It's about 22 times this year's earnings estimate. So are you a Davos convert now? Are you coming back next year?

The world needs to know. I mean, am I a convert? I think there's a lot of... Do you take back anything you said? I mean, you know, yeah, I better take back all of it because, you know, the boss sent me and he might be listening. No, I think there were a lot of productive things that went on there. I think that part of it, talking with company leaders, you know, Barron's being there and talking with companies and especially with conversations that are focused on commerce and investing and things like that with some sprinkling of how can companies do better things with their activities. I think that's helpful. I thought it was productive and useful.

Did you get a sense of whether this Davos was particularly productive? I think, first of all, Davos went from a thing that no one had heard of to a thing that everyone had heard of. And it became synonymous with all these big corporate leaders showing up and it was the place to go. And it reached sort of peak pomposity. And I think that that was, I'm going to say like several years ago, a few years ago. And that's when I wrote my Davos column during peak pomposity. Now, what has happened since then? Well, there's been a little bit of humbling across the financial world. But I also think that with this movement, this ESG investing movement, or whatever you want to call it, where there's this new conversation about sustainability and the environment and social responsibility,

that sort of thing. I think we are hitting or we have hit the 2.0. Let's call it do-gooder 2.0. Do-goodism is a good idea, right? But you got to go about it the right way. And I think early on, it was a little flimsy in terms of how you do the scorekeeping. And I think there were a lot of companies running around saying, hey, we're doing good too. And it became hard to compare. And also, there were things companies or people were doing or calling for that maybe weren't quite realistic. I think that the wild spike we saw in the price of oil and in fuel prices, and I think the shortages that we saw during the pandemic have got people thinking, okay, we need to do our best to make the world a better place, but we have to be realistic about

the resources that people are going to need in the near term and our need for companies to provide those. So my sense is that Davos now is coming into its stride with this do-gooder 2.0. I think people are getting a little more targeted and a little more realistic about some of the things that they want to do. Hopefully they can also be bold and ambitious at the same time. I think that's a good slogan. I'll get a do-gooder 2.0 t-shirt. The tagline could be, we still got to make money too. It just rolls right off the tug.

Thank you for listening. And thank you to, let's see, Mark and Fred and Steve and Adina. You know, Jackson, the Swiss people couldn't have been lovelier. The woman at the airport and the official, you know, said where were you in Switzerland? What were you there for? And I said Davos. And she

kind of raised an eyebrow and she said did you fix all of the world's problems yet? Like that. So I think she you know, she's doing a little wisecracking problems yet? Like that. So I think she, you know, she's doing a little wisecracking herself. Didn't smile.

And I said, you got to get her on the podcast. It was Thursday when I was leaving. And I said, no, that would have taken until Friday. That did not get a smile. Next year.

There's always next year, next year. I'm hopefully I'm going to get her again. I'm going to have some material ready. See you next week.