Barron FEB 2021

STOCKS BOUNCE BACK TO NEW HIGHS • PAGE M1

VOL. CI NO. 6 FEBRUARY 8, 2021 $5.00

THE OTHER PANDEMIC

Covid-19 is exposing costly
gaps in the treatment of
Alzheimer’s disease.

That threatens livelihoods—
and the broader economy.

Is a breakthrough drug
on the horizon?

PAGES 22, 28

>

63142

CONTENTS 02.08.21 VOL.CI NO.6

P. 12 P. 21, M6 P. 33

The Math Isn’t All in Bright Prospects for Platinum Funds: The Problem
Robinhood’s Favor With Active Winners
The precious metal’s role in the green economy and its relative scarcity suggest that
Follow-Up: Robinhood’s path to platinum prices could rally sharply. Here are five ways to play it. By ANDREW BARY By EVIE LIU
going public is likely to highlight
the investing app’s impressive Commodities: The Reddit-triggered surge in silver prices was a mere blip compared P. 34
growth—but also the risks it faces. with the upside potential for the supply-squeezed metal. By MYRA P. SAEFONG
Tech Trader: Amazon
By AVI SALZMAN Pedal to the Metals in the Post-Bezos Era

P. 13 Helped by a surge in retail trading, silver prices rallied at the start of this past week, but then By ERIC J. SAVITZ
faded. Among the precious metals, platinum may be the best poised for future gains.
This Little Piggly P. 36
Had a Short Squeeze Gold Futures Silver Futures Platinum Futures
Q&A: Talking With
Barron’s Centennial: Nearly 100 20% Savita Subramanian
years before GameStop, Piggly
Wiggly investors took on Wall 15 By LESLIE P. NORTON
Street. It worked—until it didn’t.
10 P. 38
By KENNETH G. PRINGLE
5 Economy: A Slog Until
P. 14 Vaccinations Rise
0
You Can Rest Easy By MATTHEW C. KLEIN
With Hilton Stock -5
P. M1
Hilton Worldwide Holdings looks -10
better positioned than rival hotel Trader: Reopening
chains for a post-Covid bounce, -15 Hopes Lift Stocks
thanks to its “asset light” model.
Sept. 2021 -20 By BEN LEVISOHN
By LAWRENCE C. STRAUSS 2020 Source: FactSet
P. M4
P. 16 Index P. 4 P. 25 P. 6
Euro Trader: Danone
The Price Is Right Review & Preview P. 10 On the Front Lines of Up & Down Wall Street: Is Told to Shape Up
for Casey’s Shares a Devastating Disease Bonds Send a Message
Mailbag P. 39 By PIERRE BRIANÇON
With its reliable growth and Alzheimer’s specialist Dr. Jason By RANDALL W. FORSYTH
promising outlook, convenience- Inside Scoop P. M7 Karlawish says new approaches P. M4
store chain Casey’s General Stores are needed as the population ages. P. 9
is a rarity among retailers. Charting the Market P. M9 Emerging Markets:
By RESHMA KAPADIA Streetwise: What’s Why Myanmar Matters
By TERESA RIVAS Winners & Losers P. M10 Working in REITs
P. 27 By LIZ MOYER
P. 18 Research Reports P. M11 By JACK HOUGH
Trouble With Money P. M5
Change Is Coming to Market View P. M12 Is an Early Red Flag P. 19
Financial Regulation Striking Price: How to
Cover Illustration by How financial advisors can help Income: Utility Stocks Use Options Wisely
Investors could benefit from more Jess Suttner families navigate Alzheimer’s. With Attractive Payouts
clarity on ESG metrics and other By STEVEN M. SEARS
data, while the financial-services © 2021 Dow Jones & Company, By BEVERLY GOODMAN By LAWRENCE C. STRAUSS
industry can expect stricter rules. Inc. All Rights Reserved. Barron’s Roundtable
P. 28 P. 31 on Fox Business
By ELEANOR LAISE Our newspapers are 100% sourced
from sustainable certified mills. Biogen’s Alzheimer’s Profile: Betting Big on Watch our TV show Saturday at
P. 22 Drug Faces a Big Test a Robust Consumer 10 a.m. or 11:30 a.m. ET, or Sunday
BARRON’S (USPS 044-700) (ISSN at 7 a.m., 10 a.m., or 11:30 a.m. This
A Wake-Up Call on 1077-8039) Published every The FDA’s decision will determine By LEWIS BRAHAM week, see an interview with White
Alzheimer’s Disease Monday. Editorial and Publication whether the stock soars or dives. House economic adviser Jared
Headquarters: 1211 Avenue of Bernstein, discussing the outlook
Cover Story: The shortcomings the Americas, New York, N.Y. By JOSH NATHAN-KAZIS for a Covid-19 relief package.
in the care and treatment of 10036. Periodicals postage paid at
Alzheimer’s have become even Chicopee, MA and other mailing
more glaring in the Covid-19 era. offices. Postmaster: Send
address changes to Barron’s, 200
By RESHMA KAPADIA Burnett Rd., Chicopee, MA 01020

February 8, 2021 BARRON’S 3

Income strategies as
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The Refinitiv Lipper Fund Awards are based on the Lipper Leader for Consistent Return rating, which is a risk-adjusted performance measure calculated over 36, 60 and 120 months. Lipper Leaders fund ratings do not constitute and are not intended to constitute investment advice or an offer to sell or the
solicitation of an offer to buy any security of any entity in any jurisdiction. For more information, see lipperfundawards.com. Lipper Fund Awards from Refinitiv, ©2021 Refinitiv. All rights reserved. Used under license. The award is based on a review of risk-adjusted performance of 33 companies for 2020.
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not take into account the specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on an investor’s objectives and circumstances and in consultation with his or her advisors.

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Nuveen Securities, LLC, member FINRA and SIPC. 20854 GAD-1134692CR-W0420X

4 BARRON’S February 8, 2021

INDEX Our index lists significant companies mentioned in stories and columns, For Customer Service, call 1 (800) 544-0422, or go to
plus Research Reports, and Corrections & Amplifications. The references customercenter.barrons.com. For reprints of articles,
are to the first page of the item in which the company is mentioned. call 1 (800) 843-0008, or go to djreprints.com.

A Adidas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . M4 GW Pharmaceuticals . . . . . . . . . . . . . . . . . . . . . . M9 K Kellogg . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Mitsui . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . M4
AES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . M3 KKR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Molson Coors Beverage . . . . . . . . . . . . . . . . . . . . 11
Akzo Nobel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . M11 H Hasbro . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Koss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Monarch Casino & Resort . . . . . . . . . . . . . . . . . 32
Align Technology . . . . . . . . . . . . . . . . . . . . . . . . . M9 Hilton Grand Vacations . . . . . . . . . . . . . . . . . . . . 14 Kraft Heinz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,11 Moody's . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Alimentation Couche-Tard . . . . . . . . . . . . . . . . . 16 Hilton Worldwide Holdings . . . . . . . . . . . . . . . . 14 Morgan Stanley . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Alphabet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,34 H&M Hennes & Mauritz . . . . . . . . . . . . . . . . . . M4 L Laboratory of America Holdings . . . . . . . . . . . 11
Amazon.com . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,34 Hormel Foods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Loews . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 N Nestle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . M4
AMC Entertainment Holdings 10,12,13,M3,M9 Newmont . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,21
American Water Works . . . . . . . . . . . . . . . . . . . . 19 I IBM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 M Marriott International . . . . . . . . . . . . . . . . . . . . . 14 NextEra Energy . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Anglo American Platinum . . . . . . . . . . . . . . . . . . 21 Illumina . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Martin Marietta Materials . . . . . . . . . . . . . . . . . 11 Nike . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Apple . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Impala Platinum Holdings . . . . . . . . . . . . . . . . . 21 Marubeni . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . M4 Novavax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . M1
AstraZeneca . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 MGM Resorts International . . . . . . . . . . . . . . . . 11
Atmos Energy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 J Johnson & Johnson . . . . . . . . . . . . . . . . . . . . 10,M1 Microsoft . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 O OneSpaWorld Holdings . . . . . . . . . . . . . . . . . . . . 32
Aviat Networks . . . . . . . . . . . . . . . . . . . . . . . . . . . M7 Oracle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Axonics Modulation Technologies . . . . . . . . . M7 Rupert Murdoch Executive Chairman, News Corp O'Reilly Automotive . . . . . . . . . . . . . . . . . . . . . . . . 11
Robert Thomson CEO, News Corp Almar Latour CEO, Dow Jones
B Baker Hughes . . . . . . . . . . . . . . . . . . . . . . . . . . . . M7 P Park Hotels & Resorts . . . . . . . . . . . . . . . . . . . . . 14
Barrick Gold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 SENIOR VICE PRESIDENT, BARRON’S GROUP Mae M. Cheng PayPal Holdings . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Biogen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 ASSOCIATE PUBLISHER, BARRON’S GROUP Dan Shar Peloton Interactive . . . . . . . . . . . . . . . . . . . . . . . . . . 9
BlackBerry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . M3 PepsiCo . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,M4
Blackstone Group . . . . . . . . . . . . . . . . . . . . . . . . . . 14 MANAGING EDITORS, BARRON’S GROUP Duncan Mavin, Dave Pettit Philip Morris International . . . . . . . . . . . . . . . . . 11
Boeing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 HEAD OF INTERNATIONAL, BARRON’S GROUP Francesco Guerrera Plantronics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . M9
BorgWarner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Pool Corp . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Boston Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 EXECUTIVE EDITOR Bob Rose SENIOR MANAGING EDITOR Lauren R. Rublin Prologis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Build-A-Bear Workshop . . . . . . . . . . . . . . . . . . . M7
DEPUTY EDITOR Alex Eule DEPUTY EDITOR Ben Levisohn S Sage Therapeutics . . . . . . . . . . . . . . . . . . . . . . . . . 28
C Canada Goose Holdings . . . . . . . . . . . . . . . . . . . M9 EDITORIAL DIRECTOR, INVESTING & ASSET MANAGEMENT Beverly Goodman Salesforce.com . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Carrier Global . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Samsonite International . . . . . . . . . . . . . . . . . . . M4
Casey's General Stores . . . . . . . . . . . . . . . . . . . . . 16 EDITORIAL DIRECTOR, MAGAZINE Phil Roosevelt Saudi Arabian Oil . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Cassava Science . . . . . . . . . . . . . . . . . . . . . . . . . . M9 Sempra Energy . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Centene . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 MANAGING EDITOR, DIGITAL Matt Bemer MANAGING EDITOR, FEATURES Jeffrey Cane Seven & I Holdings . . . . . . . . . . . . . . . . . . . . . . . . 16
CenterPoint Energy . . . . . . . . . . . . . . . . . . . . . . . 19 MANAGING EDITOR, ENTERPRISE Brian Hershberg Sibanye-Stillwater . . . . . . . . . . . . . . . . . . . . . . . . . 21
Cerner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Simon Property Group . . . . . . . . . . . . . . . . . . . . . 11
Charles Schwab . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 ASSISTANT MANAGING EDITORS Mary Romano, Robert Sabat Sony . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Chevron . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,M4 S&P Global . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Cisco Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 ASSOCIATE EDITORS Andrew Bary, Randall W. Forsyth, Jack Hough, Reshma Kapadia, Eric J. Savitz Steel Partners Holdings . . . . . . . . . . . . . . . . . . M7
Clorox . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . M2 Sumitomo . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . M4
Clover Health Investments . . . . . . . . . . . . . . . . M9 SENIOR WRITERS Bill Alpert, Daren Fonda, Matthew C. Klein, Leslie P. Norton,
CME Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,11 Al Root, Avi Salzman, Alexandra Scaggs, Lawrence C. Strauss T Take-Two Interactive Software . . . . . . . . . . . . 11
CMS Energy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Teradata . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . M9
Coca-Cola . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 REPORTERS Lisa Beilfuss, Luisa Beltran, Max A. Cherney, Carleton English, Nicholas Jasinski, Evie Liu, Texas Instruments . . . . . . . . . . . . . . . . . . . . . . . . M7
Josh Nathan-Kazis, Teresa Rivas, Connor Smith, Jacob Sonenshine, Ben Walsh Tikkurila . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . M11
D Danone . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . M4 Tilray . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . M9
DaVita . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 STORY EDITORS Henry Cutter, Ed Lin, Erin McCarthy Toshiba . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . M7
Dominion Energy . . . . . . . . . . . . . . . . . . . . . . . 11,19 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . M4
DTE Energy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 COPY DESK Michael J. Burlingham, Richard Rescigno, Robert Teitelman Twitter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Duke Energy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Tyson Foods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Duke Realty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 IDEAS EDITOR Matt Peterson
DuPont . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 U Uber Technologies . . . . . . . . . . . . . . . . . . . . . . . . . 11
DEPUTY DIGITAL MANAGING EDITOR Zoe Szathmary Under Armour . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
E Eisai . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Unilever . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . M4
Eli Lilly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 SENIOR AUDIO MANAGER Mette Lützhøft DIGITAL PRODUCERS Robert Cushing, Clare McKeen
Enbridge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 V Vaxart . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . M9
Equinix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 DESIGN DIRECTOR Chris Mihal ART DIRECTORS Robert Connolly, Nick Hallam, Sue Ng Vera Bradley . . . . . . . . . . . . . . . . . . . . . . . . . . . . . M4
E*Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 DIRECTOR OF PHOTOGRAPHY Sarina Finkelstein PHOTO EDITORS Sam Kelly, Nicole Silver Vornado Realty Trust . . . . . . . . . . . . . . . . . . . . . . . 9
Etsy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Expedia Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 RESEARCH DIRECTOR Pauline Yuelys RESEARCHER Dan Lam W Walt Disney . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Exxon Mobil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 W.R. Grace . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . M7
STATISTICS MANAGER Michael T. Kokoszka STATISTICIAN Darren Chima
F Facebook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Fidelity National Information Services . . . . . 11 MANAGER, ADVERTISING SERVICES James H. Balmer ASSOCIATE MANAGER Ward S. McGuiness
First Majestic Silver . . . . . . . . . . . . . . . . . . . . . . M9 NEWS [email protected] STATISTICS [email protected] CUSTOMER SERVICE 800-544-0422
Fiserv . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Ford Motor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 GLOBAL HEAD, WEALTH & ASSET MANAGEMENT Jack Otter

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February 8, 2021 BARRON’S 5

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6 BARRON’S February 8, 2021

UP & DOWN WALL STREET The stock-market frenzy helped executives and
founding family members of Koss Corp. reap a
Bonds Send Message: reported $45 million in profits on their shares.
Inflation Is Coming

T he stock market has By Randall W. top tick, selling mostly at $20 to $60 a It was another week of fierce—and often illogical—ups and downs on Wall Street.
been the path to Forsyth share. But that still was better than
wealth for genera- Friday’s close of $19.98—more than
tions of American two-thirds below where the stock had most sharply upwardly sloped in years. kets seem to be pricing in, which NYSE
families. That’s even ended a week earlier. That’s a result of longer-term yields means that any shortfall in a recovery
though only about climbing, with the benchmark 10-year would be a surprise. So far, 2021 has
half of them have This isn’t meant as a criticism of note ending the week at 1.17%, near the been full of them.
shares; in fact, the richest 1% of U.S. these opportunistic sellers. Nothing high end of its recent trading range, and
households account for more than half could be more rational than to hit a the 30-year bond at 1.98%, nearing 2% C entral bankers routinely
of the equities ownership, according to crazy bid. The irony is that much of the for the first time in about a year. deny any connection be-
Federal Reserve data. In most cases, the frenzied buying of stocks of seemingly tween their monetary poli-
route that has been taken is to buy limited value was done through the This is a classic indication that the cies and asset prices, even
shares in companies. But for a few, the Robinhood brokerage. Who would have bond market is anticipating stronger though that’s how those policies are
way has been to sell out. thought that an outfit with that moniker economic growth and higher inflation. transmitted to the real economy. “Pay
might be a party to giving to the rich, Those expectations got a boost Friday no attention to that man behind the
Take the Koss family, which controls who sold wisely and well, and taking after both houses of Congress voted to curtain,” they all but insist, as the light-
the eponymously named Koss Corp. from the poor buyers who didn’t? begin the process of approving Presi- ning and smoke jumps and hisses while
(ticker: KOSS), best known for popular- dent Joe Biden’s $1.9 trillion fiscal re- they manipulate the controls, believing
izing stereo headphones back when The comedown in stocks that had lief plan without votes from congres- that they’re shrouded from view.
boomers were young. Since then, its been driven to crazy heights was en- sional Republicans.
offerings largely have been left behind tirely predictable. As I wrote here a So it wasn’t surprising that Federal
by the likes of Sennheiser and Sony week ago, inflated quotes invariably Friday’s employment report was Reserve Chairman Jerome Powell, at
(SNE) models favored by audio profes- attract sellers. An old saying in the disappointing, however, with a his recent press conference, pointed to
sionals, and the ubiquitous AirPods commodities markets is that the cure smaller-than-expected 49,000 increase other factors for the rallying stock mar-
from Apple (AAPL) and noise-cancel- for high prices is high prices. Its wis- in nonfarm payrolls in January, and ket, including the convulsions in names
ling models from Bose popular with dom was driven home after a short- December’s job loss revised to 227,000 such as GameStop and the expected
those who value convenience over ulti- lived spike in silver this past week, from the 140,000 originally reported. positive effects from Covid-19 vaccines
mate sound quality. based on the misguided notion (which The unemployment rate fell to 6.3% and fiscal stimulus.
quickly faded) that a short squeeze last month from 6.7%, but mainly be-
But the Koss clan, plus other com- could be engineered in the metal. cause of lower labor-force participa- But when asked about the housing
pany insiders, last week were cashing tion. The uninspiring data could bol- market—specifically, the jump in prices
in on the jump in the price of their In any case, the stock market closed ster the argument for fiscal action. and what pace of increase might induce
microcap company’s shares, which out another winning week, with the a change in the Fed’s $40 billion
were caught up in the frenzy led by major averages posting their best The prospect of stimulus has some monthly purchases of agency mort-
the now-notorious GameStop (GME) showing since November. The S&P economists boosting growth esti- gage-backed securities—Powell de-
surge that’s moved all the way from 500, the Nasdaq Composite, and the mates, with Nancy Lazar of Corner- murred from connecting the two.
financial news to Saturday Night Live. Russell 2000 index of smaller stocks stone Macro now looking for the
ended at records. As some “meme economy to be expanding at a 7% He called the double-digit annual
As that frenetic action sent Koss stocks” hurtled back to earth, the Cboe pace by the fourth quarter, up from surge in home prices a “passing phe-
shares as high as $127.45 from around Volatility Index, aka the VIX, receded her previous estimate of 6%. That’s nomenon” related to the pandemic.
three bucks at the turn of the year, from above the 30 level that reflected what both the bond and stock mar- “There’s a one-time thing happening
various insiders took the money and the surge in risk, to the low-20 range
ran. As the Milwaukee Journal Senti- that had prevailed before the market
nel reported, the Kosses and Koss and the rest of the world took notice of
Corp. executives made more than $45 the likes of GameStop.
million selling shares—a sum exceed-
ing the company’s stock-market value Yet the fundamentally more impor-
at the end of 2020. tant financial development was, as
usual, in the bond market. The yield
Securities and Exchange Commis- curve—the graph of Treasuries from
sion filings show they missed the very short- to long-term maturities—is the

February 8, 2021 BARRON’S 7

Up & Down Wall Street Continued

with people who are spending all of their ate to a 14% year-over-year rate in 2021, G U I D E T O W E A LT H
time in their house. And they’re thinking from 11% in December and 6% a year ear-
either I need a bigger or I need another lier. The strongest gains will be in the top “This is when we
house, and a different house. Or a second and middle-high tiers favored mainly by really get to excel.”
house, in some cases. So there’s a one-time trade-up buyers. But the low and medium-
shift in demand that we think will get sat- low tiers, which attract mostly first-time The average Barron’s-ranked advisor
isfied, also that will call forth supply. And purchasers, are likely to see affordability has almost three decades of experience
we think that those price increases are suffer, even in regions that previously had and has thrived through adversity. Find
unlikely to be sustained for all of those been more affordable, it added.
reasons.” an advisor who has the experience to
As noted above, Powell has called the navigate uncertainty.
But Joseph Carson, former chief econo- home-price surge “a passing phenomenon”
mist at AllianceBernstein, observes that that “will call forth supply” to meet de- Visit the Guide to Wealth at
Powell also said “out of the other side of mand. The AEI contends that won’t be so barrons.com/guide
his mouth, ‘The housing sector has more easy. Restrictive land-use regulations in
than fully recovered from the downturn, states such as California are holding down NEW + IMPROVED!
supported in part by low mortgage interest housing construction. New supply is forth- New interface.
rates.’ ” Never did the Fed chief ever ad- coming in the South and Southwest, which More insights.
dress the question of throttling back the is attracting in-migration from the work- New finder tool.
central bank’s purchases of mortgage secu- from-home trend.
rities, Carson adds in an email. “How Top Advisors are Navigating the Crisis,” Barron’s. 3/19/20
Given all this, the AEI wonders what ©2020 Dow Jones & Company. All Rights Reserved. 2E210
The robustness of the housing and mort- justification there is for the Fed to continue
gage markets are amply evident, however. purchasing agency mortgage securities—
In December, sales of existing homes were effectively subsidizing an economic sector
more than 22% above the year-earlier level, that’s booming and thus putting houses
with the median price up 12.9%, to out of reach for many first-time buyers.
$309,800. New-home sales rose 19%, with
the median price rising 8%, to $335,900. Indeed, Steven Ricchiuto, chief econo-
mist at Mizuho Securities USA, expects
And the S&P CoreLogic Case-Shiller the Fed to begin to taper its purchases,
20-city composite home index prices were albeit not until the second half of 2022. He
up 9.1% in November—the latest month for looks for the central bank to reduce its
which a reading is available—from those a buying incrementally, while long-term
year earlier. rates rise, “to avoid excess speculation in
the housing market,” he writes in a re-
The mortgage market has been cooking search report. “Memories of the financial
as a result, with a record $4.04 trillion in crisis remain very fresh in the minds of
home loans originated last year, according regulators some 12-to-14 years after the
to a report that Carson passed along from fact,” he adds.
the American Enterprise Institute, a con-
servative-leaning think tank. Refinancings Meanwhile, the Fed will continue to
have been especially hot, the AEI says, help stoke home-price appreciation, which
with cash-outs up 55% and no-cash-outs won’t be fully reflected in government in-
up 185%, as homeowners took advantage flation data. As Joseph Carson pointed out
of record-low interest rates. in November, if the consumer-price index
actually captured the surge in home prices,
J.P. Morgan analysts predict that $500 it would be rising at about a 3% annual
billion in mortgage-backed securities will clip, twice the official calculation. But shel-
be issued this year by U.S. agencies, such ter costs are mainly influenced by rents,
as Ginnie Mae, Fannie Mae, and Freddie which have been depressed by the flight to
Mac, most of which would be absorbed by the suburbs and the urge to buy a house.
the Fed’s $480 billion annual agency MBS
purchases. The Fed’s $2.07 trillion MBS The Fed continues to pursue its goal of
portfolio throws off $80 billion a month lifting its favored inflation measure—the
that has to be reinvested—at a rate twice personal-consumption expenditures price
as much as its net new purchases—which index—so it averages over 2% for a period.
adds to the volume of securities being As the government measures it, the index
absorbed. was up only 1.3% in December from its
level a year earlier. By this criterion, Pow-
All of which has pushed mortgage rates ell & Co. are falling short of hitting their
to record lows—2.73% for a conventional inflation target, despite soaring house
30-year fixed-rate loan, a hair above the prices. But despite that contradiction, pay
nadir of 2.65% in late December, according no mind to what’s going on behind the
to Freddie Mac. Filling “the monetary curtain. B
punch bowl is fueling rampant home price
appreciation,” the AEI said. It looks for its email: [email protected]
home-price appreciation index to acceler-

8 BARRON’S February 8, 2021

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February 8, 2021 BARRON’S 9

STREETWISE Peloton will spend $100 million on expedited
machine shipments, which will cut into nascent
profits. That sounds like a high-class problem.

Back to the Office? shares at Neutral. pedited machine shipments, which
Among his top REIT picks for 2021 will cut into nascent profits. That
sounds like a high-class problem. So
are industrial players Prologis (PLD) why the selloff ?

and Duke Realty (DRE), both of BMO Capital Markets analyst Sim-
eon Siegel, who is bearish on the
Warehouse REITs which trade higher than before the stock, points out that Peloton beat
pandemic. Prologis yields a meager revenue estimates, but only by 2%.
2.2%, and Duke 2.5%, but Dilts sees And he says that the magnitude of its
upside surprises has been steadily
further share-price upside of 25% and declining, while management’s guid-
ance was barely above estimates.
Are the Place to Be. 13%, respectively.
Both companies specialize in ware- “Now a beat is a beat, and PTON is
clearly posting strong results,” Siegel
houses and distribution facilities, wrote in a Friday note to investors.
“However, given where shares trade,
Duke in the U.S., and Prologis world- as guides and/or beats slow, we worry
[the] share price will follow.”
wide. Covid-19 hurt store traffic last
Siegel notes that Peloton, some-
year, but overall spending rose, as times called the Netflix (NFLX) of
connected fitness, had recently traded
online shopping more than made up at 22% of the stock market value of the
streaming giant, but has only about
B ig-city office buildings for de-squishing. the difference. 1% of its subscriber base.
remain mostly empty, All told, he predicts an 8% decline E-commerce requires roughly three
but vaccinations are There is another, perhaps less im-
on the way. Should in office-space demand versus before times as much warehouse space as mediate threat. I spoke recently with
investors buy shares the pandemic. store-based retail. Sellers and manu- Scott Watterson, co-founder and chief
of office landlords facturers are also eager to build inven- executive of privately held ICON
now, while their Any back-to-work scenario would tories, following supply disruptions Health & Fitness, which makes fitness
compare well with now. Office build- from the pandemic and a trade war machines under brands like Nordic-
ings across 10 major cities are just Track and Proform. It has a software
platform called iFit, which allows us-
prices remain depressed and their 24% filled with workers, reckons Kas- with China. That means warehouse ers to participate in live training or
simulate runs and rides in exotic lo-
dividend yields plump? tle Systems, a security company. In demand is likely to outstrip new sup- cales worldwide.

Better to favor what is already By Jack Hough New York, the figure is 14%, and in ply in the years ahead, pushing rents Watterson told me that iFit is up to
five million members, a million of
working in real estate investment San Francisco, just 12%. well higher. Already, Dilts estimates, whom pay subscription fees. That
suggests that paying subscribers may
trusts, or REITs, says Brent Dilts, an If occupancy rebounds to some- market rents are 14% to 18% higher have tripled in a year and a half. Wat-
terson says customers today shop as
analyst with UBS. That means ware- thing below prepandemic levels, it than ones embedded in contracts for much for fitness software platforms as
for the machines. Part of ICON’s pitch
house owners. Their dividend yields might take years to be fully reflected Prologis and Duke. is that with a single fee, users can con-
nect to its treadmills, bikes, rowers,
won’t impress, but they are riding an in market rents. For example, Boston ellipticals, and strength trainers.

e-commerce boom that is likely to Properties (ticker: BXP), the biggest P eloton Interactive (PTON), The connected-fitness boom and
drive future rents higher. U.S. office REIT, has an average the seller of big-screen exer- Peloton’s lofty stock valuation would
weighted lease term of over 11 years. It cise bikes and virtual classes, seem to invite ICON to pursue an ini-
One challenge for office landlords traded recently at $92, down from said Thursday evening that its tial public offering soon. Watterson
is that managers are growing happier had no comment on that.

with the performance of their remote over $140 a year ago, but up from the number of paying subscribers more If ICON does go public, Peloton
could find itself jostling not just for
workers. In a recent independent sur- mid-$70s before effective vaccines than doubled over the past year, to 1.7 fitness subscribers, but also to hold
onto its share of the affection of
vey of more than 1,000 hiring manag- were announced. The dividend yield million, counting just those who use growth investors. B

ers commissioned by Upwork, a jobs is 4.3%. Vornado Realty Trust its machines, plus another 625,000 if email: [email protected]

service for freelancers, 68% said (VNO), the No. 2 office REIT, pays users who pay a lower price for just its

things were going better than they even more: 5.7%. app are included.

were earlier in the pandemic, versus Dilts covers Boston Properties, and That sounds like excellent news,

just 5% who said things were getting expects shareholders over the next but the stock skidded 8% on Friday.

worse. year to be rewarded with their divi- The company will spend $100 mil-

Asked about plans for staffing five dends, and not much else. He rates the lion over the next six months on ex-

years from now, managers, on average,

said 37.5% of workers would be fully

or partly remote. That’s down from

56.8% today, but up from 21.2% before BARRONS.COM/PODCASTS

the pandemic. Barron’s Streetwise
Not to worry, office bulls say. Com-

panies will want more space for each

worker, reversing years of densifica-

tion, which will help to offset declines In a weekly podcast by Barron’s, columnist Jack Hough looks

in the number of office workers. But at the companies, people, and trends you should be watching.

the problem with that thesis, Dilts This is Wall Street like you’ve never heard before. Subscribe

says, is that the vaccines have proven to Barron’s Streetwise on Spotify, Apple Podcasts,

far more effective than initially ex- or your favorite listening app.

pected, which could cut into demand

10 BARRON’S 514.81 February 8, 2021

REVIEW 31,148.24 Dow Global Index: +21.75 1.17%

Dow Industrials: +1,165.62 10-year Treasury note: +0.08

Higher Ground HE SAID

Stocks rose, erasing the previous “Invention is the
week’s losses, fueled by the Nasdaq root of our success.
and tech. Earnings were strong, led by We’ve done crazy
record quarters from Alphabet and things together,
Amazon.com. Oil giants reported and then made
losses, including Exxon Mobil’s $20 them normal.”
billion. Ford Motor and General Mo-
tors were hit by a chip shortage. And Jeff Bezos on giving up the CEO’s job at
January saw a moderate pop in new Amazon.com to be executive chairman
jobs, after several months of declines.
For the week, the Dow industrials rose
3.9%, to 31,148.24; the S&P 500, hitting
another high, soared 4.6%, to 3886.83;
and the Nasdaq surged 6%, to
13,856.30, also a record.

LOGIC FADES FOR EXXON AND CHEVRON The Downside

Big Oil: Deal THE NUMBERS Hedge funds retreated from short
Or No Deal? plays on GameStop and other high
39.1% short-interest stocks, and prices and
Exxon Mobil and Chevron, the two largest U.S. oil volatility thudded to earth. Investors
companies, discussed a megamerger last year that Percentage of the alcohol bev- faced decisions on when, or if, to sell.
would leave the U.S. with one oil giant for the first time erage market by spirits, up from GameStop lost 80% and AMC Enter-
in decades, reports The Wall Street Journal. A deal 28% in 2000, and just behind tainment, 49%. Robinhood raised
would create a $300 billion or so company that could beer, at 44%. another $2.4 billion from investors—
produce seven million barrels of oil and equivalents a $3.4 billion in a week. Day traders on
day, making it the largest operator outside of Saudi $39 B Reddit, meanwhile, drove silver up to
Aramco. The Journal says talks are off, but could be its highest point in eight years, then
restarted. Both companies declined to comment. Amount raised in 116 initial pub- saw it slip as the CME Group applied
lic offerings in January, the high- higher margin requirements.
That the pair even considered merging is a sign of how est since Dealogic began count-
much the industry has changed. Talks reportedly began ing in 1995. Going Big apparently over disagreements on strat- Illustrations by Elias Stein; Andrew Harrer/Bloomberg
as oil prices collapsed last year. Prices have since re- egy and fees. Briefs from his new team
bounded. Analysts worried that Exxon’s cash flow would 610 President Biden met with GOP sena- argued it’s unconstitutional to impeach a
not cover its dividend, which happened in 2019 and 2020. tors who offered a relief plan one-third former president and it was his First
But higher prices and cost cuts may allow it to self-fi- S&P Global count of corporate the $1.9 trillion he had proposed; he Amendment right to express his election
nance the dividend. bankruptcies announced in suggested compromise was possible. suspicions. The trial starts on Tuesday.
2020 through Dec. 13, most Senate Democrats then cast the bill as a
In 1999, the merger of Exxon and Mobil led to a period since 2012. budget matter, thus allowing a straight Annals of Deal-Making
of growth. “There were big new [drilling] opportunities in majority to pass it. The administration
Venezuela, Qatar, Kazakhstan, and Angola that required $2.6 B says it will increase weekly Covid-19 The Wall Street Journal reported that
capital,” wrote Citi analyst Alastair Syme. “Mergers pro- vaccine allocations to more than 11 Exxon Mobil and Chevron discussed a
vided the industry with the balance sheets to compete.” 2020 online-broker revenue million, and use 40,000 drugstores to $300 billion merger last year. Talks were
from payment-for-order-flow. distribute them. Johnson & Johnson preliminary and could resume…The spe-
Today, big producers are cutting back and focused on applied for emergency-use authoriza- cial purpose acquisition company frenzy
reducing breakeven levels. And, as CFRA’s Stewart Glick- To get Numbers by Barron’s tion for its one-dose vaccine. continued. Former Boeing CEO Dennis
man wrote, a merger would be unlikely to drive pricing daily, sign up wherever Muilenburg plans to raise $200 million
power, with the new entity wielding only 7% of global oil you listen to podcasts or at A New Antitrust Front for a SPAC. Rocket maker Astra Space,
production, 15% of U.S. refining capacity. That said, Barrons.com/podcasts backed by Salesforce’s Marc Benioff and
stranger things have happened. Exxon took a huge loss in Sen. Amy Klobuchar, head of the anti- former Google CEO Eric Schmidt;
the last quarter, its fourth in a row. It’s facing a challenge trust subcommittee, introduced a Wheels Up, an online jet booker; Fertitta
from activist investors, and analysts are seeking ways to comprehensive rethinking of antitrust Holdings, parent of Golden Nugget casi-
improve results. Talks could restart. — Avi Salzman law, raising the pressure on Big Tech, nos and Landry’s restaurants; and DNA-
particularly Alphabet and Facebook, testing start-up 23andMe are merging
already facing federal lawsuits. with SPACs to go public...Kraft Heinz
may sell Planters Peanuts to Hormel
The Defense Foods.

Former President Trump lost one le-
gal team for his impeachment trial,

February 8, 2021 BARRON’S 11

PREVIEW Wednesday The Bureau of Labor Statistics releases the Sign up for the Review &
consumer price index for January. Economists Preview daily newsletter at
forecast a 1.5% year-over-year rise for both Barrons.com/reviewpreview
the CPI and core CPI, which excludes volatile food and energy prices.

Monday 2/8 Thursday 2/11

UNDER ARMOUR ENDING ITS NFL DEAL Getting Separation Global Payments, Hasbro, KKR, AstraZeneca, BorgWarner,
Loews, Simon Property Group, and DaVita, Duke Energy, Expedia
A Sports Brand Nike has significantly outpaced Under Take-Two Interactive Software Group, Illumina, Kellogg, Kraft
Calls Timeout Armour throughout the pandemic. report quarterly results. Heinz, Laboratory Corp. of Amer-
ica Holdings, Molson Coors Bev-
On Sunday, as Americans tune into Super Bowl LV—Brady Under Armour and Nike Shares, Past Year Tuesday 2/9 erage, PepsiCo, Pool Corp., Tyson
versus Mahomes—sportswear brand Under Armour will be Foods, and Walt Disney report
leaving the field. The Financial Times reported recently that Nike 75% Carrier Global, Centene, Cisco Sys- quarterly results.
the company would end its on-field licensing deal with the Under Armour 50 tems, DuPont, Fidelity National
National Football League, while contracts between indi- 25 Information Services, Fiserv, Mar- PayPal Holdings hosts its 2021
viduals and Under Armour would be reevaluated before next tin Marietta Materials, S&P Global, investor day.
season. Under Armour’s senior vice president of global 0 and Twitter release earnings.
sports marketing, Sean Eggert, confirmed that the contract The Department of Labor reports
wouldn’t be renewed. “We are in active conversations with -25 The National Federation of Inde- initial jobless claims for the week
the NFL to determine alternative opportunities that best pendent Business releases its Small ending on Feb. 6. Jobless claims have
serve athletes moving forward and to ensure the best [return -50 Business Optimism Index for January. averaged 835,000 a week in January,
on investment] for Under Armour,” he said in a statement. Consensus estimate is for a 97 read- equal to December, and an increase of
-75 ing, higher than December’s 95.9 fig- nearly 100,000 a week from Novem-
The move is part of Under Armour’s restructuring, which 2021 ure. The December reading was the ber. Much of the increase stems from
began before the pandemic, and has meant exiting contracts lowest since last May. “Small busi- business closures resulting from the
with major college programs and Major League Baseball. Source: FacSet nesses are concerned about potential still-elevated level of Covid-19 cases.
new economic policy in the new ad-
On Wall Street, that’s good news. Only a quarter of ana- ministration and the increased spread Friday 2/12
lysts are bullish on the shares, according to FactSet, yet of Covid-19” according to NFIB chief
recent results have increased confidence that the company economist Bill Dunkelberg. Dominion Energy, Enbridge, and
is rebounding from pricey deals, accounting questions, and Moody’s hold conference calls to
lackluster performance. Under Armour scored two up- The Bureau of Labor Statistics discuss quarterly results.
grades in January, and its stock is up 18.4% to $17.74 for releases its Job Openings and Labor
the week and still down 1.3% for the year. Turnover Survey for December. The University of Michigan releases
Expectations are for 6.6 million job its Consumer Sentiment index for
Jefferies’ Randal Konik reiterated a Buy rating this past openings on the last business day of February. Consensus estimate is for
week, while raising his price target by $2, to $25. He writes December, compared with 6.5 million a 79.5 reading, roughly even with the
that while Nike continues to dominate in times when com- in November. January data.
fort and athleisure reign, its shares have gotten rich. In
contrast, Under Armour benefits from the same factors, March Wednesday 2/10 Coming Earnings
and is “well-positioned for global long-term growth,” as 2020
management works to improve inventory and distribution Cerner, CME Group, Coca-Cola,
“and turn to the offensive.” — Teresa Rivas Age of Athleisure Equinix, General Motors, MGM Consensus Estimate Year ago
Resorts International, O’Reilly
The global market for sportswear Automotive, and Uber Technolo- M $4.52
has been growing steadily right gies announce quarterly results. 1.24
through the pandemic. Affiliated Managers (Q4) $3.71 1.63
Federal Reserve Chairman Jerome Hasbro (Q4) 1.14
Sportswear Market Worldwide, Powell speaks via teleconference at Take-Two Interactive (Q3) 0.94 1.23
2018 to 2022 the Economic Club of New York. 0.77
T 0.95
$300 billion Philip Morris International holds 0.10
its 2021 virtual investor day. Akamai Technologies (Q4) 1.31
Cisco Systems (Q2) 0.76
Newmont, the world’s largest gold DuPont de Nemours (Q4) 0.84
producer, hosts a conference call to Fox (Q2) -0.06
discuss the exploration of new mines.
The firm will also update investors on More Earnings on Page M36.
its reserves.
200 Consensus Estimate

Day Consensus Est Last Period

100 T JOLTS Job Openings 6,600,000 6,527,000
W January CPI 0.30% 0.40%
0.15% 0.10%
December Wholesale Inventories 80.8 79.0
F February Michigan Sentiment - p

Unless otherwise indicated, times are Eastern. a-Advanced;

0 f-Final; p-Preliminary; r-Revised Source: FactSet
’20 ’21* ’22*
2018 ’19 For more information about coming economic reports
*Estimate Source: Statista - and what they mean - go to Barron’s free Economic
Calendar at www.barrons.com

12 BARRON’S February 8, 2021

In the Wake of GameStop, Robinhood declined to comment forced by the Securities and Exchange
A New Test for Robinhood or make Tenev available to discuss the Commission to pay $65 million to set-
IPO, its financial statistics, or the criti- tle claims that it misled customers on
As the trading platform considers player in the broker wars, and it’s Hot Trade cisms of the company. In blog posts, how it made money, even as it wasn’t
an IPO, the risks are mounting now an important part of the plumb- the company has dispelled rumors of getting the best execution for them.
ing of the U.S. financial system. Its Robinhood’s anything nefarious about the trading The company didn’t acknowledge
By AVI SALZMAN basic innovation—commission-free popularity soared limits, showing that volume was fault. It has said it has changed prac-
trading—has realigned the industry as retail investors “magnitudes higher than the norm.” tices. Other brokers also make money
T he Super Bowl ad that and helped attract millions of new traded GameStop. on payment for order flow—with the
Robinhood is airing this Americans to stock investing. Robinhood hasn’t released recent exception of Fidelity—but it’s gener-
weekend doesn’t talk Estimated app figures on the size of its customer base, ally a much smaller percentage of
much about stocks, and Robinhood’s platform became the downloads but last May, the company said it had their revenue
maybe that’s for the better. central battlefield where retail traders more than 13 million account holders.
A surge in stock trading took on Wall Street during the Game- 700 thousand Now, it probably has somewhere north ClearBridge Investments analyst
by retail investors has put Stop (ticker: GME) frenzy late last of 15 million. Data from web analytics Miguel del Gallego, who covers finan-
the investing app in the spotlight, month. But the company faltered at a 600 company SimilarWeb show that Robin- cial companies, thinks payment for
and it’s likely to stay there for several key moment, banning the buying of hood’s app was downloaded more than order flow could see regulatory
months. In the weeks ahead, the GameStop, AMC Entertainment 500 a million times in just two days at the changes, though he expects the
company’s CEO, Vlad Tenev, is set (AMC), and several other stocks just height of the GameStop frenzy, many general practice to continue.
to testify before Congress, and after as retail investors were rushing in. 400 times more than competitors. It’s nar-
that—perhaps as soon as the second rowing the gap with industry leader Options trading, which can involve
quarter—Robinhood is expected to Other brokers imposed restrictions, 300 Charles Schwab (SCHW), which had much larger risks than traditional stock Tiffany Hagler-Geard/Bloomberg
go public. The initial-public-offering as well, but most continued to allow about 30 million active accounts at the trading, is also likely to get more scru-
process will probably highlight Robin- stock trading. Robinhood said it was 200 end of the fourth quarter. tiny. Robinhood made nearly two-
hood’s huge growth, but also the sig- suddenly forced to place more capital— thirds of its payment-for-order-flow
nificant risks it faces in trying to over- as much as 10 times normal levels— 100 The math isn’t all in Robinhood’s revenue from options in the fourth
turn decades of Wall Street norms. with its clearinghouse as a safeguard favor, though. While Robinhood is the quarter, meaning that it could face out-
and couldn’t allow the high volume of 0 Jan. 30 growth leader, its clients have tended to size risk from any regulatory changes.
Robinhood, founded in 2013, has trading on its platform to continue. The Jan. 3 have much smaller balances than those
risen from plucky start-up to central firm eventually eased those restric- at rival brokers, with some estimating Robinhood’s business model has
tions, and fully lifted them on Friday. Source: SimilarWeb that its average account size is below often raised questions about its align-
But not before GameStop lost 85% of $5,000. Clients of some larger competi- ment with customers. “The argument
its value, a move that some investors tors tend to have more than $100,000. can be made that its real end clients are
blamed on Robinhood’s restrictions. these high frequency traders who are
Robinhood doesn’t release revenue actually taking this information and
or profit numbers, but securities fil- trading against what’s referred to as
ings offer some hints. The company uninformed investors,” Gallego said.
is heavily dependent on what’s known
as payment for order flow, meaning The company is now facing a back-
that Robinhood gets a share of the lash on social media. Some retail trad-
money that market makers pocket ers have lumped the company in with
from the spread between the bid and the Wall Street bigwigs they despise.
ask prices on assets they trade. In In an interview on Reddit, billionaire
2020, Robinhood made $687 million Mark Cuban wrote that Robinhood
from payment for order flow on stocks “let you down in a big way” and he
and options trades. (It also makes suggested that traders find a “broker
money on crypto trading, though its with TRILLIONS OF DOLLARS in
filings don’t disclose those numbers.) assets on their balance sheet.”
CFRA analyst Pauline Bell estimates
that about 80% of Robinhood’s reve- A survey of some 10,000 investors
nue comes from payment for order on social network StockTwits showed
flow, which would mean the company that 40% of them were planning to
had close to $1 billion in revenue in change brokers—and most of those
2020. Analysts say they suspect the planning to switch were Robinhood
company is unprofitable. customers. Competitors aren’t lying
down. Schwab is having success at
Robinhood’s last traditional round attracting younger customers, with
of private fund raising valued the about half of its new customers under
company at $11.7 billion. Analysts the age of 41. A majority of new cus-
think the company could go public tomers are signing up for trading tools
for considerably more than the $13 that help them create self-directed
billion that Morgan Stanley (MS) accounts, the firm says, up from 20%
paid to buy E*Trade last year. in 2016—a sign that Schwab is attract-
ing a newly emboldened generation of
To achieve that valuation, Robin- traders who aren’t content to “set it
hood will probably have to convince and forget it” with their accounts.
investors that its revenue stream is
secure and consistent. Payment for Robinhood faces another potential
order flow, however, has come under risk once it goes public: As one person
scrutiny. In December, Robinhood was wrote on Reddit last week: I “cant wait
to short Robinhood on Robinhood.” B

February 8, 2021 BARRON’S 13

Piggly Wiggly’s GameStop
Moment—in 1923

/y g By KENNETH G. PRINGLE grocer found that his ‘victory’ had cost Clarence Saunders’ Fall of a Memphis Maverick. suffered “the customary fate of the
him about $3 million and control of his Piggly Wiggly pio- To counter the shorts, Saunders Main Streeter who attempts to beat
L ong before GameStop, company.” It also tarnished his legacy. neered self-serve, Wall Street.” Three years earlier,
there was Piggly Wiggly. in which customers borrowed $10 million on margin from a short squeeze engineered by the
In 1923, the supermarket Born in 1881, Saunders worked his walked the aisles a number of investors and hatched a owner of Stutz Motor ended in bank-
company, which still does way out of poverty to become a retail and chose their own plan to buy up all outstanding Piggly ruptcy for Stutz and his company.
business in the South and pioneer, turning Piggly Wiggly (the goods. The practice Wiggly shares, driving the price up.
Midwest, was at the center origins of the name remain obscure) is the norm for mod- The stock reached $124 on March 20, Yet there were also winners in the
of a short squeeze and mar- into the nation’s first “Self-Serving ern supermarkets. 1923—when it was suspended by the Piggly squeeze, Freeman writes, in-
ket morality play that echoes the re- Store” in 1916. New York Stock Exchange. cluding a retired grocer from Provi-
cent frenzy around GameStop (ticker: Piggly Wiggly dence, R.I., who bought a thousand
GME). That is, instead of customers giving suffered “the There was a “wild scramble by the shares at $38 before the squeeze, ex-
their shopping lists to clerks to fill— customary shorts to cover,” Barron’s wrote, yet pecting to use them for dividend in-
As with GameStop and other meme the practice of the day—they walked fate of the there was less of that than many had come. Instead, he sold them for $96 to
stocks like AMC Entertainment the aisles and chose their own goods. Main Streeter expected. The stock showed a “declin- $124 apiece, making a profit of almost
(AMC), Piggly Wiggly was sold short This simple concept caught on; by who attempts ing tendency” after the shorts had $80,000 (around $1.2 million today).
by several large Wall Street invest- 1921, there were more than 600 Piggly to beat Wall covered, and “the over-the-counter
ment firms. This aroused an unex- Wiggly stores across the U.S. Saun- Street.” market for the stock gradually disap- Saunders went back to Tennessee,
pected popular backlash, stirred by a ders’ self-serve model remains the peared.” In the end, Saunders and his where “Memphis folk still have confi-
resentment of “city slickers” getting norm for supermarkets, from Kroger Barron’s associates were left with “practically dence” in him, as Barron’s reported.
rich off the “yaps,” or little guys. So, to Walmart. the entire issue of 200,000 shares on But his subsequent ventures met with
there was a sense of triumph when their hands—a large part of which had middling success. He died in 1953, his
investors fought back and put the To fuel more growth, Saunders in been accumulated at high prices” with hopes of becoming the Henry Ford of
squeeze on the shorts. November 1922 announced plans to no market to unload them. supermarkets undone by an ill-fated
sell 100,000 new shares. That, com- decision to take on Wall Street. B
“New York speculators,” crowed bined with unrelated news of a Piggly To Barron’s, Saunders had simply
one newspaper, “made to pay through Wiggly franchisee filing for bank-
the nose.” ruptcy, “caused heavy selling,” wrote
Barron’s, knocking shares down to
The Piggly Wiggly shorts got $30 from $45. Then, Merrill Lynch
crushed, much as Melvin Capital lost and other Wall Street firms launched
53% in January chiefly on its GameStop a “bear raid,” shorting Piggly Wiggly
downside bets, but that wasn’t the stock in a bet that it would fall further.
whole story. While there were big
winners, there were also big losers— Saunders cast the issue as good
none bigger than Piggly Wiggly founder versus evil, asking investors, “Shall
and president, Clarence Saunders. good business flee? Shall it tremble
with fear? Shall it be the loot of
“After working a sensational the speculator?” as quoted in Mike
squeeze on Piggly Wiggly,” Barron’s Freeman’s Clarence Saunders and the
reported at the time, “the Memphis Founding of Piggly Wiggly: The Rise &

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14 BARRON’S February 8, 2021

Hilton’s ‘Asset Light’ Focus principles, according to FactSet—the ginal advantages, at least for now. One
Primes Shares for Upside vast majority of its global hotel proper- is that Hilton is less exposed to luxury
ties were open at year end. properties than some of its peers.
By LAWRENCE C. STRAUSS slowed by Covid-19, should fare well By the
versus its peers. Numbers Before the pandemic, Hilton was As of Feb. 3, first-quarter revenue
T o an infrequent traveler, a fee-generating machine. But it’s the per available room, or revpar, for the
hotel chains can look pretty “It’s an extraordinarily well-man- Key figures for composition of those fees that sets it U.S. luxury hotel segment was down
much the same, with their aged global franchise company with Hilton Worldwide apart and bolsters the bull case for the 69.3% compared with a year earlier,
various rewards, loyalty top-notch brands at the very, very early stock. versus a 35.5% decline for upper-mid-
programs, and more re- stages of what should be a multiyear 60 scale properties, according to hotel-
cently, virtual check-ins. recovery in the hotel industry,” says In 2019, for example, Hilton gener- industry tracker STR and Raymond
There is a credible in- Bill Crow, managing director of real Rough number of ated some $2.2 billion in fees, with James.
vestment case, however, that Hilton estate research at Raymond James. company-owned about three-quarters coming from
Worldwide Holdings (ticker: HLT) hotels franchising agreements. Franchisees Although Hilton operates several
stands out among the chains for its Crow has rated Hilton a Buy for a pay a royalty fee that is generally based luxury brands, including Waldorf As-
ability to weather the pandemic and while now, but in January he raised his 75% on a percentage of the hotel’s gross toria Hotels & Resorts, it has greater
emerge in good shape—and that its price target to $125 from $105. Although room revenues and, in some cases, exposure to upper-midscale brands,
shares should have more upside. Hilton’s stock has rallied recently to Rough share gross food and beverage revenues. including Hampton by Hilton and
about $110, it is still roughly 5% below of Hilton fees Home2 Suites by Hilton, as well as
With a relatively small number of its 52-week high set in November, and that come from Some 15% of that $2.2 billion are other market tiers.
owned hotels in its portfolio, Hilton down a bit over the past 12 months. franchise deals what’s known as base management
runs a so-called asset-light portfolio fees, typically a percentage of the Michael Bellisario, an analyst at
and relies heavily on recurring, long- Still, the stock looks pricey com- $1.92 hotel’s monthly gross revenue. The Baird who has Hilton at Outperform,
term franchise fee agreements. The pared with its historical valuation, remaining 10% are incentive manage- says the company is “a lot more ex-
company is a little less tethered to lux- and it has a lot of Hold ratings. Lodg- Estimated ment fees, which are usually calculated posed to Hilton Garden Inns [and]
ury brands, overseas locations, and big ing fundamentals still remain weak, per share loss for as a percentage of the hotel’s operating Hampton Inns” in smaller markets.
cities than its rivals—and favorably and business travel in particular. 2020, according profits and can be more volatile,
positioned to ride out a storm. And its to FactSet depending on the environment. Another advantage, at least during a
hotel development pipeline, though While the company has taken a big time of international travel restrictions
hit from the pandemic—it’s expected In contrast, Marriott Interna- stemming from the pandemic, is that
to post a loss for 2020 of $1.92 a share tional’s (MAR) 2019 fees totaled Hilton is more domestically focused
based on generally accepted accounting about $3.8 billion, roughly half from and less dependent on big cities. For
franchising. “The Street tends to put the 12 months ended on Sept. 30, 84%
a greater multiple on franchise-fee of Hilton’s adjusted earnings before
income than it does on the manage- interest, taxes, depreciation, and amor-
ment business,” says Crow. “Managing tization, or Ebitda, came from the U.S.
a hotel is a very difficult process.”
Hilton earned six cents a share on
Hilton’s road to becoming an asset- an adjusted basis in the third quarter,
light company—it owns only about 60 down from a profit of $1.05 a year
hotels worldwide—didn’t occur over- earlier, as revenues fell about 60%, to
night. Blackstone Group (BX) took $933 million. However, the company
Hilton private in 2007, made changes, doesn’t have any big debt maturities
and spun it off in 2013. Although there until 2024 and no plans to add more
continues to be demand for Hilton to debt, Chief Financial Officer Kevin
manage properties, especially overseas, Jacobs tells Barron’s.
it has steadily expanded its franchise
business. As of Dec. 31, Hilton held nearly

In 2017, Hilton spun off Park Hotels Checking In
& Resorts (PK) as a real estate invest-
ment trust, and its timeshare business, Hilton Worldwide shares have retraced
which now operates as Hilton Grand most of their early pandemic losses, and
Vacations (HGV). some analysts think there is room to run.

Jefferies analyst David Katz gives $120
plaudits to Hilton Worldwide’s “man-
agement team just in terms of overall 100
execution and of creating value,” avoid-
ing unnecessary acquisitions, and 80
“growing its footprint.”
60 Illustration by Adam Simpson
As of Sept. 30, Hilton’s footprint
consisted of 18 brands stretching 40
across more than 6,300 properties
with nearly one million rooms in 118 20 2020
countries and territories. Marriott In- 2017
ternational recently said it had a port-
folio of more than 7,500 properties Source: FactSet
under 30 brands in 132 countries and
territories.

Despite a smaller footprint than
Marriott’s, Hilton enjoys several mar-

February 8, 2021 BARRON’S 15

$3.3 billion in cash, providing what the HOW DO YOU MANAGE
company says is sufficient liquidity to RISK WHEN THE WORLD IS
get through the crisis. As of Sept. 30,
its long-term debt totaled $10.4 billion. UPSIDE DOWN?

One concern: As of Sept. 30, the We can't control what's next, but we can help navigate it. CME Group provides 24-hour
company’s net debt to Ebitda ratio was access to trading opportunities in every investable asset class, allowing market participants
a lofty 5.8 times. The company aims to worldwide to manage risk and capture opportunities. For every economic twist and turn,
get that ratio back to the prepandemic when the new normal is anything but… CME Group.
range of three to 3.5, a realistic goal once
travel picks up. VIS IT CM EG RO U P.COM /AC TIO N

H ilton also was burning cash Derivatives are not suitable for all investors and involve the risk of losing more than the amount originally deposited and any profit you might have made. This
last year, including about $100 communication is not a recommendation or offer to buy, sell or retain any specific investment or service. Copyright © 2020 CME Group Inc. All rights reserved.
million in the third quarter.
But “we’re not that far away
from break-even,” says Jacobs. “We
need occupancy to get up a little higher
systemwide to generate a little bit
more revenue.”

Another plus for Hilton is its devel-
opment pipeline, a key growth driver
for hotel companies. Net unit growth,
which measures the number of rooms
added, minus any removals, grew by
about 6.5% in 2019. But even as
Covid-19 halted construction on some
projects in the pipeline—many of them
in growing overseas markets such as
China—Hilton managed 5.1% last year.

The company has said that it can
boost its net units by 4% to 5% for the
next several years. Bellisario wrote
recently that he expects Hilton’s 2020
net-unit growth and its forecast to lead
the sector, supporting “our positive
view of the shares.”

Perhaps the toughest part of the
bull case for Hilton is valuation, which
has to be viewed through the prism of
a once-in-a-century pandemic and
lower-than-normal earnings estimates
over the next few years. Hilton recently
traded at nearly 17 times enterprise
value to estimated 2022 Ebitda,
according to Bloomberg.

That’s expensive, but “we’ve never
come through stuff like this,” says
Crow. His price target of $125 assumes
an enterprise value to Ebitda multiple
that is stretched but uses “trough earn-
ings,” as he puts it.

Then there’s business travel, which
in more normal times accounts for
about 70% of Hilton’s business. If
that doesn’t start to claw back this
year, the stock is likely to sell off
sharply.

Still, Covid vaccines are being
rolled out, and there are signs of
pent-up demand for business travel.

Katz of Jefferies remains optimistic.
Hilton, he says, is a “high-quality
name” that “you can just own forever
and you will continue to wind up in
better and better places.” B

16 BARRON’S February 8, 2021

Time to Stock toward prepandemic levels after the
Up on Casey’s U.S. achieves mass vaccination.
General Stores
Even during the crisis, the company
The fourth-largest U.S. convenience-store chain offers has been rapidly expanding its loyalty
reliable growth, making it a rarity among retailers program, adding about half a million
new members in its most recent quar-
By TERESA RIVAS Growth Is people are still going to pop down to up from 39.6% in the prior period. ter alone—a good sign for growth, and
In Store the C store.” A well-oiled self-distribution net- another reason that analysts expect
P izza purists may scoff at a sales to climb above prepandemic lev-
gas-station pie, but Ameri- Recovering from Casey’s General Stores, with a mar- work for both fuel and merchandise els of just shy of $10 billion by the full
cans eat 75 million slices a Covid setback, ket value of nearly $7 billion, might means that even though Casey’s has fiscal-year 2022, which ends in April
from Casey’s General Casey’s sales not be a household name outside the lower traffic levels than rivals in more- of next year.
Stores each year, making it are expected Midwest, but perhaps it should be. It’s urban markets, it delivers similar
the fifth-largest pizza chain to bounce the fourth-largest convenience-store gross profits and return on capital. “There are opportunities, as people
in the U.S. And the conve- chain in the U.S., behind privately held Casey’s network also means that com- drive more and have discovered the
nience-store company has plenty more 18.4% 7-Eleven, Circle K owner Alimenta- petitors can’t muscle in on its turf [company’s] prepared food, for Casey’s
to recommend it to investors beyond tion Couche-Tard (ATD.B.Canada), without facing significantly higher to continue to grow that,” says Julie
its ability to make a mean Margherita. in the company’s and Speedway, soon to be absorbed by supply-chain costs. Biel, portfolio manager at Kayne
fiscal fourth 7-Eleven owner Seven & i Holdings Anderson Rudnick. “For an investor
Investors have long been aware of quarter, which (3382.Japan). The coronavirus hasn’t been kind [focused on] near-term earnings
the company’s appeal. Casey’s (ticker: ends in April. to Casey’s, however. In its fiscal fourth growth, it could be interesting.”
CASY), which owns and operates In many small towns, Casey’s is quarter of 2020, which ended in April,
more than 2,200 stores across 16 the only resource for groceries or hot Casey’s revenue fell nearly 17%, to Covid-19 hasn’t stopped Casey’s
states, had outperformed the S&P 500 meals, and that has proved particu- $1.81 billion, as the first wave of from expanding. The C-store industry
index for years, thanks to its double- larly profitable: Margins on inside- Covid-19 pummeled the U.S. Sales rose is fragmented, with leading players
digit earnings and revenue growth and store sales, which exclude fuel, were to more than $2 billion in the subse- commanding only mid-single digit per-
expanding footprint. Then, Covid-19 41% in Casey’s most recent quarter, quent two quarters, but still fell by centages of the total market. Casey’s
hit, and the growth understandably double digits from the year-ago period. has been purchasing smaller competi-
slowed, as did the stock gains. Casey’s Back on Track tors—the company previously indi-
underperformed the S&P 500 by one C asey’s already has started to re- cated that it thinks it can double its
percentage point over the past year. After taking a Covid-19 hit, Casey’s stock has returned cover. Despite the hit to sales, store count—as it builds economies of
to its winning ways. the company is expected to scale for long-term growth. In Novem-
The pandemic, however, will end. grow earnings per share by ber, Casey’s announced that it would
And Casey’s growth is likely to reaccel- $225 12.6% from a year ago to $7.99 this acquire Bucky’s Convenience Stores as
erate as customers return from lock- fiscal year, and sales are projected to part of a $580 million deal, the biggest
down and the company scoops up 200 return to year-over-year growth, with in its history and one that analysts
smaller rivals. That makes the Ankeny, an 18.4% rise to $2.15 billion in the applauded from a strategic and finan-
Iowa, company a rarity in retail—a 175 fiscal fourth quarter of 2021, which cial perspective.
reliable, compounding growth story in ends in April.
a sector that has been buffeted by dis- 150 That growth profile makes the
ruption. A recent pullback offers an Casey’s should benefit from a gen- stock’s valuation all the more attrac-
opportunity to get in ahead of what 125 eral economic reopening, as more peo- tive. Although it changes hands at 24
could be another strong cycle. ple get back on the road, eat out, and times forward earnings, slightly above
100 buy meals on the go. About a third of its five-year average of 23 times, it’s
“In retail in the U.S., it’s tough the company’s food sales stem from worth noting that the Bucky’s transac-
to find sustainable visible growth 2019 2020 75 commuters dropping in for lunch, a tion, which is pending, hasn’t been
because of disruption and economic 2021 pattern that should slowly improve incorporated into many analyst models
impacts, but Casey’s is relatively im- yet. That will expand the earnings
mune,” says Markus Hansen, portfolio Source: FactSet portion of the price/earnings ratio.
manager at Vontobel Asset Manage-
ment’s Quality Growth Boutique. “Casey’s wants to be in the top quin-
“Until Amazon can deliver you a can of tile of all consumer-growth stories,”
Coke or a bag of candy in 15 minutes, says Stephens analyst Ben Bienvenu.
“If they can deliver on that, there’s a
lot of room for valuation expansion.”
Bienvenu has a $210 price target on
Casey stock, 8% above a recent $194.

In addition, Casey’s trades at just
over 11 times enterprise value to earn-
ings before interest, taxes, deprecia-
tion, and amortization, or Ebitda. As
Hansen notes, chains have fetched at
least 12 times that figure in recent
mergers and acquisitions. “If there
were to be a deal for Casey’s, it would
not be for less than 15 times,” says
Hansen. “The stock isn’t expensive
for the price you’re paying.”

Time to stock up. B

February 8, 2021 BARRON’S 17

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18 BARRON’S February 8, 2021

Biden’s Team hether you invest in ratings firms. tomer orders were executed at inferior
Puts Its Focus oil-and-gas companies The to-do list for financial regula- prices, the SEC found. Robinhood
On Financial or trade Bitcoin, finan- didn’t admit or deny the agency’s find-
Regulation cial regulation under tors, meanwhile, is getting longer and ings. “We are fully transparent in our
the Biden administra- more pressing. communications with customers
Cryptocurrency, climate-risk about our current revenue streams,” a
disclosure, consumer protection, W tion will make its mark The volatile trading in GameStop Robinhood spokesperson says, adding
and the volatile trading in on your portfolio—and (ticker: GME) and other securities “is that the company has improved its
GameStop are all expected to may even change the way you invest. going to be at the top of the SEC’s best-execution processes.
be focuses of the SEC and agenda,” says Dennis Kelleher, head of
other regulatory agencies. Regulatory actions on the horizon the public-interest group Better Mar- Investors are also looking for the
What investors can expect. are likely to give shareholders access kets and a member of the Biden tran- SEC to hand back their megaphone.
to new data to aid their decision-mak- sition’s agency review team for securi- Last year, the commission made it
By ELEANOR LAISE ing about companies, including man- ties regulators. One issue he expects tougher for investors to get share-
datory disclosures of climate risks and the Securities and Exchange Commis- holder proposals on corporate proxy
board diversity. Rule changes could sion to examine: the true costs to in- statements, in part by raising the own-
also give them a louder voice in corpo- vestors of commission-free trades. ership threshold required to submit a
rate-governance discussions. proposal. Another 2020 rule gave
Robinhood, the online trading app management a louder voice in the
Investor protection will come to the at the center of the GameStop frenzy, third-party proxy advice used by
fore, experts say, as regulators revisit last year agreed to pay $65 million to many institutional investors. Major
conflicts of interest in investment ad- settle SEC claims that it didn’t ade- elements of both rules will generally
vice and tackle newer challenges, like quately disclose payments it received first apply in the 2022 proxy season.
cryptocurrency regulations. from trading firms in exchange for
routing customer orders to them, an The effect of the rules was to “muz-
The financial-services industry arrangement known as payment for zle the voice of shareholders,” says
faces tougher enforcement of securi- order flow. Although Robinhood ad- Amy Borrus, executive director of the
ties laws and consumer financial-pro- vertised commission-free trades, cus- Council of Institutional Investors.
tection rules, while industries across “Shareholders large and small are look-
the board must weigh how any new ing to the SEC to step up its mission to
required disclosure of environmental, be the investor’s advocate,” she says,
social, and governance (ESG) factors including by reversing the two rules.
will be perceived by investors and
Another corporate governance is-
sue expected to receive renewed atten- Illustration by Matt Chase
tion is a bit of unfinished business
from the soon-to-be 11-year-old Dodd-
Frank Act. The law directed the SEC
to adopt rules requiring public compa-
nies to claw back improperly awarded
incentive compensation in the event of
certain financial restatements. The
commission proposed a clawback rule
in 2015, but never completed it.

New laws that reshape financial
regulation will be difficult with the
Democrats’ razor-thin Senate advan-
tage. That makes the nominees to lead
the SEC and the Consumer Financial
Protection Bureau all the more impor-
tant. The personnel at the top of these
independent agencies “matters enor-
mously,” says Aron Szapiro, head of
policy research at Morningstar, and
President Biden has put forward picks
that reflect the Democratic consensus,
which is “very focused on ESG and
protecting investors.”

Gary Gensler, Biden’s pick to head
the SEC, pushed for greater transpar-
ency in derivatives trading when he
was chairman of the Commodity Fu-
tures Trading Commission. Rohit
Chopra, a commissioner of the Federal
Trade Commission and Biden’s choice
for CFPB director, advocated for bet-
ter treatment for borrowers in an ear-
lier stint as the CFPB’s student-loan

February 8, 2021 BARRON’S 19

ombudsman. Such requirements would give investors INCOME INVESTING
Consumer financial-services firms far more clarity, says Cheryl Smith, econo-
mist and portfolio manager at Trillium Here Are 6 Utilities With
should expect the CFPB to review rules on Asset Management, because companies Fast-Growing Dividends
payday lending, debt collection, student- would have to disclose ESG risks in securi-
loan servicing, and fair lending, lawyers ties filings and not just in “a glossy two- By Lawrence C. Strauss outlook through 2024.”
say. The bureau may also reverse the regu- page brochure with pictures of bunnies Within the sector—known for steady
latory flexibility that it granted early in the and deer.” M any utility stocks have re-
pandemic to mortgage servicers that mained unloved through but modest dividend increases—there are
missed deadlines for sending loss-mitiga- The real challenge for the SEC “will be much of the pandemic, their plenty of utilities that have boosted their
tion notices, and credit bureaus and lend- to generate a set of intelligent disclosure attractive yields and reliable recent payouts at a high-single or even
ers that were slow to investigate disputes. requirements that are also efficient” and dividends notwithstanding. double-digit clip. A recent Barron’s screen
consistent with international standards, highlighted some of those companies, in-
New cryptocurrency regulations may says Joseph Grundfest, professor of law The Utilities Select Sector SPDR cluding NextEra Energy (NEE), whose
also be on the horizon. Gensler in recent and business at Stanford University and a fund (ticker: XLU), a good proxy for assets include the regulated Florida Power
years has done research and taught former SEC commissioner. larger-cap businesses in that sector, has & Light utility as well a growing renewable
courses on blockchain and digital curren- a one-year return of about minus 6%, energy business.
cies as a professor at the Massachusetts F or companies with considerable cli- versus plus 20% for the S&P 500 index.
Institute of Technology. mate risks, however, the required From 2017 through 2019, NextEra
disclosures may raise the cost of Still, earnings, which help fuel divi- raised its disbursement at an annualized
The SEC may take a look at when digital capital as investors and ratings firms dends, are holding up for most utilities. rate of about 13% from $3.93 a share to $5.
assets are deemed to be securities and how digest the new data, analysts say. And the utility stocks in the S&P 500 Last year, it was boosted to $5.60 a share,
they can be packaged into products like were recently yielding about 3.2%, com- or $1.40 following a stock split last fall.
exchange-traded funds and sold in line That is a particular issue in the capital- pared with around 1.5% for the broader The stock was recently yielding 1.6%,
with existing securities regulations, says intensive energy industry, says Kevin market. about half the average for the sector.
Amy Lynch, president of FrontLine Com- Book, managing director at ClearView
pliance and a former SEC examiner. Energy Partners. “It takes a lot of money The consensus FactSet 2021 earnings But the stock is expensive, recently
going into the ground to get fossil fuels estimate for the Utilities Select Sector SPDR trading at 37.6 times estimates 2021 profits.
Both the SEC and CFPB are expected to out,” he says, and valuations in the sector was recently $3.35 a share, down only 2%
dial up enforcement actions. Acting CFPB have only become more sensitive to the from $3.42 nearly a year ago. The recent “The valuation is pricey, but it is a great
director Dave Uejio, a veteran at the bu- cost of capital in recent years. estimate for the fund’s dividends per share company,” says John Bartlett, a portfolio
reau, has already directed its enforcement was $2.08, versus $2.21 a year ago. manager and analyst at Reaves Asset
division to expedite pandemic-related in- The SEC might also work to harmonize Management. “The market’s not stupid.”
vestigations. While the Trump-era CFPB the ESG terminology used by issuers as So why have investors kept away?
didn’t make Covid-related consumer harm well as by investment advisors, policy ex- Morningstar analyst Charles Fishman There have been a few exceptions for
a focus of enforcement actions, it did leave perts say. Issuers are “throwing out all says that utility stocks “were pretty pricey utility dividends. One is Dominion En-
behind a road map of such issues that sorts of terms that aren’t consistent,” says going into the pandemic” and cites that as ergy (D), which had to lower its dividend
might help guide the bureau’s new efforts. James Rich, a senior portfolio manager for “probably the main reason” for their un- last year after it divested itself of its storage
As part of its supervisory work, the CFPB sustainable fixed-income strategy at Aegon derperformance since. The Utilities Select and gas-transmission assets, notably pipe-
last year sought information from compa- Asset Management, and regulators could Sector SPDR fund recently fetched nearly lines, to Berkshire Hathaway Energy
nies on their pandemic response and chal- help standardize the definition of a “green 20 times its projected 2021 earnings, com- for $9.7 billion.
lenges they were facing. bond” or “sustainable” fund. pared with its five-year average of 18.3,
according to FactSet. Another is CenterPoint Energy
The assessments “were not designed to The Labor Department is also expected Still, in a Jan. 22 note, Fishman wrote (CNP), a utility holding company that last
identify violations of federal consumer to soften its stance on retirement plans’ that he thought the utility sector was year ended up slashing its quarterly divi-
financial law,” according to a summary of use of ESG funds. A department rule last fairly valued. “Growth investments in dend to 15 cents a share from 29 cents. The
the findings published in mid-January, but year made it tougher for plans to include renewable energy, grid modernization, company had a stake in a master limited
revealed consumer harms ranging from these investments, but Biden has ordered a and electric vehicles should outweigh partnership that also cut its dividend.
inaccurate credit reporting to mortgage review of any Trump-era rules that may higher regulatory, operational, and finan- CenterPoint Energy’s stock, which yields
servicers providing faulty information to conflict with his administration’s environ- cial risk,” he observed, sizing up the re- 3%, has a one-year return of minus 16%.
consumers about forbearances and failing mental goals. And while investors big and cent change in presidential administra-
to process forbearance requests. small gain some powerful advocates at the tions. “We forecast that the U.S. utilities But as our screen found, there are a
regulatory agencies, the financial-services we cover will invest $656 billion over the number of utilities that have been boosting
Given the bureau’s relatively light en- industry can look forward to stricter rules next five years, more than consensus their dividends by at least 6% annually
forcement under Trump appointee Kath- and tougher enforcement. expects and up from the $541 billion and often more: American Water Works
leen Kraninger, the findings suggest that spent in the past five years.” (AWK), Atmos Energy (ATO), CMS
companies may have been “lulled into a Both the SEC and the Labor Depart- In his view, that “supports our 5.5% Energy (CMS), DTE Energy (DTE),
sense of sharing information that’s not ment are likely to put more emphasis on average annual industry earnings growth and Sempra Energy (SRE).
going to come back to haunt them,” says mitigating conflicts of interest in invest-
Brian Fink, a lawyer at McGlinchey ment advice, Morningstar’s Szapiro says. With dividend increases like that,
Stafford and former program manager in investors should consider utilities for
the CFPB’s office of supervision policy. For the SEC, that may mean rewriting some downside protection. B
Now, he says, “the aggressiveness that ap- Regulation Best Interest, which governs
pears likely to come is not something that brokers’ recommendations to customers,
makes people sleep well at night.” and attempts to raise their standards of
conduct—but the Commission is unlikely
Sustainable investors are looking for to throw out the entire rule, he says.
actions from regulators that could bolster
holdings that score well on ESG metrics. The Labor Department, meanwhile,
Biden campaigned on requiring public might review rules governing advice on
companies to disclose climate risks and rollovers from 401(k)s into individual re-
board diversity. tirement accounts. B

20 BARRON’S February 8, 2021

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February 8, 2021 BARRON’S 21

Why Platinum The rising popularity of electric In addition to Sibanye, other plati-
Is Poised to Shine vehicles could trim demand. Catalytic num producers include Impala Plati-
converters—exhaust-system devices num (IMPUY) and Anglo American
The precious metal has lagged behind gold and silver. Yet its importance used to control pollution in conven- Platinum (ANGPY), nearly 80%-
as a component of hydrogen fuel cells is only likely to grow. tional vehicles—are the main use for owned by Anglo American (NGLOY)
the metals: palladium for gas-powered of South Africa. Anglo American Plat-
By ANDREW BARY supply constraints, resilient automotive Miners at cars and platinum for diesels. inum is the blue chip of the group,
demand, new uses such as hydrogen Anglo American with a market value of $27 billion. Its
T he Reddit army of traders fuel cells, and investment interest. Platinum’s Yet, Froneman observes, the internal shares trade at a premium to rivals’ at
recently took aim at silver, Dishaba open-pit combustion engine has many years left. seven times estimated 2021 earnings.
triggering a brief spike in its Major platinum producers, such as platinum mine in EVs account for only a small part of the Chris LaFemina, a Jefferies analyst,
price to nearly $30 an South Africa-based Sibanye Stillwa- South Africa. 90 million new cars and light trucks calls Anglo’s open-pit Mogalakwena
ounce, before it settled this ter (ticker: SBSW), are highly profit- sold annually—a market still expanding mine in South Africa the “premier
past week at $27. Another able and trade at some of the lowest “If the Reddit by 2% to 3% a year. In addition, emis- platinum asset in the world.”
precious metal should be in valuations in the mining sector. crowd sions standards in developing nations
their sights: platinum. It is generating Sibanye is a top-three producer of had paid are getting tougher, another factor boost- Sibanye Stillwater began in 2013 as
more interest because of its role in the platinum, at about one million ounces attention ing demand for platinum-group metals. a spinoff from Gold Fields (GFI). Un-
green economy and its relative scarcity. annually, and among the top three in to platinum, der Froneman’s leadership, it began
palladium and rhodium. It also mines and not Platinum even could benefit from buying platinum mines. Its most im-
Platinum, now trading around about a million ounces of gold. silver, they EVs. It’s a crucial component in the fuel portant deal was the $2 billion pur-
$1,100 an ounce, is up 15% in the past could have cells—rather than batteries alone—that chase in 2017 of Stillwater Mining, a
12 months, but has lagged behind gold, Sibanye, whose U.S.-listed shares moved the already help power a few of them, turn- platinum and palladium producer
silver, and other platinum-group met- trade around $16, is valued at just four price a lot ing hydrogen into electric current. Fuel based in Montana. That buy was well-
als, such as palladium and rhodium, in times projected 2021 earnings of $3.79 more.” cells could account for 6% of global plat- timed because palladium prices then
recent years. Platinum demand for die- a share. The two leading gold miners, inum demand by the end of the decade, rose, allowing Sibanye to cut debt. The
sel-engine pollution controls fell in the Newmont (NEM) and Barrick Gold Will Rhind, CEO of some analysts predict. deal also made Sibanye less dependent
wake of Volkswagen’s (ticker: VOW. (GOLD), trade for around 15 times GraniteShares on South Africa, whose mining compa-
Germany) emissions scandal in 2015. estimated 2021 earnings. Nearly eight million ounces of plati- nies trade at discounts to global peers.
num, worth $8 billion, are produced
Platinum peaked more than a decade Sibanye CEO Neal Froneman tells annually. A reliance on South African “The company is at an inflection
ago at $2,250 an ounce, when it traded Barron’s that he sees a “supercycle” in output creates supply risk, given peri- point, with growing free cash flow and
at a premium to gold. It’s now at a 40% platinum-group metals this decade. odic labor strife and an uneasy relation- a strong balance sheet,” says Raj Ray, a
discount to gold, which is fetching Palladium is up 70% over the past two ship between mining companies and the BMO Capital Markets analyst. “It’s
$1,800 an ounce. Bulls argue that plati- years, to $2,300 an ounce, while ultra- government. Platinum is also hard to well-positioned to participate in the
num could head back toward its old rare rhodium has risen eightfold, to obtain. Most South African mines are ESG revolution.” He has an Outper-
high in the next five years because of $21,000. Froneman thinks platinum deep underground and labor-intensive. form rating and a $22 price target on
could hit $2,000 in four to five years. the stock. The shares’ low valuation
“If the Reddit crowd had paid at- reflects South African risk and con-
tention to platinum, and not silver, cerns about the sustainability of high
they could have moved the price a lot prices for palladium and rhodium.
more; it’s a much smaller market than
gold or silver,” says Will Rhind, the Froneman sees a “significant re-rat-
CEO of GraniteShares, which runs ing of the stock” as Sibanye shows con-
GraniteShares Platinum Trust sistent performance in coming quarters
(PLTM), a $25 million exchange- and lifts its dividend yield, now under
traded fund that holds the physical 1%. The company, which reports sec-
metal. The largest U.S. platinum ETF ond-half results on Feb. 18, has a goal of
is the $1.4 billion Aberdeen Stan- a 25% to 35% dividend payout ratio,
dard Physical Platinum fund which could lead to a 5% yield.
(PPLT). Platinum ETFs globally hold
about four million ounces, against 100 Platinum has lost some of its luster
million for gold and one billion for in the past decade, but the coming
silver, according to Bloomberg. years look much brighter. B

Going Platinum

Here are some stocks and exchange-traded funds to play a rally in platinum.

Market

Courtesy of Anglo American Platinum Recent 52-Week 2020E 2021E 2021E Value Dividend
Yield
Company / Ticker Price Change EPS EPS P/E (bil)
1.2%
Anglo American Platinum / ANGPY $17.25 24.9% $1.09 $2.37 7.3 $27.5 3.3
0.7
Impala Platinum Holdings / IMPUY 14.46 44.7 1.24* 3.10 4.7 11.4

Sibanye Stillwater / SBSW 15.99 55.5 2.38 3.79 4.2 11.7

Platinum ETF / Ticker Recent 52-Week Fund
Price Change Assets Expense

Aberdeen Standard Physical Platinum Shares / PPLT $102.81 10.9% (mil) Ratio

GraniteShares Platinum Trust / PLTM 10.86 11.3 $1,370 0.60%

25 0.50

*Impala’s fiscal year ends in June; 2020 EPS is actual; E=Estimate Source: Bloomberg

22 BARRON’S February 8, 2021

February 8, 2021 BARRON’S 23

THE Alzheimer’s disease has been
understudied and underfunded,
precipitating another health-care-
related economic crisis. Why this
problem has persisted for so long,
how Covid made it worse, and
what needs to be done

BY RESHMA KAPADIA

OTHER
PANDEMIC
When Covid-19 hit, Rosanne Corcoran went of normalcy to run errands, go to the chiropractor, or
take a walk, with the help of a regular paid care-
into lockdown mode, creating a cocoon around her giver—until Covid-19 hit. Doing without the addi-
family and dismissing the part-time paid caregiver tional help has taken its toll. “My mother has de-
who had helped her care for her mother, Rose, who clined, and I’ve declined. It’s an awful choice to have
has Alzheimer’s. But for months, Rose has stayed to make, but I’m going to, because I want to survive
up all night, leaving the 53-year-old Rosanne so this,” says Corcoran, who just rehired a caregiver for
sleep-deprived that her cardiologist recently coun- weekend help, despite the pandemic.
seled her to look past her fears about the virus and
bring in help. Families grappling with Alzheimer’s often face
awful choices, but it has been taken to new heights
Rose was first diagnosed with mild cognitive im- over the past year. Roughly a third of the 450,000
pairment a decade ago. When, in 2015, doctors said Covid deaths in the U.S. have been at long-term care
she could no longer live independently, Corcoran put facilities like nursing homes, where about half of the
her Realtor license in escrow and brought Rose to
live with her family outside of Philadelphia. The Illustrations by JESS SUTTNER
mother of two young adults snuck in a couple hours

24 BARRON’S February 8, 2021

residents are living with Alzheimer’s or A Costly direct medical costs is significantly genius, which helps financial advisors the $448 million allocated in 2011.
some other form of dementia. Even Disease higher than cancer.” navigate these issues with their clients. Drug development is also looking
those who have been safe from the “It affects people in every respect.”
virus have suffered; 70% of caregivers Most costs Cost estimates vary, but a 2020 more promising; there are now more
surveyed by UsAgainstAlzheimer’s associated with paper in American Journal of Man- Alzheimer’s was recognized as the than 100 ongoing trials. More recent
this past fall reported a decline in their Alzheimer’s aged Care put the total health-care most common cause of dementia clinical trials for Biogen’s much-
loved ones’ memory or behaviors. Resi- disease are cost of the disease at $305 billion— in 1976. In the 45 years since, prog- anticipated aducanumab and Eli
dents in long-term care facilities have caretaking- and projected it would hit $1 trillion ress in fighting the disease has Lilly’s antibody donanemab incorpo-
been isolated from relatives and friends related and by 2050. With few treatments avail- been glacial, in part due to mispercep- rated biomarker tests that earlier trials
who supplement their care, provide not covered by able, most of the direct costs come tions about the disease that delayed lacked. The near-term attention is
extra eyes that spot changes in health insurance. from skilled nursing care, paid home funding and scientific research and on Biogen’s monoclonal antibody adu-
conditions, and tap into reservoirs of health care, and hospice. created an inadequate care system in canumab, which is awaiting a decision
memories to keep them engaged, while $357,000 its early days. from the U.S. Food and Drug Admin-
unpaid caregivers like Rosanne have While some of this is covered by istration, expected by June. It has been
been cut off from support services. The typical total Medicaid for low-income Americans, “As a nation, we struggled to see a bumpy road for the treatment, with
lifetime cost, most of it is not covered by Medicare, the disease as a disease,” says Dr. Ja- an advisory panel of the FDA ques-
The pandemic has cast a harsh light in 2019 dollars, leaving families to foot the bill. The son Karlawish, co-director of the Penn tioning the merits of aducanumab last
on the inadequacies of the U.S. care- for someone with total lifetime cost of care for someone Memory Center. For decades, cultur- fall (see related article, page 28).
giving system and the enormous dementia over the with dementia is estimated at ally, Alzheimer’s symptoms—memory
emotional and economic burden rest of their lives, $357,000 in 2019 dollars, according to loss, confusion, or forgetting to pay If approved, even with conditions,
on families—and ultimately the according to the the Alzheimer’s Association. The bulk bills—were brushed aside as just the experts on aging say it will serve as a
economy—bringing the fight against Alzheimer’s of those costs are borne by family natural course of aging, and problems signal and bring in a rush of invest-
Alzheimer’s to an inflection point. It Association caregivers, often in the form of unpaid that could be handled by family, al- ment. A lack of approval could have
comes as the oldest baby boomers enter caregiving—not to mention the psy- most always wives and daughters, the opposite impact in the near term,
the age range where Alzheimer’s is of- Estimated total chological and emotional toll. Karlawish says (see Q&A, page 25). but researchers note several other
ten diagnosed, and against a backdrop health-care treatments on the horizon, including
where science could be on the cusp of costs of the For Stephanie Monroe, the uncer- With limited funding in the first 20 drugs from Roche’s Genentech and
sorely needed victories—including the disease vary. tainty, confusion, and fear around her years, research was restricted primar- Japan’s Eisai. Even more encouraging
possibility of the first new drug ap- parents’ care during the past year have ily to how a brain with Alzheimer’s is the diversification of treatments
proval in 18 years, and progress in bio- $305 been the worst experiences of her life. changed, rather than to the multifac- deeper in the pipelines that go beyond
markers to enable earlier detection. billion Monroe, who retired from the federal eted pathways that contribute to the amyloid and tau tangles—important
government and now works on equity disease, the factors that influence a because scientists think Alzheimer’s
Alzheimer’s is a progressive brain One cost estimate and access-related issues at UsAgainst- person’s risk, and devising cutting- will ultimately be treated much like
disease that is the most common cause from a 2020 paper Alzheimer’s, has agonized over edge clinical trials. Research talent heart disease, with a mix of therapies
of dementia. Of the top 10 causes of in the American whether to find alternative housing for was lost to diseases attracting more and interventions, or possibly a combi-
death globally, it’s the only one that Journal of Man- her parents. The Baltimore-area long- investment, says Dr. Maria Carrillo, nation therapy.
can’t be cured, slowed down, or pre- aged Care, and term care facility they live in had chief science officer at the Alzheimer’s
vented, at least not yet. The disease that number is spotty communications about Covid-19 Association. Even today, much of what There has also been progress
manifests in different ways, with some expected to reach outbreaks and protocols, and there is currently available is short-term around biomarkers and blood tests
patients living 20 years after diagnosis, $1 trillion by 2050 were signs that her father, who has palliative therapies that don’t address that could help with early detection—
though it’s often closer to four to eight Alzheimer’s, was deteriorating as so- the underlying biology of the disease. crucial since the disease can emerge
years. Although 80% of those with the cial activities like choir and mah-jongg decades before symptoms. “Ten years
disease are 75 or over, Alzheimer’s typ- were suspended. A move, though, The complexity of the brain adds to ago, we would have said it’s science
ically emerges in midlife, 20 to 30 years would separate her parents from her the challenge. Because there isn’t yet a fiction: There’s no way we can mea-
before symptoms like memory loss or aunt who lives in the community, as solid understanding of why memory sure tiny proteins in the brain in
troubles with language appear. well as nearby church friends. “There’s changes, the clinical trials for Alzhei- blood,” Carrillo says. But C2N Diag-
no good decision,” Monroe says. “It’s mer’s take longer, often 18 to 24 nostics introduced a test last fall that
With the world in the midst of an all about weighing the consequences, months, because researchers need to has been tested on a small group, and
aging boom, the number of people liv- costs, and benefits—and feeling guilty see if the drugs move memory, rather Lilly and Roche Holdings also have
ing with Alzheimer’s or some form of about any decision you make.” than just look at underlying changes in tests, with trials possibly completed
dementia is expected to triple by 2050 the biology. Early trials were open to by summer and more information
to 152 million—a bit more than the pop- The costs can ripple through genera- those who had a clinical Alzheimer’s about whether they can be mass pro-
ulation of Russia today. That is bringing tions, and not just due to lost wages or diagnosis. But now, trials include peo- duced also forthcoming. “That would
recognition to the scale of the problem, time out of the workforce for care- ple with biomarkers like the amyloid be game-changing,” Carrillo says.
with nonprofits, academics, businesses, givers. Studies show that spousal care- plaques and tau tangles (both are forms
and governments in January creating givers who report strain face a 63% of problematic protein deposits in the With recent research suggesting
a global initiative, Davos Alzheimer’s higher mortality risk in four years than brain) that are now seen as hallmarks that about 40% of dementia is modifi-
Collaborative, aimed at speeding up the noncaregivers who are the same age. of Alzheimer’s disease, and have been able, scientists are also testing how
global response to the disease, in part Smaller studies also found that some the target of many of the drugs in trial. interventions around cognitive en-
by using the road map offered by the caregivers have compromised immune gagement, diet, sleep, and exercise
discovery of Covid-19 vaccines. systems and increased need for medi- The past decade has brought could affect risk factors for Alzhei-
cations, and have seen their own change, partly due to the advocacy mer’s. That’s another reason there’s a
“Alzheimer’s is a disease of greater health-care costs increase in the of organizations like the Alzheimer’s push for doctors to make cognition
prevalence and greater lethality than aggregate by an estimated $9.7 billion. Association and UsAgainstAlzhei- tests part of their standard protocol:
Covid-19,” says George Vradenburg, “The financial costs are underesti- mer’s. Funding for Alzheimer’s and Currently, less than half of primary-
who co-founded the advocacy and mated. The emotional, psychological, dementia research at the National care physicians in a survey by the
research group UsAgainstAl- and even physical costs are underesti- Institutes of Health has increased to Alzheimer’s Association said it’s part
zheimer’s. “This is an ongoing pan- mated,” says Amy Florian, CEO of Cor- roughly $3 billion, about half of what of their standard practice. Technology
demic. Its cost to America in terms of is spent on cancer, but far higher than could also facilitate earlier detection,

February 8, 2021 BARRON’S 25

FROM THE FRONT LINES:
A LEADING SPECIALIST
TALKS ABOUT THE FIGHT
AGAINST ALZHEIMER’S

Top on the list of fears among older Americans: Alz- Dr. Jason Karlawish, We need to recognize that we all face the risk of becom-
heimer’s, a disease that is often misunderstood and co-director of the ing a caregiver and look for how to provide some insur-
underdiagnosed. Dr. Jason Karlawish, co-director Penn Memory Center ance against that risk. A lot of solutions right now tin-
of the Penn Memory Center, has spent decades ker with the tax bill, like offering a tax credit. Other
researching the disease and treating those with it, rized the necessary funding for research. So the money democracies, like Japan and Germany, have instead said
giving him a front-row view of the challenges that face is there, and there’s recognition of the disease as a dis- let’s do a payroll tax to assure a common fund to pro-
the estimated six million Americans living with Alzhei- ease, and you are starting to see a pickup in the result vide some support for long-term care services for the
mer’s, as well as millions more of their caregivers. of those investments [in drug development]. neither rich or poor but the vast middle class.

Karlawish, a professor of medicine, medical ethics, We have made spectacular progress in understanding What else?
and health policy and neurology at the University of the biology of the disease, and also uncovered that it is a The pandemic revealed the challenge of providing care
Pennsylvania, has tapped his experience to take some very complicated and complex disease. We are begin- where there is no adequate system, and it showed how
of the mystery out of the disease in his new book, The ning to carve out identifiable and potentially druggable tenuous our system of institutional long-term care sup-
Problem of Alzheimer’s, out later this month. Barron’s targets, such that we should view this disease as we view ports, like nursing homes and assisted living, is. Covid
talked with Karlawish about where the U.S. took wrong cancer or heart disease. And the progress in biomarkers showed we need to invest in institutional long-term care.
turns, reasons for optimism, and the changes needed has been inspiring in its ability to detect diseases.
as the number of Americans living with Alzheimer’s is What concerns you about the current discussions
expected to more than double to 13.8 million by 2050. What should those who get an Alzheimer’s diagno- around Alzheimer’s?
sis expect? We are going to enter into a very difficult conversation as
Here is an edited version of our conversation: In an otherwise healthy adult who I diagnose with mild- a society about when we are dying of this disease—and
stage dementia caused by Alzheimer’s disease, on aver- how. The current way we talk about it suggests we need
Barron’s: You have said Alzheimer’s should be age, they have 10 years of progressive cognitive decline. to be more mature and thoughtful, rather than saying,
viewed as a humanitarian crisis. Please explain. “The moment I can’t drive or feed myself, X happens.”
Jason Karlawish: Like all humanitarian problems, How can we get a better handle on Alzheimer’s?
multiple disciplines need to be brought to bear. One We need to listen to a story unfolding for the past four A child born with Down syndrome was often either
of those is medicine, but we are not going to drug decades: While there have been no proven treatments institutionalized or allowed to die of complications [in
our way out of this. Failure to see [Alzheimer’s] as to attack the pathology of the disease, we have seen a the past]. Life span was 12 years. A lot changed, not
a complicated problem that needs better diagnosis decline in the risk of developing dementia. just in medicine but also in how we cared for [people
and treatment—but also care, not just in the medical with Down syndrome] and deinstitutionalized them.
world—is why this will remain a crisis. That’s encouraging. What’s causing the decline?
Access and opportunity. If you at least get people be- The struggle to create a self [for someone with
What is a major problem in the way the U.S. yond a high school education, give them access to Alzheimer’s] has to respect that life changes.
approaches Alzheimer’s? health care and to exercise, which helps maintain brain
We have failed to fully recognize our need for long-term health, you create healthier brains. The theory is they Thanks, Jason. —R.K.
care services and supports. Alzheimer’s isn’t just a cog- are better able to withstand the pathologies that come
nitive problem. It’s a disability that requires someone with aging. There are things we can do right now. Photograph by MICHELLE GUSTAFSON
else to step in. The caregiver is the accommodation. It’s
not until later in the disease that it’s those things we rou- What should top the Biden administration’s
tinely associate with caregiving. For the first two-thirds priority list to better prepare for Alzheimer’s?
of the disease, it is about planning a day, staying social
and engaged, the ability to pay bills, manage finances,
and travel from one place to another.

We haven’t seen an Alzheimer’s drug approved in
18 years. Is anything changing on this front?
The National Alzheimer’s Project Act [in 2011] autho-

26 BARRON’S February 8, 2021

HOW TO PREPARE with researchers looking to smart- labor participation has fallen. The persist after Covid because of what
phones and artificial intelligence to absence of these women could further happened during the pandemic with
Getting an Alzheimer’s diagnosis can pick up on subtle changes in key- hamper economic growth. people in facilities.”
quickly plunge families into unfamiliar strokes, typing speed, or writing pat-
territory, navigating a sea of specialists, terns that could be early flags. Plus, fear of future long-term care Long-term care facilities could also
looking for caregiving support, and needs for parents also weigh on their come out financially scarred: Two-
scrambling to put together a dynamic care These scientific developments children’s calculations about moving thirds of nursing-home providers in
plan. Barron’s talked with experts on aging are reason for hope, but even away and job choices, according to a recent survey from the American
about some of the best ways to prepare. biotech executives say that a Coe. If parents have long-term care Health Care Association and National
cure is a ways away. As a re- insurance to help cover such needs, Center for Assisted Living said they
Early signs: Money missteps, including sult, care will continue to be at the adult children are more likely to move won’t make it another year, given
missed bill payments or mistakes counting center of Alzheimer’s treatment, and away and potentially take different Covid-related costs. The pandemic has
change or calculating a tip. See a doctor and fixing the U.S. caregiving system jobs—suggesting that caregiving fears also thrown into question the business
a financial advisor. needs to be a top priority. could also be restraining the type of model of nursing homes relying on the
mobility and productivity needed for short-term rehab stays that Medicare
Diagnosis: Think longer term. “People think Unlike cancer or heart disease, a dynamic economy. covers for those just out of the hospital
that life ends at diagnosis and they need much of the cost related to Alzheimer’s to subsidize the long-term care these
to get their affairs in order,” says Kirsten disease comes from caregiving. Medi- The financial costs can cascade facilities provide for those on Medicaid,
Jacobs, director of Dementia and Wellness care doesn’t cover most long-term care. through multiple generations as as fewer people have elected to get sur-
Education for LeadingAge, an association of Medicaid covers more, but requires caregivers compromise their own geries and the rehab business has dried
nonprofit providers of aging services. “Often, near-impoverishment to qualify. The finances and retirement security. At up during the pandemic.
that is not the case, especially as people are average annual Medicaid payment for the local level, Medicaid budgets are
being diagnosed earlier.” those 65 and older with Alzheimer’s is crowding out investments in youth “This is our opportunity to really
23 times as high as for those without education. “We are seeing right be- be thinking about how and where we
Create a flexible plan that can stretch sev- Alzheimer’s—an annual average of fore our eyes the intergenerational can care for people at the lowest cost
eral years and adapt as needs change. “When $8,779 versus $374. impact,” Vradenburg says. Millenni- and get the best outcomes—lowering
your loved one first gets dementia, put your als make up a sixth of those caring Medicare and Medicaid costs but also
name on the list for all types of programs. I Caregiving typically is associated for people with Alzheimer’s. the cost to the family,” says Coe.
failed to do that because my mom didn’t look with helping older adults with feed-
sick,” says Loretta Woodward Veney, 62, ing, bathing, grooming, or using a The sheer number of baby boomers That will require investing in
who eventually applied for a Medicaid toilet, but those needs typically come could outstrip available caregivers— long-term care infrastructure.
waiver program in Maryland that allowed in the last third of the disease. The including informal ones, since family Near the top of the list is focus-
her mom, 92, to get care in a group home. first two-thirds are largely focused on sizes have been shrinking. With fewer ing on supportive services that
helping Alzheimer’s patients with daughters and sons able to care for ultimately can save money by keeping
Long-term care: Even if a person is being daily life, including monitoring medi- aging parents, demand for long-term people at home longer, says Nora Su-
cared for at home, check out nearby long- cines and finances, transportation, care facilities like memory care and per, senior director of the Milken In-
term care facilities in the event the disease and keeping them engaged and safe. assisted living will increase. Both are stitute Center for the Future of Aging.
progresses and more care is needed. Look for largely paid for out of pocket, raising
services provided on site, including regular An army of family and friends— questions of how families will digest President Joe Biden’s agenda in-
visits from a physical therapist, dentist, or often women in their prime earning those costs. The annual median cost cludes money for increased access to
even manicurist. “At first, a change of pace and years—shoulder roughly two-thirds of assisted living is about $51,600, home and community-based services,
exposure to others is good, but the disease gets of the care for those with Alzheimer’s. according to Genworth’s Cost of Care funding for states to innovate more-
to a point where it can get very disorienting to Many interrupt their careers, give up survey. The median cost of assisted creative and cost-effective ways of
take them out for services,” says Amy Florian, promotions, cut back on hours, or quit living facilities with memory care is providing care, as well as tax credits
CEO of Corgenius, which helps financial advi- jobs. The average caregiver spends even higher, at roughly $57,000 a year. for informal caregivers and increased
sors navigate these situations for clients. If about five years on care for a dementia tax benefits to buy long-term care
such services aren’t provided, see if the facil- patient. That indirect cost can total With costs rising, demand for home insurance with retirement savings.
ity allows them to come in. On-site hospice is roughly $500,000 per person, based and community-based services that Experts on aging want to see more
another benefit worth asking about. on models that account for lost wages, can keep people independent longer investment in resources such as adult
promotions, and benefits, as well as the and out of nursing homes will only day facilities, training nurse practitio-
Take a close look at patient-to-staff ratios obstacles most people face when trying intensify. Yet many of these services— ners to become dementia-care special-
and turnover rates for all employees, includ- to re-enter the workforce in their 50s such as adult day care—have been es- ists, and creating dedicated teams that
ing nursing and cooking staff, as well as ad- or 60s, says Norma Coe, associate pro- pecially hard hit during the pandemic, can help families navigate the web of
ministrators like the director. fessor of medical ethics and health with many forced to shutter because specialists, clinical trials, and services.
policy at the Perelman School of Medi- of lockdowns. Many of those that
Look for newer thinking, such as facili- cine at the University of Pennsylvania. stayed open, meanwhile, have suffered Technology will also play a big role,
ties that don’t segregate those with Alzhei- a severe financial hit, says Kirsten Ja- and not just with telemedicine. Tech-
mer’s into memory-care wings, or that part- The indirect costs are likely to be cobs, director of Dementia and Well- nology can provide a range of moni-
ner with artists. Explore intergenerational higher in the future, as a larger share ness Education for LeadingAge, an toring that allows for independence
models or facilities connected with universi- of the next cohort of caregivers are association of nonprofit providers of but alerts caregivers when needed.
ties, and “greenhouse” homes—smaller primary breadwinners or single. The aging services. Sensors in rooms could mitigate phys-
communities that often have more consis- hit to their Social Security, for exam- ical danger, while software that can
tent on-site staff and allow people to get ple, may be even greater than for some At some point, in the later phases help monitor bill-paying or bank ac-
outside more easily. — R.K. in the current cohort who may be able of dementia, when people may get counts could help, since impaired
to claim spousal benefits on their more agitated or their safety may be money-management skills are among
higher-earning partner’s record, says compromised, many Alzheimer’s the first visible symptoms.
Coe. Rising female labor-force partici- patients will need round-the-clock
pation played a big role in the last care in a facility. Here, Florian worries Also high on the priority list: re-
economic recovery, especially as male about Covid’s lasting impact: “I fear thinking the value of caregivers. Many
that stigma is going to increase and paid caregivers at long-term care facil-

February 8, 2021 BARRON’S 27

FINANCIAL ADVISORS ARE OFTEN THE FIRST TO SPOT woman is 78, it will cover $10,000 a month for six
DEMENTIA IN CLIENTS. WHAT THEY RECOMMEND years. “That might be just 50% of the cost of care,”
Spickler says, “but it’s a lot better than nothing.”
By Beverly Goodman their minds begin to fail. That gets costly quickly:
According to the 2020 Genworth Cost of Care survey, For people who don’t have, or want, long-term care
Melissa Spickler, a financial advisor with Merrill a semiprivate room in a nursing home costs $93,075 insurance, the focus needs to be on ensuring that care-
Lynch in Bloomfield Hills, Mich., knew some- a year; add another $12,000 for a private room. As taking costs don’t decimate the portfolio. Purchasing
thing was wrong as soon as she heard that her pricey as that is, if you need more than 10 to 15 hours an income annuity, for instance, Smith says, can guard
client, “Beth,” had called. It was just two hours of home care per day, McClanahan says, moving to a against a spouse running out of money. Spouses or
after their last conversation, and she was calling facility is usually more cost-effective. other family caretakers may require some money for
with the same exact question. She called a third time additional help with housekeeping, cooking, child care,
the same day, with the same question. Spickler did This, of course, requires planning well ahead of a or other tasks they have less time or energy for—not to
what she had done with other clients and called a fam- diagnosis. Many advisors recommend long-term care mention some extra caretaking needs of their own.
ily member that her client had on record as a trusted insurance; Spickler believes so strongly in it that she
contact—Beth’s son—and let him know what had hap- asks clients who decide against it to sign a document It’s also worth discussing how much caretaking a
pened and what it could mean. “I know my clients acknowledging that it was discussed and rejected. Even spouse is willing to do, says Geri Eisenman Pell, an
really well, and I know their kids,” Spickler says. “I for the very wealthy, long-term care insurance can pro- advisor with Ameriprise in Rye Brook, N.Y. One couple,
know when something’s changed, and I know the dif- tect a spouse, ensure an inheritance, and generally miti- for instance, was financially equipped to deal with the
ference between forgetfulness and signs of dementia.” gate the financial destruction this disease can wreak. husband’s diagnosis, but his wife wanted to make sure
she could continue to spend as much as she wanted on
Financial advisors are often the first to spot the Pam Smith, an advisor at 6 Meridian in Wichita, her own care. “She knew that to get through it, and be
signs of dementia, for two reasons: They’re less likely Kan., is among the many advisors who recommend there for her kids afterward, she needed to take care of
to be in denial about the symptoms, and trouble with hybrid policies. These have a single, large premium, herself,” Pell says. “They had $4 million, and they were
finances is often one of the first problems. “Managing which can sometimes be paid over five or 10 years. If going to spend it. And they did.” They didn’t need to
your finances is a big frontal-lobe thing,” says Caro- worry about leaving their kids an inheritance because
lyn McClanahan, a financial advisor in Jacksonville, you don’t end up needing long-term care, they had already purchased a $3 million second-to-die
Fla., who is also a physician. “It requires a lot of you can get your premium back or leave life insurance policy—which factored into their decision
brain flexibility, and it slips the easiest.” it as a death benefit. Smith starts talking not to buy long-term care insurance.
to her clients about long-term care in-
Because of the unique nature of the disease, the first surance at age 58. Not all advisors have experience in this area. For
line of defense is, unfortunately, financial rather than Pricing is highly variable, but Spick- those looking for this kind of planning, Pell suggests
medical. Alzheimer’s is typically diagnosed when peo- ler offers an example: A 52-year- asking lots of open-ended questions to get at how often
ple are 75 or older, but the disease often begins some old woman can pay $20,000 they’ve helped other families in this situation, whether
20 years before signs of dementia manifest themselves— a year for five years to buy they’ve run family meetings, and their approach to
and that is when planning should begin. Since there is a $100,000 hybrid family conflict. Most experts stress that, ideally, the
virtually no medical treatment, Alzheimer’s expenses policy with a 3% advisor should have some relationship with children
are largely caretaking-related, and not covered by in- inflation rider. or other close relatives; at the very least, clients need
surance or Medicare—meaning that costs for a family, When this to provide a trusted contact, and a contact for accoun-
on average, are more than $350,000, according to the tants, lawyers, and other professionals they work with.
Alzheimer’s Association, twice as much as what’s in-
curred by caregivers of people with other conditions. Smith emphasizes the importance of keeping clients
engaged, even after a diagnosis of dementia or Alzhei-
Even if you aren’t worried about Alzheimer’s in mer’s. “I want them to feel a part of the meeting, and
particular, McClanahan warns that 70% of people will hear their voices for as long as they have them.”
need some sort of long-term care: “Rarely do people die
quickly.” The healthiest people are often the ones most This is also the time to revisit the crucial conversa-
likely to need long-term care: By living longer, their tion around end-of-life care. Get specific, McClanahan
chances of getting dementia increase, and their physical says. “The last couple of years of life can be a lot of
bodies can stay healthy for years, even decades, after rehab, hospitals, and nursing homes,” she says. “Most
people want to be kept comfortable, but not go through
all that.” Decide at what point, for instance, a bout of
pneumonia results in a call to hospice instead of a trip
to the emergency room. Have the hard, frank conversa-
tions now and you’ll be better prepared to be emotion-
ally present when the end eventually comes. B

A longer version of this article appears on Barrons.com.

ities hold multiple jobs and have long paying them living wages and offering Security credits for caregiving could qualified expense that could be paid for
commutes to work—both of which a career ladder to make this an indus- slow the intergenerational ripples cre- by health savings accounts.
have made the entire system vulnera- try they want to be part of. That’s going ated by the disease. Also on the table:
ble during Covid. It has also contrib- to take government intervention.” ways to save for, and possibly insure “There are models out there. It’s
uted to incredibly high turnover and against, the long-term care risk. For about the will to put them in place and
shortages in an overstretched industry. Considering ways to compensate the example, the bipartisan Homecare for recognize this is a big challenge that
“The pandemic made it clear that how army of informal caregivers that pro- Seniors Act introduced in the House in could really bankrupt our system,”
we pay caregivers isn’t adequate,” Su- vide the bulk of care for Alzheimer’s 2019 could be revived, potentially al- says Super. “What gives me hope is
per says. “We need to make sure we are patients also needs attention; proposals lowing home care to be considered a that the pandemic has raised aware-
like paid eldercare leave and Social ness of how the system is broken.” B

28 BARRON’S February 8, 2021

Biogen Goes All-In “It is basically a declining business,” That’s what’s different about adu-
On Alzheimer’s Drug says Mohit Bansal, an analyst with canumab, and why investors are hold-
Citigroup. “In the case of an adu- ing out hope. Biogen said that the
FDA approval would cause the stock to soar. Rejection would lay bare canumab non-approval, it just becomes FDA had requested additional data
the biotech’s problems. Investors have a few months to place their bets. a very difficult investment story.” that needed more time for review. The
FDA’s deadline has now been pushed
By JOSH NATHAN-KAZIS chance for the drug—and for Biogen “The upside is A drug to treat Alzheimer’s disease to June 7 from March 7. Illustration by Dan Page
(ticker: BIIB), which is counting on incredible. is an inherently risky bet. Even as the
A fter 18 years without a the approval as its other products face They would pharmaceutical industry has made The delay and the unusual relation-
new treatment for Alzhei- challenges. have huge advances in cancer and some ships between the drugmaker and the
mer’s disease, an extra unfettered genetic diseases, progress on neuro- regulator make it difficult for inves-
three months for the Food The delay adds one more wrinkle to access to the logical disorders in general—and Alz- tors to game out a decision. “This out-
and Drug Administration a decision that could determine the Alzheimer’s heimer’s in particular—has stagnated. come remains unanalyzable,” wrote
to decide on Biogen’s adu- fate of the giant biotech, as well as market for Failed trial has followed failed trial, as Piper Sandler analyst Christopher
canumab might not seem tens of billions of investor dollars and years.” one drug after another has disap- Raymond.
like long to wait. the health of millions of Americans. pointed.
Colin Bristow, an On an earnings call this past week,
Still, the delay, announced on Jan. If the FDA approves aducanumab, analyst at UBS If aducanumab fails, the nearest the company offered no further details
29, was unexpected. The agency’s Wall Street expects the company’s alternative on the horizon is a similar on the delay, but said it remained con-
panel of outside experts has already shares, which traded recently at $263, monoclonal antibody from Eli Lilly fident in aducanumab’s approval. “We
rejected the evidence for aducanumab. to climb as much as 70%. Analysts (LLY) called donanemab, which Lilly continue to stand behind our clinical
Under normal circumstances, that estimate the drug could bring in $10 says performed well in a trial in early data,” Biogen CEO Michel Vounatsos
would have been the end of the com- billion a year in sales, or more. symptomatic Alzheimer’s patients. said on the call. “We believe our re-
pany’s hopes. Lilly doesn’t plan to share details on sults support approval.”
The consequences of failure are the trial until mid-March.
But the FDA didn’t say no to adu- nearly as stark. Biogen’s core busi- The company plans to spend $600
canumab. Instead, it asked for more nesses are struggling, with many of its Aducanumab’s journey toward million launching aducanumab in
time. Which means there remains a most important drugs facing growing approval would ordinarily have ended 2021, a third of which is reimbursable
challenges from competitors. at least twice by now. Biogen said in by its Japanese partner, Eisai (ES-
March 2019 that it was stopping two ALY). Biogen’s chief financial officer,
late-stage trials because the drug Michael McDonnell, said on the earn-
wasn’t helping patients. Seven months ings call that the company has allo-
later, it said that the drug actually had cated a “significant portion of its man-
helped, after all. In November, the ufacturing capacity to aducanumab,” a
FDA convened a panel of experts that decision that would “impact 2021 re-
rejected Biogen’s analysis, voting over- sults” if the drug doesn’t receive ap-
whelmingly that the company’s data proval.
didn’t prove that aducanumab is an
effective treatment for Alzheimer’s The full-court press comes as
disease. things begin to look grim for many of
Biogen’s most important products.
The FDA usually takes the advice
of its expert panels. But Biogen shares Its best-selling drug, a multiple
are trading as if aducanumab has a sclerosis treatment called Tecfidera, is
real chance—largely because of an competing with a brand-new generic
unusual back-and-forth between the version after an unexpected court rul-
drugmaker and the FDA. ing this past spring. Analysts expect
its sales to fall to $1.7 billion this year
Evidence came in the form of a doc- from $4.4 billion in 2019, when it ac-
ument the FDA presented to its panel counted for 31% of Biogen’s total sales.
of experts in November. Normally, the
agency will give the panel a lengthy In addition, Biogen anticipates
briefing book independently analyzing “significant erosion” in U.S. sales of a
the evidence for the drug it is asking cancer drug, Rituxan. Its other multi-
the panel to review. This time, FDA ple sclerosis drugs are also facing
submitted a 343-page document that it growing competition, as is its $2 bil-
had prepared with Biogen. lion-a-year spinal muscular atrophy
drug, Spinraza.
“There was a special relationship,”
says Marc Goodman, an analyst with Biogen has another shot at a huge
SVB Leerink. “You could crystal- neurology market in the second quar-
clearly see it. The briefing documents ter, when a large study of a depression
were unprecedented. I’ve been doing drug it is developing with Sage Ther-
this job over 20 years and I’ve talked apeutics (SAGE) returns data. A neg-
to people who have been doing it lon- ative result, however, could hurt the
ger, and we’ve never really seen any- stock even more.
thing like that before, where the FDA
is just working that closely with a Wall Street expects Biogen’s earn-
company. They went to the [advisory ings to drop sharply in 2021, to $20.22
committee] basically saying, ‘This a share from $33.70 a share.
drug’s getting approved.’ ”
Biogen, meanwhile, has doubled
and redoubled its bets on adu-
canumab, even authorizing two sepa-

February 8, 2021 BARRON’S 29

rate $5 billion share repurchases since gen as a sign that the agency wants to “While the trial data has led to Blockbuster serving in an acting capacity.
December 2019. Analysts have seen say yes. some uncertainty among the scientific In the Balance If she is given the top job on a per-
the buybacks as a bet by the company community, this must be weighed
on aducanumab’s approval; buying its In meeting minutes quoted in the against the certainty of what this dis- Biogen’s manent basis, that could be taken as a
own shares in anticipation of a spike joint briefing document, the FDA said ease will do to millions of Americans aducanumab positive sign for aducanumab. That’s
when the FDA gives the nod. that the “wholly unique situation” of absent treatment,” an Alzheimer’s could rake in because in 2016, in an eerily parallel
the aducanumab program in the sum- Association executive wrote in a pub- situation, Woodcock backed the ap-
“We are of the view that the more mer of 2019, when Biogen was review- lic comment submitted to the FDA $10 B proval of a Duchenne muscular dys-
prudent choice would be to save the ing the data it received after the trials advisory committee. trophy drug, despite the opposition of
cash for [business development] in were stopped, required that analyses a year in sales, the FDA’s advisory committee and
case the decision does not go in com- of the trial data be done “as part of a So, it’s easy to understand the pres- or more, if it is opponents within the agency. (Despite
pany’s favor,” Citigroup’s Bansal bilateral effort involving” the FDA sure on the FDA to say yes. But ap- approved by the the approval, insurers balked at pay-
wrote in an October note about the and Biogen. The company says that it proving a drug that might work could FDA, Wall Street ing for the drug.)
second buyback announcement. worked with the FDA “in a collabora- make it harder to find one that defi- analysts estimate.
tive manner to achieve a maximum nitely works. Complicating the picture is Eli
Biogen defended the buybacks. understanding of the existing data Lilly’s announcement in January that
“Biogen is committed to allocating through a working group.” “The reason we have a regulatory its drug donanemab slowed decline in
capital efficiently, effectively, and ap- agency is because science is difficult, early symptomatic Alzheimer’s pa-
propriately,” the company said in a T hat collaboration was unusual and we know that the only way we get tients by 32%.
statement. “While share repurchases enough that the advocacy through to correct answers is being
are one component of our strategy, last group Public Citizen voiced rigorous and empirical,” says Dr. Peter The implications for aducanumab
year alone we executed eight business- concerns to the FDA. Asked to Bach, director of the Center for Health are unclear: Some analysts suggest
development deals that have a total comment on the criticism that officials Policy and Outcomes at Memorial that Lilly’s apparent success could
value of roughly $3 billion.” had collaborated inappropriately, an Sloan Kettering Cancer Center. ease pressure on the FDA, with the
FDA spokesperson said that the possibility of another therapy backed
If aducanumab makes it to market, agency could not comment on pending Once a treatment is approved, it by better data just a few years down
it’s all fine for Biogen. applications. becomes harder to run trials of other, the line. But the success of do-
possibly better drugs. And allowing a nanemab, which works on the same
“The upside is incredible,” says “The reality is it probably deserves drug company to reap huge profits general principles as aducanumab,
Colin Bristow, an analyst at UBS, who to have another study to prove that it from a drug that doesn’t actually work could also help shore up doubts
says sales of aducanumab could be as really works,” Leerink’s Goodman warps the incentive structure in- around the science behind the Biogen
high as $20 billion a year. “They says of aducanumab. “But it’s Alzhei- tended to push companies to discover drug and weigh in favor of approval.
would have unfettered access to the mer’s, and that’s why I think things useful drugs. “I think it would be a
Alzheimer’s market for years.” are different....There’s nothing ap- great pity to see the drug approved,” If the FDA does approve adu-
proved for Alzheimer’s. And I think Bach says. canumab, analysts predict Biogen
But if the FDA disagrees, Biogen that the [FDA] division head is frus- shares could soar to around $450. If it
could fall hard. The company issued trated by that.” The FDA is caught in the middle, is rejected, Jefferies analyst Michael
2021 sales guidance this past week and it couldn’t come at a more delicate Yee expects the stock to drop to be-
that fell well short of Wall Street ex- There is undoubtedly an urgent time as it seeks to shore up a reputa- tween $180 and $220.
pectations, even though it included need to make new Alzheimer’s drugs tion for rigor and independence that
“modest” aducanumab revenue. In a available. According to the Alzhei- has suffered over the past year. Biogen shares, which trade at 13
note that day, Bansal wrote that if ad- mer’s Association, 5.8 million Ameri- times forward earnings, in line with
ucanumab isn’t approved, the conser- cans are living with the disease today, The Biden administration has yet to that of major competitors, haven’t
vative guidance “resets the downside including 10% of Americans over 65. name an FDA commissioner; the closed below $200 since 2013.
much lower,” and could mean the agency is being led by a longtime se-
stock will drop even further. nior official, Dr. Janet Woodcock, Even in a best-case scenario for
Biogen, uncertainties remain. The
Aducanumab’s potential comeback Changing Fortunes megablockbuster sales estimates for
began months after Biogen said in aducanumab don’t factor in the possi-
March 2019 that an independent data- How Biogen's stock has reacted to developments on its Alzheimer's drug. Jan. 29, 2021 ble near-term arrival of Lilly’s alter-
monitoring committee had deter- Biogen (BIIB / Nasdaq) FDA delays decision native. How deeply that could cut
mined that two large trials of the drug into Biogen’s sales depends on how
were failing. (The company still ac- $400 March 21, 2019 Oct. 22, 2019 until June. quickly Lilly could get its drug to
knowledges that one study failed.) 350 market.
After an analysis of data that wasn’t Two late-stage Biogen says it will seek Nov. 6, 2020
available when the trial was stopped, aducanumab trials halted. FDA approval based on FDA advisory panel In a statement, Biogen said it was
it now believes the second study actu- new analysis of data rejects evidence for too early to talk about competition
ally found that patients on a high dose from the halted trials. between the drugs. “While we feel
of aducanumab experienced 22% less aducanumab. that it is premature to speculate on
clinical decline than those in the pla- commercial uptake given that neither
cebo group. 300 aducanumab or donanemab are ap-
proved products, we welcome innova-
The FDA’s advisory committee dis- 250 tion in Alzheimer’s disease where new
agreed. The votes of advisory panels treatments are desperately needed,”
aren’t binding, but the FDA rarely 200 2020 2021 the company says.
ignores them. “The chances of this Jan. 2019 Source: FactSet
getting approved in this cycle are ex- The FDA’s delay gives investors
tremely low,” Bansal says. “The panel more time to decide how to play the
was overwhelmingly negative.” aducanumab conundrum. Precedent
suggests that Biogen will be disap-
That isn’t reflected in how the stock pointed, and that the stock will dive.
is trading, however. Investors are tak- But it’s hard to dismiss the signs that
ing the FDA’s collaboration with Bio- something unexpected is in store. B

30 BARRON’S February 8, 2021

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February 8, 2021 BARRON’S 31

FUND PROFILE Talking With George Smith and Chris Pearson
Co-Managers, Davenport Small Cap Focus Fund

A Small-Cap Fund in stock options and move on. This Pearson, left, and in 2006 and has been there ever since.
Wins Big Without strategy has enabled the fund (ticker: Smith look for small- The two work with 10 long-tenured
Relying on Big Tech DSCPX) to deliver an 19.4% five-year cap companies with
annualized return, besting 99% of its executives who act analysts, and everyone at the firm
peers in Morningstar’s Small-Blend as “owner-opera- invests in Davenport’s funds through
category. The fund’s 0.97% expense tors,” meaning those their retirement plan—roughly $25
ratio is below average for an actively with large insider million of which was in Davenport
managed fund. ownership. That Small Cap Focus at the end of 2020.
approach has led
Smith, 45, got his start as an ana- Davenport Small “All of our employees continue to
lyst at Davenport in 1997 right after Cap Focus to out- be invested alongside clients,” Smith
graduating from the University of perform competitors says. “It creates an alignment of inter-
Richmond with a degree in finance. over the past five ests and accountability.”
But his actual connection began even years, while also
earlier. “I had a relationship with a seeing a lower level Insider ownership can encourage
broker at Davenport & Co. when I was of volatility. executives to think long-term and not
in my teens,” he says. “I had maybe take unnecessary risks with their and
By LEWIS BRAHAM entire careers at parent firm Daven- $500 in an account that my parents fellow shareholders’ money for a
port & Co., a Richmond, Va.–based started for me. I was very interested in transitory payout. The average stock
O ne sign of a good leader is broker and financial advisor in busi- stocks, and I would call [my broker] in Davenport Small Cap Focus’ port-
commitment. In the busi- ness since 1863. and badger him incessantly. The size folio is currently about 16% insider-
ness world, that often of my account was very misaligned owned versus the Russell 2000’s 7%,
means someone who Looking for that same managerial with the amount of attention that he Smith says.
puts their own money on commitment in the companies they had to pay to me and the number of
the line and sticks with a hold is key to the duo’s investment calls that I put into him.” Controlling individual-company
company through good strategy. They seek small companies downside risk is essential as the fund
times and bad. Few fund managers with executives who act as “owner-op- Pearson, 36, also went to the Uni- is concentrated—typically holding
are as committed as George Smith and erators”—those with large insider versity of Richmond. He got an intern- between 30 and 35 stocks—so any
Chris Pearson of Davenport Small ownership who behave more like the ship at Davenport working for Smith
Cap Focus. Both have worked their devoted founder of a business than a Photographs by
hired-gun executive who might cash
JUSTIN T. GELLERSON

32 BARRON’S February 8, 2021

losses from company blowups are greater depend on rising commodity prices. Yet Scoreboard: The Far Side
than in highly diversified portfolios. Hav- they are also leery of overpaying for stocks
ing executives with skin in the game makes in hot sectors. Perhaps the most surpris- (Stocks continued to rise in anticipation of post-Covid growth. U.S. stock funds soared 3.18% on relief and
that less likely to happen. In fact, the fund ing aspect of the fund’s strong longer-term vaccine hopes. India Regional Funds rallied 6% on a faster-than-expected recovery from pandemic highs.
has proven less volatile than its small-blend performance is its minuscule 4% weight-
category peers and the Russell 2000 in the ing in tech stocks and nonexistent health- One Week Year-to-Date
past five years, and its worst loss—a drop of care exposure—two sectors that have re-
28.5% from Feb. 1 through March 30 in cently driven the market higher. U.S. STOCK FUNDS 3.18% 5.36%
2020—compares favorably to the average TOP SECTOR / India Region Funds 6.32 6.33
fund’s 34.3% loss and the Russell 2000’s In comparison, tech stocks and health- BOTTOM SECTOR / General U.S. Treasury Funds – 1.34 – 3.17
32.2% decline. care stocks make up 15% and 21%, respec- S&P 500 2.23 3.08
tively, of the Russell 2000. The small-cap U.S. BOND FUNDS 0.03 0.06
A typical investment for the fund is index did outperform Davenport for the Bloomberg Barclays AGG Bond – 0.35 – 0.91
Monarch Casino & Resort (MCRI). “In- past 12 months, but its annualized return
siders own 25% of the company and the still lags behind the fund by more than THE WEEK'S TOP 25 Investment Objective One Week Year-to-Date
CEO [John Farahi] 10%,” Smith says. “The two percentage points for the past three
Farahi family founded this company, and and five years. Fund Specialty & Misc 18.89% 56.3%
it’s the consummate owner-operator situa- Specialty & Misc 15.42 41.5
tion. They’ve done an excellent job building “It’s not that we refuse to invest in tech- Cannabis Growth I / CANIX Science & Tech 15.32 26.9
this from the ground up, essentially from a nology,” Smith says, pointing out that the American Gro Cannabis E / AMREX Flexible Portfolio 14.65 34.1
motor lodge into a billion-dollar enterprise fund recently sold a highly profitable posi- Jacob Internet Fund Inv / JAMFX Financial Services 14.08 18.3
that we think can grow from here.” tion in e-tailer Etsy (ETSY). “We just find Footprints Discover Val / DVALX Small-Cap Core 13.62 28.7
that in the world of smaller-cap technol- Emerald Bank&Finance Ins / HSSIX Science & Tech 12.16 16.2
Smith is particularly excited about the ogy, the business risk is elevated—the risk Jacob Discovery Inst / JMIGX Small-Cap Growth 10.69 25.5
prospects of a casino Monarch acquired in of failure, rapid change or obsolescence. Eventide Expo Tech I / ETIEX GL Sm/Mid-Cap 10.56 18.7
Black Hawk, Colo., in 2012, which it has There’s also a growth-at-any price phe- Jacob Small Cap Gro Inst / JSIGX Flexible Portfolio 10.1
recently renovated and expanded. nomenon in tech that’s occurring [today] Kinetics SO & CR Inst / LSHUX GL Sm/Mid-Cap 9.94 16.9
that may start to exhaust itself in the not Fairholme Fairholme / FAIRX Mix Tgt All Mod 9.77 23.8
Nor is he concerned about Covid-19 too distant future.” Kinetics SC Oppty NL / KSCOX Small-Cap Value 9.71 23.9
killing the business. In fact, during the Roumell Opp Value Inst / RAMSX Multi-Cap Value 9.60 23.1
panic last March, he bought 200,000 Health care is similar, especially in Bridgeway Ultra-Sm Co / BRUSX Small-Cap Growth 9.40 42.4
more Monarch shares as the stock’s price small-cap biotech companies dependent on Athena Bhvrl Tctcl I / ATVIX Small-Cap Growth 9.24 24.2
fell to a 2020 low of $14. One reason for government approval for new drugs to suc- Morg Stan I Inc I / MSSGX Small-Cap Core 9.14 24.9
his confidence: The fund’s strategy favors ceed, leading to “binary outcomes,” Pear- Friess Small Cap Gr Inst / SCGFX Small-Cap Growth 8.92 15.5
companies with low debt and strong bal- son says. Perkins Discovery / PDFDX Multi-Cap Core 8.87 26.6
ance sheets that can weather market Kinetics Paradigm NL / WWNPX Small-Cap Growth 8.87 20.1
storms. The fund’s largest sector weighting cur- TANAKA Growth Fund R / TGFRX Science & Tech 8.60 12.1
rently is its 29% position in consumer-dis- Driehaus Micro Cap Gro / DMCRX Multi-Cap Growth 8.57 13.0
“Monarch has arguably the best balance cretionary stocks. Historically, the fund’s Kinetics Internet NL / WWWFX Mid-Cap Growth 8.51 14.1
sheet in the [casino] industry,” he says. allocation to the sector has been closer to Morg Stan Insight A / CPOAX Health/Biotech 8.43
Today Monarch stock trades at $55. 25%. “We feel good generally about the con- Alger Mid Cap Fcs Z / AFOZX Small-Cap Growth 8.43 7.7
sumer right now,” Smith says. “If you just Franklin Str BD A / FBDIX 8.40 20.7
Because the fund has a high-quality tilt, look at pent-up demand, savings, consumer Oberweis Micro-Cap Inv / OBMCX
Smith and Pearson tend to avoid cyclical credit metrics—all of it seems to portend
sectors like energy and mining, which healthy spending going forward.” THE WEEK'S BOTTOM 10 Investment Objective One Week Year-to-Date
Fund
Davenport Small Cap Focus Besides Monarch Casino, the consumer Equity Mkt Neutral – 4.55% – 16.0%
category also includes OneSpaWorld Nvgtr Sentry Mgd Vol I / NVXIX Alt Long/Short Eq – 3.37 – 3.5
Holdings (OSW), a company that operates Gotham Short Strat Inst / GSSFX Alt Long/Short Eq – 3.37
spas on cruise ships that has also suffered Hussman Inv Strat Gro / HSGFX Alt Long/Short Eq – 3.27 7.3
Covid lumps. The stock hit a low of $2.50 F/m Inv Euro L/S SC IS / BESMX Corp Debt BBB Rtd – 3.17 – 20.9
last March. But Pearson sees it as a safer PIMCO Extend Dur Inst / PEDIX Abs Return – 3.15
way to play a recovery in travel. ATAC Rotation Instl / ATCIX Precious Metals Eq – 2.80 – 6.9
Gold Bullion Strat Inv / QGLDX Genl US Treasury – 2.68 3.4
OneSpaWorld “doesn’t put up any of the Wasatch Hois US Tr Inv / WHOSX Alt Long/Short Eq – 2.67
capital” for having spas on ships, he says. Gotham Hedged Plus Inst / GHPLX Alt Long/Short Eq – 2.18 – 6.2
“They just manage the spas and take a fee Forester Value N / FVALX – 6.6
for it, and they have a near-monopoly posi- – 4.6
tion.” Because it has a capital-light busi- – 1.5
ness, the company’s balance sheet is strong
Total Return enough to face the downturn. The market THE LARGEST 25 Assets 3-Year* 1-Week YTD
1-Yr 3-Yr 5-Yr agrees: Today its shares trade at $10. Fund Return Return

DSCPX 23.6% 14.1% 19.4% A recovery in travel spending is part of (billions) Investment Objective Return
the team’s thesis about pent-up consumer
Small Blend Category 21.5 7.4 13.4 demand. “Think about all of those trips to American Funds Gro A / AGTHX $125.2 Large-Cap Growth 18.6% 3.04% 5.0%
Vegas that were deferred, trips to New 110.3 Large-Cap Growth 16.8 2.85 3.2
Top 10 Holdings % of Assets York, spring breaks, cruises,” Pearson says. Fidelity Contrafund / FCNTX 89.9 Intl Large-Cap Growth 2.70 3.1
Company / Ticker “People are going to be champing at the bit American Funds EuPc R6 / RERGX 87.7 Mix Tgt All Gro 9.6 0.92 1.5
to get out there” once the pandemic ends. American Funds Bal A / ABALX 74.9 Mix Tgt All Mod 8.2 1.01 2.2
Cannae Holdings / CNNE 6.4% American Funds Inc A / AMECX 67.2 Large-Cap Core 5.5 2.03 3.1
And this fund will be ready for that American Funds ICA A / AIVSX 64.4 Instl Money Mkt 9.0 NA
Monarch Casino & Resort / MCRI 6.1 surge when it happens. B BlackRock Cash Inst SLA / 63.0 Large-Cap Core NA NA 2.6
American Funds Wash A / AWSHX 61.9 Global Equity Income 8.6 1.84 1.5
Evoqua Water Technologies / AQUA 5.2 American Funds CIB A / CAIBX 59.6 Large-Cap Core 3.7 0.69 3.1
American Funds FInv A / ANCFX 58.9 Global Large-Cap Growth 10.1 2.43 4.3
Stewart Information Services / STC 4.0 American Funds NPer A / ANWPX 56.9 Global Large-Cap Core 16.7 2.42 3.4
American Funds CWGI A / CWGIX 56.0 Large-Cap Growth 8.1 1.67 4.1
Builders FirstSource / BLDR 4.0 T Rowe Price BC Gro / TRBCX 53.5 Core Plus Bond 19.0 3.70 – 0.7
MetWest Total Rtn I / MWTIX 51.5 Large-Cap Core 6.2 – 0.24 3.7
Lamar Advertising / LAMR 3.9 Fidelity Str Adv LgCp / FALCX 48.2 Multi-Cap Core 2.51 4.4
Fidelity SA US Tot Stk / FCTDX 44.7 Multi-Cap Growth 0 2.76 7.7
Colfax / CFX 3.8 Fidelity Gro Company / FDGRX 44.2 US Mortgage 0 4.52 0.2
DoubleLine Tot Rtn I / DBLTX 41.9 General Bond 29.5 – 0.15 – 0.8
J&J Snack Foods / JJSF 3.0 Fidelity Str Adv Cre Inc / FPCIX 41.3 Large-Cap Growth 4.3 – 0.22 7.8
Fidelity Blue Chip Gr / FBGRX 40.5 Large-Cap Growth 6.1 4.54 5.0
NewMarket / NEU 2.9 American Funds Gro R6 / RGAGX 38.2 Core Bond 29.7 3.02 – 0.6
Fidelity Srs Inv Gd Bd / FSIGX 37.5 Multi-Cap Core 18.9 – 0.30 3.7
Switch / SWCH 2.9 American Funds AMCP A / AMCPX 34.4 Core Plus Bond 6.6 2.76 – 1.1
PGIM Tot Rtn Bond Z / PDBZX 34.4 Mix Tgt All Gro 13.2 – 0.35 0.9
Total 42.2% T Rowe Price Cap App / PRWCX 6.0 1.92
13.0
Note: Holdings as of Dec. 31; Returns through Feb. 1;
three- and five-year returns are annualized. *Annualized 02/01/2018 to 02/04/2021. Through Thursday. Source: Lipper

Sources: Morningstar; Davenport Asset Management

February 8, 2021 BARRON’S 33

FUNDS More than two dozen actively managed funds
rose more than 100% last year. But was that
skill or luck? Let history be your guide.

When Great Returns be a harbinger of problems. ing a fund; you are really buying a
Ron Baron, for instance, is a stock. Everything else in comparison
is a rounding error.”
longtime, renowned bull on electric-
ARK founder Cathie Wood is also
Can Mean Bad News: vehicle-maker Tesla (TSLA). In an a firm Tesla believer, but her actively
interview with Barron’s in early 2020, managed, $25 billion ARK Innova-
Baron said he expected the electric- tion exchange-traded fund (ARKK)
vehicle maker to reach a $1.5 trillion has taken a more conservative ap-
proach. Tesla is the fund’s top holding,
More 2020 Perversity market value by 2030. Tesla stock but its weight is capped at roughly
soared more than 740% last year and 10%, so it won’t overtake the portfolio.
is now halfway to that valuation. It The ARK ETF’s strong returns—it
also is the single-biggest driver, by far, was up 153% last year—can be attri-
buted to a wider range of stocks, in-
of the 149% gain for the $7.1 billion cluding Square (SQ), Roku (ROKU),
and Invitae (NVTA).
Baron Partners fund (BPTRX),
ARK Innovation has beaten the
which beat the Russell 3000 by 128 Russell 3000 for five of the six years it
has been in existence, usually by per-
percentage points. centage points in the single digits, and
never by more than 100 points, as it
C hoosing a success- one-year returns are problematic, as The Baron Partners fund began did last year. “I don’t think we expect
ful actively man- they’re representative of a fairly short buying Tesla in 2014; its last to deliver over 100% return next year,
aged fund has piece of market history and not neces- purchase was in February 2016 for of course,” says Ren Leggi, client port-
never been easy, sarily indicative of manager skill. less than $40 per share. The stock is folio manager at ARK. The company’s
and 2020, with The No. 4 best performer, $1.6 billion now at $850. Co-managers Ron and targeted annualized return for the
its many quirks, Michael Baron have trimmed the next five to seven years is about 15%.
shined a light on Morgan Stanley Inception Port- fund’s Tesla position since then. At
folio (ticker: MSSGX), for example, S trong conviction is a good
thing in an active manager,
just how difficult it can be—even when lagged behind the Russell 3000 index the beginning of 2020, it had grown but it must be consistent and
repeatable. Yet even for sea-
you think you have all the information. in four out of the nine years prior to to about 17%. The fund sold 20% of soned investors who know to look at
a fund’s longer-term history, some of
Last year, more than two dozen By Evie Liu 2020, and barely matched the bench- its stake throughout 2020—but the these outsize gains may skew those
figures for years to come.
actively managed stock funds re- mark in two other years. Yet in 2020, stock rose so quickly that by the end
The Morgan Stanley Inception
turned more than 100%, versus the it returned 151%, nearly 130 percent- of the year, nearly half of the fund’s Portfolio fund, for instance, has
returned an average of 46% over the
Russell 3000’s 19% gain. That’s really age points ahead of the broad market. assets were invested in Tesla. “We are past five years. Remove 2020’s run-
up and the fund’s rolling five-year
quite remarkable: In the past decade, Why? Two small companies that more confident in Tesla’s business annualized return since its inception
three decades ago drops to 10%—
there hasn’t been even a single fund focus on cloud computing—Appian fundamentals than we were at the roughly in line with the Russell 3000
index.
that returned more than 100% in a (APPN) and Fastly (FSLY)—returned time of our last purchase,” says
This highlights another wrinkle in
calendar year; it quite possibly never more than 300%. Those two stocks, Michael Baron, adding that the firm evaluating a fund’s history: Returns
are measured at specific points to en-
happened before. plus personal-styling service Stitch is nonetheless mindful of portfolio able uniformity and make compari-
sons easier. These snapshots in time,
So, is this a sign that active man- Fix (SFIX), contributed to roughly a concentration. however, do not reflect how people
actually invest, Wiener says: “Most
agement is “back?” Not quite. third of the fund’s gain last year. That concentration could leave the investors don’t put their money in at
the beginning of a quarter and take it
“You see these incredible numbers Even assuming that a manager is fund vulnerable to any sharp move- out at the end of the quarter.” Your
own personal performance could be
at the end of 2020 because of what skillful—rather than just lucky—in ments in the stock. “You are taking a very different—for better or, usually,
for worse. B
happened in that one-year period,” owning a stock that skyrockets and big leap of faith when somebody has

says Daniel Wiener, chairman of Ad- pulls the rest of the fund along with it, almost 50% of their money in one

viser Investments. “But you shouldn’t such wild outperformance can also stock,” says Wiener, “You are not buy-

let that drive your investment deci-

sion, because these are one-offs.” Too Good to Be Repeated
The top performers of 2020 are

mostly concentrated growth funds Active management seems to have had a good 2020, but the biggest winners reached heights never seen
from a handful of firms. The top three before—and that probably won't be seen again.
funds are from ARK Investment Man-
agement, it has two others in the top Annual return relative to Russell 3000 ARK Innovation ETF
20; Morgan Stanley also has five 15.0 (percentage points) Morgan Stanley Inception fund
funds on the list. Baron Capital Man-
agement and Zevenbergen Capital 100 Baron Partners fund

Investments each have a few funds

in the top 20. 50

While doubling your money is a

win for current investors, these out- 0

size gains pose problems for potential

investors trying to evaluate these -50

funds. 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Now, savvy investors know that Source: Morningstar

34 BARRON’S February 8, 2021

TECH TRADER Many cloud stocks, which wouldn’t exist without
Amazon Web Services, trade at 20 times sales. At
the same multiple, AWS would be worth $1 trillion.

Amazon Sends a yet to be named will take over AWS. stake worth about $200 billion.
If there’s any reason for caution Second, Jassy has been at Amazon

about Amazon, it would be a potential for 23 years. It’s the only place where

Clear Message–Its leadership vacuum at AWS just as he’s worked since graduating from
competition in the cloud market is Harvard Business School in 1997. He
heating up. has a strong reputation among Ama-
zon watchers, Wall Street loves him,
There are now real rivals for AWS,

Future Is the Cloud although the precise math is fuzzy. and Bezos trusts him. So, Jassy was
Alphabet (GOOGL) had $3.8 billion the obvious choice.
in cloud revenue in the quarter, up
47%, and the company said its Google Finally, the transition is happening
at a moment of strength for Amazon. In

Cloud Platform, which competes with the fourth quarter, its sales were $125.6

AWS, grew even faster. But that seg- billion, up 44% from the total a year

ment also includes Google Workspace, earlier, blowing past Wall Street esti-

E veryone knew the day “cloud” wasn’t mentioned. which competes with Microsoft Office. mates. Profits of $14.09 a share in the
was coming, but in- Today, AWS is synonymous with Microsoft (MSFT) had “connected latest quarter were nearly double ana-
vestors still seemed lyst forecasts, even though the company
surprised by Jeff Be- cloud computing. In the fourth quarter, cloud” revenue of $16.7 billion in its spent more than $4 billion in the period
zos’ announcement it had revenue of $12.7 billion, boosting latest completed quarter, but that in- to protect workers against Covid-19.
that he would be step- the total for the year to $45.5 billion, cludes more than just Azure, Micro-
up 29%. AWS ended 2020 with a soft’s direct rival to AWS. Microsoft Jassy was already running the most
also puts Office 365 and a cloud ver- important part of Amazon. This is no

ping down as CEO. backlog of $50 billion, 68% above the sion of its Microsoft Dynamics enter- longer an e-commerce company with a

Amazon.com has never had another total a year earlier. The business has prise application business in its cloud cloud computing hobby; AWS is now

chief executive, after all, and Bezos grown more than 475% since the end bucket. Oracle (ORCL) and IBM worth more than the retail segment.

built the business from scratch into By Eric J. Savitz of 2015, and next-year sales will easily (IBM) also claim substantial cloud And yet it’s hard to separate Ama-

one of the world’s largest companies, top $50 billion. Many cloud software businesses. But Amazon remains the zon from Bezos. The stock fell 2% on

with 1.3 million employees, annual companies—most of which wouldn’t dominant player, and not by a little. the transition news, despite being

revenue nearing $500 billion, and exist without AWS—are trading for T here are several reasons accompanied by the banner earnings
a market value of $1.7 trillion. 20 times sales or higher. Apply that that Amazon is unlikely results. Any weakness could be a
measure to AWS and the business to miss a beat through buying opportunity. This past week,
No one has ever launched a com- is worth more than $1 trillion. the CEO transition. Morgan Stanley analyst Brian Nowak
pany and steered it to a valuation of reiterated his Overweight rating on
more than a $1 trillion while still at the Jassy has served as CEO of Amazon

helm. By that measure, Bezos is more Web Services since its humble begin- First, as executive chairman, the stock, upping his price target to

successful than Steve Jobs, Bill Gates, ning, and he became the logical suc- Bezos said he intends to spend time $4,200 from $3,900 and setting a

Warren Buffett, Sam Walton, Walt cessor to Bezos after the recent retire- thinking about new products and “bull case” target of $5,000, 50%

Disney, Henry Ford, Andrew Carne- ment of Jeff Wilke, the longtime leader early initiatives, where he has always above Amazon’s recent close of $3,352.

gie, or John D. Rockefeller. of the company's retail business. thrived. “Keep inventing, and don’t His view is that Bezos will still be

Amazon (ticker: AMZN) shares Taken together, there has been a despair when at first the idea looks around, Jassy knows what he’s doing,

have appreciated every year since 2014, lot of change for Amazon in a short crazy,” he wrote in a letter to Ama- the bench is deep, e-commerce is still

increasing more than tenfold over that period. Wilke’s successor, Dave Clark, zon employees last week. “Remember accelerating, and so is Amazon Web

span. The company has spent years has just settled into his new role. Jassy to wander. Let curiosity be your com- Services.

pressing its advantage in e-commerce. is getting the top job. Bezos is moving pass. It remains Day 1.” Bezos is the The bottom line: Amazon is ready

It has a growing fleet of delivery trucks to executive chairman. And someone company’s largest investor, with a for its post-Bezos close-up. B

and jets servicing vast warehouses

staffed by humans and robots.

And, yet, the real value driver has

been the emergence of Amazon Web Andy Jassy, who will become Amazon CEO
Services, an idea nurtured by Bezos’

longtime lieutenant, Andy Jassy—yes, later this year, founded its cloud business
the man just named to replace Bezos

as CEO later this year. —Amazon.com Web Services—in 2002. David Paul Morris/Bloomberg
In July 2002, Amazon issued a

short press release unveiling Amazon- “This is an important beginning and
.com Web Services. Bezos said that

Amazon was “putting out a welcome a new direction for us,” the company
mat for developers,” adding propheti-

cally, “this is an important beginning said at the time.
and new direction for us.” The word

February 8, 2021 BARRON’S 35

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36 BARRON’S February 8, 2021

Q&A An Interview With Savita Subramanian, Head of
U.S. Equity & Quantitative Strategy, Bank of America

Adjusting
To the Biden
Market

By LESLIE P. NORTON

I t’s time to buy cyclicals and small-caps. That’s been a
bold call, especially for fund managers who have ac-
quired a “hot-stove mentality” after being burned over
the past 10 years. But this time, says Savita Subrama-
nian, Bank of America’s widely followed strategist,
outperformance could last for years, as it did after the
tech bubble burst. Finding promising investments is
even more important today, especially if the market itself
delivers lackluster returns, as she expects.

A double major in math and philosophy at the Univer-
sity of California, Berkeley, Subramanian is a heavy user
of quant data in her studies of investor sentiment, and has
been chief strategist since 2011. She recently chatted with
Barron’s about how the Biden administration will achieve
economic growth, and why—despite being the firm’s head
of ESG—she’s recommending energy stocks. Read the fol-
lowing edited excerpts for more.

Barron’s: President Biden has issued dozens of execu- benchmark. We’re looking for S&P nated reopening. It’s hard to be bear- We’re seeing more and more of the de-
tive orders. How should investors digest these? earnings to grow by about 20% this ish, given all the stimulus. coupling of fundamentals from perfor-
Savita Subramanian: They represent a few thematic year. Obviously, we’re expecting to see mance. It’s always troubling to see, and
changes and a big break from the market leadership of the some multiple compression. We’re Here’s why we’re not bearish: Inter- it smacks of speculation. A couple of
past four years. This administration is less focused on asset expecting to see a very strong economic est rates are superlow, U.S. large-caps things: All of the action seemed to be
inflation and more on real inflation, in creating jobs and recovery. Our economists Michelle offer great yields, relative to bonds, focused on the small-cap space. Compa-
reinvigorating the real economy, rather than just bolstering Meyer and Ethan Harris are looking and the Biden administration is laser- nies with high short interest in the S&P
stock market returns. From listening to this new adminis- for 6% growth on U.S. gross domestic focused on the economy. It’s hard to 500 behaved normally, but those in the
tration’s rhetoric, they’re not looking at barometers like the product. Most of that recovery should see a recession-driven bear market. Russell 2000 behaved very atypically.
S&P 500 index or investment returns as a metric of suc- take place in the second half of this The good news is this seems to be local-
cess or failure. Instead, they’re focused on addressing some year as we see broad dispersal of vac- The market was gripped by the ized in smaller-market-cap stocks, so
of the bigger inequities in the market, like income inequal- cines and a more concerted, coordi- spectacular rise of GameStop the impact is less extreme, and it’s em-
ity. That means we’re going to see less-great market re- [ticker: GME]. What does it mean?
turns, but probably a bigger return in the economy overall.

Your market call is pretty tepid.
I’m one of the lowest forecasts on Wall Street. We’re looking
for 3,800 on the S&P 500. It’s a very tech-growth-heavy

Photograph by NATHAN BAJAR

February 8, 2021 BARRON’S 37

With expectations for a strong economic “In 14 of the past 14 recessions, the recovery was led by Even with the pivot toward ESG,
recovery, Subramanian favors energy, value and cyclical. So, we’re going to see a value cycle.” energy companies will stay relevant
financials, industrials, and health care. for a long time to come.

blematic of more speculative drama in tially see an inflation spike. Two years what could have been a deeper reces- Why Inflation ulus during Covid-19 was sizable,
the market, rather than in more funda- ago, we polled all of our stock analysts sion. Spending took place in home Is a Bear equivalent on some level to fiscal and
mental investing. to ask where they were seeing input goods and the higher-end consumption Fed stimulus. It was at least $1 trillion
cost pressure and pricing power, and areas of the market. Those areas could Inflationary of support from Corporate America.
What would make you more the only two sectors they cited were be at risk in 2021. Our sector under- pressures Companies repurposed manufactur-
bearish? utilities and health care. We did the weights are communication services, could increase ing to create ventilators, engaged in
If we saw interest rates rise meaning- same report a couple of months ago, which are half-growth, half-bond prox- rates and drive loan forbearance for consumers, made
fully from here. A big portion of the and almost every analyst cited infla- ies; real estate; and staples. retirees seeking monetary donations. My own com-
investor base today is retirees looking tionary pressure. income out of pany initiated layoff freezes. It quelled
for income, forced to buy the S&P In 14 of the past 14 recessions, the stocks. a lot of consumer fears.
500. We’ve got really tight pockets of Today, close to 70% of stocks pay recovery was led by value and cyclical.
the market where you could poten- a dividend that’s higher than the 10- So, we’re going to see a value cycle. 70% There’s a learning curve that has
year Treasury, which is very close to Growth stocks are overly discounting been adopted by investors in terms of
a record high. [The 10-year currently this low-rate, low-growth environment. Percentage of separating the real from the green-
yields 1.12%.] If rates rise to 1.75%, An easier call to make than value is stocks that pay a washing. We’re also seeing big
which our economist is expecting, that another area nobody wants to touch— dividend above the changes in the information that inves-
proportion drops to 44%. And all of a smaller companies, because of liquid- 10-year Treasury, tors are being given about companies.
sudden, that story vaporizes. That’s ity, because of the oligopolistic market. now at 1.12%. Companies have realized that if they
the swing factor. And that’s one rea- We could be at the start of a longer- don’t publish a corporate sustainabil-
son we’re less optimistic about equi- lived small-cap cycle, which tends to ity report, they’re going to trade at a
ties, not to mention all of the last eight to 10 years. discount to their peer that does. So,
speculations we see. that transparency and explosion in
What about the technology and data is huge from an investor perspec-
The similarities between today and megacap parts of the market? tive. All of a sudden, you can codify all
2000 is democratization and retail Coming out of the tech bubble, value of these factors we once only thought
participation in the market, the decou- outperformed growth for at least about. But ESG is always going to be a
pling of fundamentals from price. seven years. Some cycles last awhile. messy process. There’s always going
The last time we’ve seen earnings sur- to be this interpretive element to it.
prises met with negative reactions, as What surprises me is how reluctant
we’re seeing now, was in March 2000. fund managers or institutional inves- Yet despite being the global head
The other similarity is our sell-side tors are to shed exposure to that past of ESG for your firm, you’re over-
indicator, a very good market-timing leadership when we’re at what looks weight the energy sector.
model that looks at Wall Street’s aver- like a break point in terms of the econ- Renewables companies have done well,
age recommendation to stocks in a omy and the political environment. It’s despite the fact that we had four years
balanced fund. That model is now spit- the hot-stove mentality, because every under an administration that wasn’t
ting out close to 60%, which would be year since 2008, where anyone has bet focused on these themes. It’s really
a sell signal, close to 2007 and almost on rising interest rates and inflation, great that ESG investors today have an
exactly at the same level as March they’ve basically been smacked down. ally in the White House. Yet you don’t
2000. All of these ducks are lining up. need mandates from Washington poli-
More immediately, any potential ticians to get going. Investors realized
So, what should investors do? reversal in Trump-era corporate tax that the future is renewables and are
Focus on GDP-sensitive areas of the cuts, which would make sense to fund slowly phasing out traditional com-
market that haven’t done well for al- all of the growth, would hit communi- modities. But we still need to keep the
most a decade. Our sector overweights cation services and information tech- lights on, and things going, to get to
include financials, energy, industrials, nology: the two leadership sectors carbon neutrality. There’s an opportu-
and health care. We find some pent-up most overweighted by fund managers. nity to buy traditional energy compa-
manufacturing demand from an un- nies that are setting more-aggressive
precedented paralysis in the manufac- Let’s talk about ESG. goals of environmental compliance, but
turing and services economy. We’re We’ve really seen a demonstrable and are also providing much-needed fuels
more bullish on business investment well-articulated pivot of Corporate to keep, to reintegrate, the economy,
than on consumption of durable goods. America in terms of how they’re aim- because we aren’t at the point where
Within consumption, we’re more bull- ing to please. They’ve gone from we can do everything on wind and
ish on a pickup in consumer services shareholder to stakeholder returns. solar. So, we’re actually overweight
than a pickup in consumer goods. That’s huge. They’re articulating and energy, which draws a lot of raised
Based on our credit-card data for 2020, essentially promising us they care eyebrows. I feel totally comfortable
unlike in the usual economic recession, about the communities in which they with that because energy companies
spending trends remain strong. We operate, their employees, and cus- are essentially reinventing themselves.
had the fastest bear market. The Fed, tomer satisfaction beyond the bottom
fiscal policy, and Corporate America line. I don’t think it’s anticapitalist. Thanks, Savita. B
basically stepped up and staved off But I think it’s a new way of thinking
about capitalism. The corporate stim-

38 BARRON’S February 8, 2021

THE ECONOMY Temporary-help employment rose by 3.1% in
January, the fastest rate since October. The temp
sector is often a bellwether for hiring elsewhere.

January’s Jobs Report countedasunemployedwhohave that the pandemic would do long-
been jobless for 27 weeks or longer term damage to the broader economy.
has soared to 40%, the highest level And while layoffs were comparatively
since 2012. low, Indeed’s chief economist Jed
Underscores Urgency That’s not to say there isn’t any Kolko found that high-paying em-
ployers were among the most aggres-
good news in this month’s report. The sive at cutting job postings because
third wave of the viral outbreak seems they wanted to avoid saddling them-
selves with expensive labor at a time
Of Vaccination Push to have crested, as have the associated of economic uncertainty.
job losses in leisure, hospitality, and
personal services. Those sectors lost While the financial sector has had a
about 54,000 jobs in January, which is mild downturn during the pandemic
compared with the 2008 crisis, the
far less severe than the 554,000 jobs tech and management consulting in-
dustries initially shed far more jobs
lost in December. Bars and restau- than during the worst of the financial
crisis. As of last month, however, em-
rants shed slightly fewer jobs in Janu- ployment in all three has either re-
turned to where it was before the pan-
ary than they did in November. demic or is now even higher. What’s
more, Kolko says that hiring for tech
T he U.S. recovery facts of a broken seasonal-adjustment And some sectors actually did well. and finance is accelerating, with job
has paused, with algorithm more than anything else. Employment at temporary-help ser- postings up more than 20% and 11%,
private sector busi- School employment normally falls vices rose by 3.1% in January—the respectively, since the end of Septem-
nesses adding just about 4% between December and Jan- fastest monthly growth rate since Oc- ber—a sign of rising business confi-
6,000 jobs in Janu- uary. This year, the drop was only 3%, tober, and significantly faster than the dence in the state of the economy
ary. At that rate, it but from a much lower base. average monthly growth rate from once the acute health crisis passes.
would take 119 August through December. Temp
Unsurprisingly, the separate survey There is also good news in the
household survey, which implies that
years before employment returned to of households that is part of the jobs agencies are extremely sensitive to the total employment rose by 381,000 in
January after adjusting for the latest
the prepandemic level of February report found no meaningful change in business cycle, with hiring there often Census population estimates. That
would be the best month of growth
2020. Good thing, then, that hiring By Matthew C. the jobless rate after accounting for anticipating gains in permanent em- since October. Even better, the gains
were led by full-time jobs, which
should pick up as more consumers get Klein the surge in the number of people who ployment elsewhere. were up more than 300,000. That
helped contribute to the drop in the
vaccinated and more money gets dis- aren’t counted as being in the labor number of Americans working part
time who would rather be working
tributed by the federal government— force due to the pandemic. This ad- E ven more encouraging are full time, as well as the massive drop
but the latest numbers suggest it could justed measure has been flat at just the data for several highly in unemployment.
be a rough slog until then. above 9% since October, because the paid sectors. Earlier in the
drop in the number of unemployed pandemic, job losses in fi- The new population estimates,
Start with the bad news from the however, are potentially a cause for
concern. For the past three years,
establishment survey portion of the has largely been offset by the rise in nance, tech, and consulting were far annual population revisions have
cumulatively reduced the number of
jobs report. Retailers, warehouses, the number of people who have tem- smaller than at restaurants or den- American adults by 2.1 million peo-
ple, with the active labor force
and delivery services lost a combined porarily left the labor force. Worry- tists’ offices, but they were neverthe- shrinking by a total of 1.2 million.
That’s the biggest three-year decline
69,000 jobs in January on a season- ingly, the share of Americans who are less alarming because they implied on record, by far.

ally adjusted basis. Construction and Money from the government
should be able to tide over workers
durable-goods manufacturing—two of and businesses until vaccinations
restore normalcy. The clock is tick-
the most reliably cyclical sectors in the Snapping Back ing. B
economy and among the most obvious
beneficiaries of the booms in home Several high-paid sectors fell far harder in 2020 than in 2008 but have also rebounded much more Email: [email protected]
building and car-buying—lost a com- quickly, with particularly sharp gains in the past few months.

bined 20,000 jobs. The health-care Payroll employment, cycle start = 100 Finance and
sector cut 30,000 jobs. For all of these 100 Insurance
categories, January was the first nega- (corona crisis)

tive month since April. Those sectors Tech (corona

had done well in December even as crisis)

the viral outbreak worsened, adding a 98 Consulting
combined 220,000 jobs, but their (corona crisis)

good fortune seems to have run out. 96 Tech (financial
State and local governments also crisis)

continued to cut their noneducational Consulting
workforces, shaving almost 20,000 (financial crisis)
jobs in January. The most obvious

bright spot was the apparent surge in 94 Financial and
hiring at public and private schools, Feb. 2020 insurance
which theoretically added almost (financial crisis)
120,000 jobs on a seasonally adjusted
’21

basis. But those gains are likely arti- Bureau of Labor Statistics; Barron's calculations

February 8, 2021 BARRON’S 39

MAILBAG Send letters to [email protected]. To be considered for The Readback, a podcast taking you
publication, correspondence must bear the writer’s name, inside the latest stories, is available
address, and phone number. Letters are subject to editing. wherever you listen to podcasts.

Reining In consider this fictional scenario. Con- become obsolete and the creative Roundtable, Part 3). At no point did
Extreme sumer Reports puts out a negative destruction of the system replaces he mention that Illumina’s gene-
Leverage rating on a $100 vacuum cleaner. them with something else. Invest sequencing technology has been sur-
Millions of Reddit users then con- accordingly. passed by Pacific Biosciences of Cali-
To the Editor: spire to punish Consumer Reports by Ben Mackovak fornia, which it attempted to merge
As the GameStop frenzy shows, there is a problem with purchasing the vacuum en masse. Cleveland with just over a year ago. The merger
how our current markets operate (“Squeeze Play,” Cover During the feeding frenzy, retailers was disallowed by regulators due to
Story, Jan. 29). As many focus on the socio-political as- obey the law of supply-and-demand Past Its Prime? the potential monopoly it might have
pects of this situation, they are missing the main problem: and keep marking up the vacuums created. Since then, Pacific Biosci-
U.S. regulators stopped doing their jobs over a decade ago. until the price reaches $1,000. When To the Editor: ences stock has appreciated over
the dust settles, a Reddit user posts a As a member of WallStreetBets since 600%. Although I am no expert in
One thing that needs to be reined in that should have photo of himself and his new vacuum 2018, I have witnessed many of the genomic technology, it seems that
been obvious for at least six months to the Securities and with the caption, “Consumer Reports Redditors’ schemes over the past few Illumina is running a generation
Exchange Commission is the extreme amount of leverage was wrong, and I have a $1,000 years (“WallStreetBets May Be Unique, behind Pacific Biosciences in its
in our system: Margin debt has increased at a greater- vacuum cleaner to prove it!” but That Doesn’t Mean It’s Not a Bub- core business, similar to what Intel
than 60% rate during that time, breaking the previous Bill Callahan ble,” Up & Down Wall Street, Jan. 29). has done in the chip industry.
records last seen in 2000 and 2008. One short-term, New Bedford, Mass. The recent media coverage of the group Richard Peterson
common-sense solution to some of this volatility would be of retail traders has painted them as an San Rafael, Calif.
not to allow any investor to sell short a company no mat- Short Squeezes unstoppable, coherent force. While this
ter what its prospects are if the level of short position might be true with the GameStop fi- Futures Funds 101
outstanding is greater than 100%. GameStop’s was 140% To the Editor: asco, there have been countless failed
before this started. A long time ago in a galaxy far, far attempts to rile support to a failed To the Editor:
Brad Brooks away, it was generally understood that company or “meme stock.” Of all the investments mentioned in
East Hampton, N.Y. stocks with high short interest under- “After 10 Years of Underperfor-
perform over time (“How Small-Cap However, many of WallStreetBets mance, Commodities Are Set to
To the Editor: Fund Managers Are Navigating the subscribers are competent investors Boom. Here’s How to Play the Rally”
To understand the wisdom of GameStop investors, GameStop Mess,” Funds, Jan. 29). The who can provide compelling predic- (Jan. 29), one that requires a lot of
past two weeks notwithstanding, it has tions and valuable due diligence. The study is investing in futures funds
typically been a poor strategy to invest recent spotlight on the Reddit group such as U.S. Oil, because of the ef-
in stocks with high short interest. Short has caused millions of outsiders to fects of contango and backwardation.
squeezes are not well understood be- flood the message board with less
cause they are rare, hard to quantify, respectful stock suggestions and These concepts are not the easiest
and defy conventional wisdom. countless “pump and dump” traps. to grasp, but what they amount to is
It’s a shame the broader population the fact that futures contracts need to
I have lived through several acute will not be able to witness WallStreet- be rolled over in these funds from
short squeezes during my 20 years in Bets in its prime. month to month, and the costs can be
the market, and history tells us that Demetrius Pyo significant—such that, while the
they typically don’t last long. Within Pittsburgh price of a commodity goes up, the
the data set I’ve compiled, the average price of your exchange-traded fund
short squeeze lasted 12 trading days Illumina’s Prospects can go down.
(GameStop squeeze lasted 10 days).
History also tells us that when a short To the Editor: This is something that the average
squeeze eventually exhausts itself, the It seems to me that James Anderson investor should understand before
price reversal is fast and severe. The may be overly optimistic about Illu- considering these investments to
stock price typically declines 50% mina over the next 10 years (Barron’s avoid getting an unpleasant surprise.
within the next three to four trading Christopher Galik
days. The full round-trip retracement On Barrons.com
back to the presqueeze stock price
takes an average of 72 trading days to “It’s a shame the broader population
play out. will not be able to witness
WallStreetBets in its prime.”
The market is impossible to pre-
dict in the short run, but over time, Demetrius Pyo, Pittsburgh
fundamentals and valuation matter.
A strategy based on chasing deterio-
rating businesses in hopes of igniting
a short squeeze does not seem like a
sustainable long-term plan. With or
without short sellers, businesses

40 BARRON’S February 8, 2021

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