Topline: Private equity giant Kohlberg Kravis Roberts & Co. (KKR) disclosed in a filing Friday that it now owns a 10.7% stake in U.S. restaurant chain Dave & Busters, and plans to continue discussions with management as it pushes for changes to the business.
Dave & Buster’s (PLAY) stock surged up to 16% on the news Friday, reaching almost $49, its highest level since June 2019. Shares are currently up 12% for the day while KKR stock increased 2.5%.
The firm took a rare activist step in disclosing its stake, saying that it has held discussions with Dave & Buster’s management and board as it pushes for changes, though its filing did not include any specific plans or proposals for the company.
KKR, which previously reported a 2.65% stake in Dave & Buster’s last September, also disclosed that it may discuss “any extraordinary corporate transaction” with management and shareholders, including a merger or a change in the board.
KKR reportedly has a “good relationship” with Dave & Buster’s management and the two sides have had a “constructive dialogue,” a source told Axios, while also confirming that KKR isn’t internally talking about attempting a hostile takeover.
Crucial statistics: Wall Street analysts are largely bullish on Dave & Buster’s: It has nine “buy” ratings, four “hold” ratings and zero “sell” ratings, according to Bloomberg data.
Key background: The Dallas-based company, which first opened in 1982, has over 110 locations. Shares of Dave & Buster’s fell 7.5% overall in 2019, while the S&P 500 rose 30%. The company suffered a one-day drop of 20% in June when it reported a surprising decline in quarterly sales that severely rattled investor confidence in the retailer. Facing headwinds like higher wage costs and restaurant oversupply in what is an increasingly competitive industry, Dave & Busters said earlier this week that its comparable store sales would decline between 2.5% to 3% for fiscal year 2019.
Crucial quote: “Based on our review of past engagements, we believe the KKR Fund may undertake a traditional activist campaign and seek to gain board representation if the firm is unable to make progress working directly with management to improve performance,” Stifel analyst Christopher O’Cull said in a note on Friday. He previously predicted that a leveraged buyout of Dave & Buster’s would be possible for around $50 per share, but that the company will be taken private at a significant premium.
Tangent: Raymond James analyst Brian Vaccaro also forecasts a possible leveraged buyout scenario, where KKR, which has steadily increased its stake in Dave & Buster’s since the third quarter of 2019, would pay a price of $55-per share for the company.
I am a New York—based reporter for Forbes, covering breaking news—with a focus on financial topics. Previously, I’ve reported at Money Magazine, The Villager NYC, and The East Hampton Star. I graduated from the University of St Andrews in 2018, majoring in International Relations and Modern History. Follow me on Twitter @skleb1234 or email me at firstname.lastname@example.org
With Trump’s Phase 1 trade deal with China now complete after a lengthy signing ceremony on Wednesday cheered on by Wall Street luminaries such as Blackstone cofounder Stephen Schwarzman, hedge funders Ken Griffin and Nelson Peltz, and Mary Callahan Erdoes of JPMorgan, investors now have a new reason to try and play growth in the country. Record earnings released by investment bank Morgan Stanley the morning after trade negotiations wrapped up reveal the profits that can be made by smartly investing in the world’s second-largest economy.
Morgan Stanley’s fourth-quarter earnings revealed strength across the firm. Revenues surged 27%, propelled by growth across important divisions such as trading, underwriting and wealth management. Overall, Morgan Stanley posted $10.8 billion in revenues for the quarter and $2.2 billion in profits, and for the full year, the investment bank generated a record $41.4 billion in revenue and a $9 billion profit, underscoring the success CEO James Gorman has had in managing its vaunted investment bank, building up its wealth management operations and refitting its trading desks to boost profits.
One line item in the results, however, uncovered a new story for Wall Street watchers to follow. Morgan Stanley’s investment management division booked an almost unprecedented investment windfall in Asia, which reflects the potential China and the rest of the region holds to both the firm and its Wall Street peers in banking and private equity.
In 2013, Morgan Stanley’s Asian private equity division helped take Chinese baby-milk producer Feihe International private, working with the company’s controlling family, led by CEO Leng Youbin. The company, founded in 1962, had listed American Depositary receipt shares on the New York Stock Exchange in 2008. After generally languishing in the wake of the listing, shareholders like Youbin and his family trusts looked to privatize the business, working Morgan Stanley’s Asian private equity arm on a $147 million deal to buy out the public shares listed on the NYSE. Morgan Stanley contributed $28.1 million of equity on behalf of its limited partners, Feihe’s CEO ponied up a further $8 million, and the consortium raised $50 million in debt financing from Wing Lung Bank Limited and Cathay United Bank to get the deal done.
For the participants, the 2013 deal has turned into one of the big windfalls of this era. The Leng family’s shares are now worth $5.2 billion according to Forbes calculations and Morgan Stanley’s shares are worth some $2.3 billion. When Morgan Stanley released full-year earnings, the deal even moved the needle for the 60,000 worker investment bank.
The firm’s investment management division saw revenues more than double to $1.4 billion, led by $670 million in quarterly investment revenue versus $82 million in the year prior. Of the windfall, Morgan Stanley said its investment revenues “increased from a year ago on accrued carried interest related to an underlying investment’s initial public offering, subject to sales restrictions, within an Asia private equity fund managed on behalf of clients.” The carry and gains appear have boosted the firm’s overall earnings by at least 15% for the quarter. Typically half of private equity investment fee revenue will go back to employees in the form of earned carried interest.
On a conference call with analysts, CFO Jonathan Pruzan elaborated about China Feihe, “The company has been quite successful and grown quite nicely. … To give you some sort of context around the round numbers, the investment that we made was less than $50 million, and the current investment value is approximately $2 billion.” (Morgan Stanley declined to comment further.)
China is the preeminent driver of wealth in the world. When Forbes released its 2019 list of China’s wealthiest people, reporters uncovered 60 new billionaires in the country, many of whom are building businesses domestically that may one day resemble companies like Procter & Gamble, Starbucks, Pfizer and Nike. Wall Street has to pay attention, especially with domestic markets richly valued after a decade-long bull run.
For years, dealmakers like Blackstone’s Schwarzman, JPMorgan’s Jamie Dimon and Blackrock’s Larry Fink have been studying ways to build their presence in the region and either bank, partner or invest on behalf of the country’s growing business elite. While groundwork is mostly still just being laid, deals like Morgan Stanley’s recent coup underscore the potential remaining in China.
The Phase 1 trade deal signed on Wednesday signaled China’s intention to continue opening its financial system to foreign banks and investors. Vice premier Liu He, carrying a note from premier Xi Jinping, said at the Phase 1 signing China is transitioning from a high-growth economy to one more focused on quality increases. Presumably, that pertains to consumption, financial products and markets, and the capitalization of corporation. Some new developments reached in the deal appeared to make headway for U.S. firms excited about this potential.
The deal further opened Chinese markets to U.S. credit rating agencies, distressed debt investors and foreign financial firms seeking to fully own and manage subsidiaries in the region. Bankers have long wanted to own subsidiaries in the region and mostly unwound joint ventures that helped build China’s state-owned banking giants like ICBC.
In fact, a good way to gauge whether the Phase 1 trade agreement did in fact make substantial inroads, will be to watch how the largest U.S. financial firms respond. New action from the likes of JPMorgan’s Jamie Dimon and Blackstone’s Schwarzman would signal the effectiveness of Wednesday’s deal.
I’m a staff writer at Forbes, where I cover finance and investing. My beat includes hedge funds, private equity, fintech, mutual funds, M&A and banks. I’m a graduate of Middlebury College and the Columbia University Graduate School of Journalism, and I’ve worked at TheStreet and Businessweek. Before becoming a financial scribe, I was a part of the fateful 2008 analyst class at Lehman Brothers. Email thoughts and tips to email@example.com. Follow me on Twitter at @antoinegara
Despite the highest stock market prices in history and Presidential tweets proclaiming the wonder of the economy, it’s still possible to identify equities coming in at under book value and with price/earnings ratios actually somewhat close to earth.
What if — under these conditions of over valuation — you could find stocks trading with price/earnings ratios of below 15 and at less than their book value? You know, like Warren Buffett used to do it.
Instead of falling in love with Tesla, now trading with a forward p/e of 75, at 12 times book and with more debt then equity, what if you could consider old-school valuation techniques and identify what they used to call “cheap.”
Are there still such things as actual value stocks?
Here are 4 possible candidates:
WestRock is a New York Stock Exchange-listed stock in the “packaging solutions” business with headquarters in Atlanta.
The stock trades with a price/earnings ratio of 12.65 and at a 7% discount to its book value. The record of earnings is quite good for this year and looks in the green over the past 5 years. Investors receive a fat 4.68% dividend. That long-term debt exceeds shareholder equity is a concern — however, the current ratio is positive.
Metlife is the brand name life insurance firm that’s been around for 145 years. Based in New York, the stock trades on the NYSE.
The price/earnings ratio of Metlife is an amazingly low 6.85. You can buy shares at the current price for 70% of the company’s book value. Shareholder equity is greater than long-term debt. The dividend payment comes to 3.43%. With an average daily volume of 5.3 million shares, no need to worry much about liquidity.
AXA Equitable Holdings is an NYSE-listed insurance brokerage founded in 1859 and headquartered in New York.
The p/e is 14.73 and it trades at an 18% discount to its book value. Long-term debt is less than total shareholder equity. Investors receive a dividend of 2.41%. Earnings this year are excellent and the 5-year track record of earnings is very good.
Amplify Energy is an independent oil and gas company that trades on the New York Stock Exchange.
This one requires closer inspection than those listed above. With a price/earnings ratio of 6.46 and trading at just half its book value, the stock is definitely “cheap.” One concern is that long-term debt exceeds shareholder equity. Also, it’s odd that the dividend yield is 11% — how likely can that high of a payout be sustained? Meantime, Amplify’s earnings this year are excellent and the 5-year record is good. Average daily volume is relatively low at just 248,000 shares.
I do not hold positions in these investments. No recommendations are made one way or the other. If you’re an investor, you’d want to look much deeper into each of these situations. You can lose money trading or investing in stocks and other instruments. Always do your own independent research, due diligence and seek professional advice from a licensed investment advisor.
My Marketocracy work is profiled in The Warren Buffetts Next Door: The World’s Greatest Investors You’ve Never Heard Of by Forbes Investments Editor Matt Schifrin. I’m a 1972 graduate of the University of North Carolina
Robinhood, the mobile trading app that has more than 6 million users, is contending with a glitch in its platform that enables some traders to use unlimited borrowed money to purchase stocks.
Known as “infinite leverage,” traders took to Reddit forums like WallStreetBets earlier this week to brag about the funds they were able to borrow despite the low amounts of cash in their accounts.
One trader boasted being able to get $1 million in borrowed funds with just $4,000. Another trader claimed to be able to borrow $50,000, purchase shares of Apple and subsequently lose the money. Robinhood traders also posted videos and screenshots showing how they were able to manipulate the platform including providing directions.
First spotted by Bloomberg, the glitch enables traders to inflate their account balances when borrowing money on margin. A common practice among traders, traders borrow money from the brokerage to purchase stocks. The firm, in this case Robinhood and its banking partner, acts as the lender issuing the money based on account balances, creditworthiness, and other criteria.
By artificially increasing the account balance the traders were able to get their hands on more money to purchase stocks. In media reports Robinhood said it’s aware of what it called “isolated situations,” saying it’s communicating directly with the customers.
This isn’t the first time Robinhood has had to contend with missteps since launching in 2013. Last year it made a PR blunder when it was forced to pull its new checking and savings account off the market. It boasted an interest rate of 3% but the product ran afoul of regulators. It held off until October in finally rolling out a cash management account, which now has a 1.8% APY.
Despite that misstep and the glitch its dealing with now, Robinhood should continue on its meteoric rise. Since launching in 2013, it has amassed more customers than E*Trade and has a valuation of $7.6 billion.
Venture capitalists can’t get enough of the startup, throwing hundreds of millions of dollars it’s way. In July it raised $323 million giving it the hefty valuation it now commands. It also has aspirations beyond trading. It recently applied for a national bank charter with the Office of the Comptroller of the Currency. Its not clear how far those efforts will go given the OCC is losing its power to grant nonbank entities bank charters.
Robinhood isn’t the only high profile fintech to suffer from technical issues in recent weeks. In mid-October Chime, a popular challenger bank, experienced an outage that lasted more than 24 hours, preventing many of its more than 5 million customers from making payments and accessing their cash. Chime blamed its payment processor, saying it was experiencing problems that brought down Chime’s website and mobile app. In September Chime suffered a similar, albeit briefer, outage.
A journalist for more than fifteen years, I am a freelance writer reporting on personal finance, entrepreneurship, investments, fintech and technology for a variety of media outlets. What sets me apart from my peers is my ability to take complex topics and explain it to the masses. After years of covering the equities markets as a technology reporter and special contributor to the Wall Street Journal, I embarked on a freelance career providing my readers with invaluable advice on everything from investing to landing a job. With the intersection between personal finance and technology getting blurred, cutting through the fintech noise and getting to the bottom of the story is becoming increasingly important to readers around the globe.
Stocks down for the week so far but trade optimism gives positive tone early
Micron shares fall on disappointing forecast
Wells Fargo gets a new CEO, helping lift shares
Friday dawns after a week that didn’t provide much direction for investors. Stocks have generally chopped around in reaction to the latest geopolitical or domestic political news, and stayed in a tight range.
The question Friday might be whether the major indices can propel themselves to a victory for the week, because they start the session slightly down from a week ago thanks to positive trade vibes and solid durable goods data. That data looked really nice, up from the previous month and rising for the third month in a row. We’ll have to see if that’s sustainable because a lot of it was from the defense sector in the form of planes and parts. Either way, the trend can sometimes be your friend, as the old market saying goes.
Also, the Personal Consumption Index (PCE)—the Fed’s preferred inflation metric—rose 0.1%, roughly in line with expectations. The core index, which strips out the often-volatile food and energy prices, also rose 0.1% to an annualized rate of 1.8%. It’s an uptick for sure, but still below the Fed’s stated target of 2% inflation. Might this be enough to shift the Fed’s thinking from dovish to neutral?
Whether or not stocks make a last-minute run here, it’s been hard to find much of a theme in the last few days. Hopes for progress in trade negotiations got reinforcement yesterday with an October 10 date set for new talks, but the noise out of China since then has mostly been about how willing they are to buy more U.S. products.
That’s all good, but it doesn’t get at the intellectual property and other issues that U.S. negotiators say are at the heart of the matter and apparently were a sticking point when the last round of talks broke down. It’s hard to see these talks getting much further without movement on these issues.
Another focus is the impeachment drama in Washington. Two big bombshells came out this week, but stocks didn’t show much reaction. As we’ve said, it’s important to keep your emotions out of trading, and impeachment is an emotional issue. It’s likely to be a long process and a constant background noise over the next weeks and months, but investors might serve themselves better by watching earnings and data.
It’s interesting to hear some analysts saying that the impeachment situation might actually be bullish because it could put pressure on the administration to get a trade deal done on the sooner side. This school of thought suggests President Trump might be keen to get some positive headlines to counter the negative ones. That remains to be seen and is just speculation for now.
On the earnings front, bad news came at the end of the week from Micron (MU), as the semiconductor firm issued guidance that Wall Street didn’t seem to like too much. Shares were down 5% in premarket trading. Revenue and earnings beat third-party consensus views, but were way down from a year ago as the company continues to struggle with demand for its memory products. It wouldn’t be too surprising to see the weakness in MU shares work their way into the entire chip sector, maybe putting pressure on Technology stocks today.
And Wells Fargo (WFC) is back in the news today after the financial company hired a new CEO. This ended a six-month search and means investors won’t have to approach WFC’s earnings call next month with more questions about who would head the company. Shares rose in premarket trading.
Quarterly Market Gains Not Much To See
The old quarter is just about over, and it’s been a wild one that basically didn’t go much of anywhere if you look at the major indices. Sure, they surged to new peaks at times, but also retreated. It ended up being almost a wash, with the benchmark S&P 500 (SPX) closing Thursday up just 1% from where it finished at the end of June.
The choppy trade that marked most of the quarter continued on Thursday, with the market giving up early gains, clawing back to flat and then losing more ground by the closing bell. Some of the “risk-on” trading we saw on Wednesday didn’t really carry into Thursday, with small-caps in the Russell 2000 (RUT) drifting lower and Financials having a rough day.
Instead, some caution appears to be coming back into play late this week, with Utilities and Real Estate near the top of the leaderboard Thursday. Those aren’t places people tend to go when they’re feeling gung-ho about the economy. Bonds—another defensive area—also rallied, but gold didn’t share in the fun.
Though every day seems to have a different theme, there’s a lot of concern out there about the fundamental picture. It’s good to hear that new trade talks begin October 10, as we found out Thursday, but a resolution doesn’t seem all that close.
One concern is that new tariffs announced last month on Chinese goods could start having an impact on consumer spending, which would possibly cause companies to get even more cautious. If companies stay in a holding pattern, it’s hard to see any significant rally on the horizon. Earnings growth is already expected to fall year-over-year in Q3 after sinking in Q1 and Q2.
When you get right down to it, earnings drive the market. If investors continue to see earnings grow at slower rates, at some point the market could start to reflect that. FactSet, a research firm, predicts a nearly 4% earnings loss for S&P 500 companies in Q3. Earnings fell 0.4% in Q2 and also fell in Q1, making this potentially the first three-quarter stretch of falling year-over-year earnings since late 2015/early 2016.
No Fun for FAANGS
Some of the FAANG stocks, including Amazon (AMZN), Netflix (NFLX) and Facebook (FB), also are having tough weeks. Again, it’s regulatory issues dogging FB, but the others could be under pressure from changing money flows as the FAANG sector seems to be losing some of its mojo, according to an article this week on MarketWatch.
Next week will be October, after Monday at least, so let’s look at what the market’s going to be grappling with beyond the China trade and impeachment stories. We’re still a few weeks out from earnings, meaning volatility could be a factor and the market could move up or down quickly based on the latest headlines or tweets. It could still do that after earnings start in mid-October, too, but earnings give people something solid to point at in times of turmoil.
One thing we’ll be pointing to next week is a monthly payrolls report for September. A lot of eyes are likely to be on the numbers a week from today, wondering if those relatively modest job gains back in August were a one-time deal or maybe a sign of something more serious. Even before August, job growth had been slowing this year, but it’s still above the level economists think we need to keep unemployment low.
Other data aren’t so exciting next week, but Chicago PMI on Monday might be interesting when you consider recent data where manufacturing activity appears to be slowing down. Chicago PMI surprised to the upside last time and came in above 50. Anything below that would indicate economic contraction, according to how the report is structured. It was 50.4 in August.
Volatility can sometimes tick up the last days of the quarter, but the Cboe Volatility Index (VIX) has dropped below 16 this morning after topping 17 earlier this week.
Company Caution Crimps Quarter: Normally, the government’s report on gross domestic product (GDP) gets lots of attention. That wasn’t the case yesterday because a few other things were going on (there’ve been some political headlines, if you haven’t noticed). A check of the data showed 2% growth in Q2, which means the slowdown that began early this year continued. As a reminder, gross domestic product was nearly 3% in 2018. To some extent, this downturn probably reflects the trade war with China. Many companies appear to be in a holding state because they’re putting off decisions on business plans. You can’t continue to have companies putting decisions off, because it could start affecting the longer curve of growth. It may already be doing that.
Crude Concerns: The fundamental concerns mentioned above aren’t any easier to dismiss when you consider how crude’s behaved recently. Remember when U.S. crude rose above $60 less than two weeks ago in a 15% one-day rally? Seems like a long time ago, with crude back down in the mid-$50s by Thursday. Rising U.S. inventories apparently caught some market participants by surprise and raised questions about demand. It’s just a week or two of data, so you don’t want to make any broad conclusions, but falling crude demand would possibly be a sign of a slowing economy if it continues. That remains to be seen, but for the moment it’s hurting the Energy sector, which suffered more than a 1% loss yesterday.
Batting 3000: The first time the S&P 500 (SPX) crossed the 2000 level was on Aug. 26, 2014. But it traded below 2000 on an intraday basis 22 months later, on June 27, 2016. The lesson here? Just because an index crosses a big round-number benchmark doesn’t mean you can put that magic number in the rearview mirror and forget about it. We’re getting a reminder of that now, with the SPX struggling to get its head above 3000 after first hitting that mark back in July. At this point, the late July intraday high of 3027 remains the peak, and the SPX has fluttered back and forth above and below 3000 ever since.
This doesn’t necessarily mean we’ll still be wrestling with 3000 in mid-2021, though that can’t be ruled out. And while we’re talking scenarios, one can’t rule out a major test to the downside either. In the near term, it’s very hard to see any move above 3000 lasting long without a China deal. Anticipated weak earnings are another major barrier, because without earnings growth, it gets harder and harder to justify rallies.
TD Ameritrade® commentary for educational purposes only. Member SIPC.
I am Chief Market Strategist for TD Ameritrade and began my career as a Chicago Board Options Exchange market maker, trading primarily in the S&P 100 and S&P 500 pits. I’ve also worked for ING Bank, Blue Capital and was Managing Director of Option Trading for Van Der Moolen, USA. In 2006, I joined the thinkorswim Group, which was eventually acquired by TD Ameritrade. I am a 30-year trading veteran and a regular CNBC guest, as well as a member of the Board of Directors at NYSE ARCA and a member of the Arbitration Committee at the CBOE. My licenses include the 3, 4, 7, 24 and 66
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