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✨ Post-Breakup Glow-Up

✨ Post-Breakup Glow-Up

Plus, Starting With the Man in the Mirror.

February 25, 2024

Happy Sunday to everyone on The Street.

We’re approaching the final day of the month, which means it’s almost time for The Last Cast Letter. For those of you who don’t know, we write a monthly newsletter focused on fascinating trends in the real estate space. This newsletter is also a way for you to participate in direct real estate investments.

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Review

This past week was all about Nvidia, which announced exceptional earnings and a rosy outlook bolstered by its expanding AI division. Despite the hype the company still managed to beat expectations.

The chipmaker's shares soared about 20% in the two sessions following the earnings announcement on Feb. 21, propelling Nvidia’s market capitalization beyond the $1.9 trillion mark.

This remarkable ascent in Nvidia's stock value propelled the broader stock market to unprecedented levels, with the S&P 500 index breaking the 5,100-point barrier and the Nasdaq 100 index surpassing the 18,000-point threshold.

Amid Nvidia’s record-breaking performance, particularly in AI, several stocks and ETFs were positioned to benefit. Notable mentions included C3.ai, Advanced Micro Devices, and specific ETFs with exposure to Nvidia and related tech sectors.

Jensen Huang, CEO of Nvidia, predicted “AI factories” would revolutionize industries globally by transforming data into valuable outputs, like those generated by AI chatbots. Nvidia’s advancements, particularly in AI chips where it holds a 70% market share, position the company at the forefront of this industrial shift.

Meanwhile, the Federal Reserve’s recent minutes revealed a cautious approach toward rate cuts, emphasizing vigilance against inflation. They expressed concerns over premature policy easing, highlighting commercial real estate vulnerabilities. The focus remained on achieving a sustainable 2% inflation target, with policy adjustments to be data-driven.

The U.S. marked the second anniversary of Russia’s invasion of Ukraine by imposing sanctions on over 500 Russian entities. Targeting the military-industrial complex and third-country companies aiding Russia’s war efforts, this move was part of a broader strategy to apply economic pressure in response to the conflict and associated human rights violations.

Lastly, in 2023, Bill Ackman‘s Pershing Square realized $610 million, ranking seventh among top hedge fund managers. Focusing on just eight stocks, his fund achieved a 26.7% return, led by significant gains from Chipotle and other large-cap stocks.

Preview

Economic Data

Monday: New home sales
Tuesday: Durable-goods orders, consumer confidence, S&P Case-Shiller home price index (20 cities)
Wednesday: GDP (first revision), Advanced retail inventories, Atlanta Fed President Raphael Bostic speaks.
Thursday: Initial jobless claims, personal income, personal spending, PCE index, pending home sales,
Friday: S&P U.S. manufacturing PMI (final), ISM Manufacturing, Construction spending, Consumer sentiment (final)

Earnings

Monday: Li Auto, Archer Aviation
Tuesday: American Hotel Income Properties, Cracker Barrel Old Country Store, Bumble, Beyond Meat, RedFin, Compass
Wednesday: AMC Entertainment Holdings, C3ai, Advance Auto Parts, Monster Beverage Corp
Thursday: Artis Real Estate Investment Trust, Autodesk Inc, Best Buy
Friday: Quaker Chemical Corp, CubeSmart, FuboTV

Post-Breakup Glow-Up

Focusing on Money Management Earnings

DigitalBridge Group (DBRG) has transformed itself from a real estate investment trust into a private-equity business. The company is hoping investors like the new look.

At one point, DBRG was among the biggest private cell tower operators in the US. In 2013, it sold that arm of business to American Tower (AMT). Lately, the company has been trying to get data center operations off its balance sheet as well.

Executives believe a push into private equity and a focus on money management earnings will generate more growth.

Not Just Real Estate

One challenge for DigitalBridge has been getting investors to see it as an asset-management business rather than a REIT.

Competitor Blackstone (BX) trades at more than 25 times its annual fees. With a seat among other alternative-asset managers, Barron’s argues that DBRG stock might have a 20% upside.

An analyst at Raymond James says investors have been paying too much attention to real estate holdings within DBRG. They should be paying more attention to fee growth from asset management.

Show Me the Numbers

Fee-earnings equity at DigitalBridge has ballooned from $7 billion to $30 billion in the last two decades. Zooming in, fee-earning assets grew 46% from September 2022 to September 2023.

However, revenue from fees can be volatile, and competitors like Blackstone can make private equity a tough business.

Time will tell if DigitalBridge can hit its growth targets and pave the way for itself in the private equity realm.

DBRG currently trades at around $20 per share. Where will it trade at the end of the year?

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Get Your Head on Straight

Tackling the Mental Health Crisis

Medical companies are focusing their attention and resources on mental health.

According to researchers, one in eight people around the world has a mental health disorder. 28% more people reported having anxiety and depression in 2020 versus 2019, largely due to the Covid-19 pandemic.

Deloitte expects the market size for neuropsychiatric treatment to increase from $99 billion in 2022 to nearly $122 billion in 2026. Due to the crisis and the opportunity, big pharma is now focusing more on the issue.

Big Pharma Gets Bigger

Acquisitions in the sector have ramped up as companies work together to formulate and test new mental health treatments.

AbbVie (ABBV) announced it was acquiring Cerevel Therapeutics (CERE) in December. Cerevel is currently working on drugs to address schizophrenia and Alzheimer’s disease. Since the announcement, AbbVie stock has risen 23% and Cerevel stock rose 20%.

In the same month, Bristol-Myers Squibb (BMY) revealed its plans to acquire Karuna Therapeutics (KRTX) in a $14 billion deal. Karuna has a treatment coming out later this year to address schizophrenia. After the announcement, Karuna stock rose almost 48% while Bristol-Myers Squibb dipped 3%.

Zooming in on the Little Guys

Investment opportunities also lie within smaller and mid-sized healthcare companies.

Tema ETFs recently started a Neuroscience and Mental Health ETF (MNTL). A portfolio manager says “breakthrough therapies” could come from small and mid-cap companies.

The fund includes Acadia Healthcare (ACHC), which has behavioral health treatment sites. Another stock in the fund is Talkspace (TALK) which offers online therapy.

Awareness of mental health issues and treatments is growing around the globe. With more money pouring in from investors more breakthroughs might be ahead.

Which stock are you most optimistic about?

Starting With the Man in the Mirror

Silver Lining Among Military Stocks

Despite ongoing conflicts in Ukraine and the Middle East, military stocks have not seen much growth.

However, Barron’s sees one military stock standing out from the rest. L3Harris (LHX) doesn’t build things like jets and planes. It produces technology such as advanced radar and navigation systems.

The stock is up 2.23% this year, far below the overall stock market.

Investors are hoping L3Harris can change that, with some help from an activist investor.

Shaking Things Up

L3Harris has a market value of around $40 billion, making it the 6th largest US military contractor. In 2023 the company acquired Aerojet Rocketdyne, adding rocket engine manufacturing to its arsenal.

Chris Kubasik, formerly of Lockheed Martin (LMT), took over as CEO in 2021. Since then shares have returned just 1%, hampered by inflation and fixed-price contracts hurting margins for the entire sector.

Enter D.E. Shaw.

The activist investor fund bought a stake in the company late last year. Now the company is undergoing a business review to improve overall performance.

Positive Signs

The review seems to be working. L3Harris’ fourth quarter earnings beat expectations. Operating profit margins are expected to slightly improve from 2023’s 14.8% to 15%.

That’s why Rob Stallard of Vertical Research Partners has the stock rated as a “buy” with a $240 price target, representing a 14% upside.

Currently, L3Harris stock is trading around 16 times EPS. The company has a goal of around 14% annual earnings growth for the next 3 years. If it succeeds, analysts believe the stock would be worth 20 times its EPS, or around $280 per share.

Even within a lagging sector, L3Harris is addressing its internal problems to maximize earnings. This could be good news for investors.