Loading summary
Transcript37 lines
- [00:02]
A
Real estate. We ask why Compass is buying anywhere in this week's merger moment. Pump and dumps. We bust through the jargon and Palantir and Boeing join forces. What this means for defense for Wednesday, September 24th, it's Brew Markets Daily and I'm Ann Berry. More market details to come. But first, in the realm of defense, next gen AI is partnering with Old World manufacturing. Palantir just announced it will deploy its foundry system across Boeing's BDS factories. That Boeing division is one of the world's largest defense and space contractors, making military aircraft, commercial and government satellites, spacecraft and weapons. Palantir's foundry platform will soon be used to standardize analytics and insights across the division's factories wherever they are in the world, enabling Boeing's more than dozen production lines to optimize operations using Palantir's turbocharged data. Now this is a notable moment that unites two of the biggest defense companies in the world, despite their very different origin stories and at a time when Boeing certainly needs the help. Palantir, founded relatively recently in 2003, has soared to a market cap of over $425 billion on the back of its AI native capabilities. It's now far bigger from that perspective than one 9 year old Boeing market cap less than half that of Palantir's, at $162 billion. Boeing is at a pivotal moment in a turnaround that was set in motion by CEO Kelly Ortberg a year ago. He arrived last August after Boeing had suffered multiple high profile safety incidents with its commercial aircraft, notably with the 737 Max. Combined with the labor tensions and production stalls, Boeing was running at a nearly 1 billion loss per month in 2024. Well, so far this year, Ortberg has stabilized the commercial division, ramping up deliveries and securing orders from major airlines including Qatar Airways and British Airways, a big driver of Boeing's jump in Q2 revenue by 35% year over year. But while Boeing's share price is up over 20% year to date and losses have narrowed, the pressure to cut costs remains. The company carries over 50 billion billion of debt and fixed price contract structures that dominate its defense business means Boeing has to find ways to increase productivity to lower costs in order to get those contracts to be profitable. Cue the efficiency focused partnership with Palantir, the relative newcomer software coming to the elder statesman's aid. We're going to keep watching for the hard numbers on where that goes because it's a really important example of exactly how Palantir software can be used for the factories, the actual machinery, the engine behind the production of some of these very sensitive defense products. Now, Palantir stock, although it was down today, was up on the news. As a reminder, it's been up an astonishing 136% year to date. Now coming up, a member of our audience asks us to explain just what is a pump and dump in the markets and real estate brokers. Two public companies get together to shake up the industry. We break it down, but first, Brew Markets Daily is sponsored by Public, the investing platform for those who take it seriously. And before the show today, our producer John mentioned a feature he recently found on Public.
- [03:34]
B
That's right. I've been getting portfolio insights from Alpha, that's Public's AI powered research assistant. And then I discovered Alpha can do recaps of earnings calls. That's where I love getting the inside peek into businesses as soon as they share their updates.
- [03:46]
A
Public gives you smarter context in which to use a wide range of asset classes, offering the tools you need to build and manage your wealth, whether it's with stocks, options, bonds or crypto. So get started at public.com brewmarkets that's public.com BrewMarkets paid for by Public Investing.
- [04:00]
B
Full disclosure in Podcast Description well, we.
- [04:03]
A
Saw a high profile merger moment this week in real estate as broker Compass signed an agreement to buy anywhere real estate for about $1.6 billion in stock. This continues a trend of mergers across the industry. But this particular deal caught our eye because it would bring together the largest and the second largest, number one and number two real estate brokerages in the United States. And the operating model of Compass might ultimately affect the way houses are listed for sales a lot more industry wide. So before we dig into that, John, take us through the players.
- [04:36]
B
All right, so of course let's start with the company being acquired. And that's because some folk may not be familiar with its stable of brands. That's Anywhere real estate, like you mentioned, appropriate ticker symbol H O U S. It's the parent company of Century 21, Sotheby's International Realty, Corcoran and Caldwell Banker and Anywhere, which I think is a terrible name, IPO'd in 2012 under the name Realogy. And since then the stock has dropped over 65%, market cap about a billion.
- [05:03]
A
So you like the ticker but you don't like the name. Just to be super clear on anywhere ticker is great.
- [05:08]
B
That same year, 2012, when Realogy was ipoing, Compass was founded in New York. It went public in 2021 under the ticker comp and around the same time as Open Door and WeWork. And since its founding, it has expanded by a quarter, acquiring regional brokerages. And its IPO share price, it's been down 60% since the IPO, but up 38% year to date. Market cap around 4.5 billion.
- [05:30]
A
Got it. Well, let's just take a quick look at the independent histories, John, of these two companies before we talk about the logic of them coming together. And let's just start with anywhere real estate. Again, as you said, stock price is down over 65% over a 13 year period, right. I mean, which is pretty extraordinary when you think about it. And so I dug into the reason for that sustained decline over time. Now, one of the key reasons that that share price has just underperformed so dramatically is that competition has come into the brokerage world, right? Compass being a prime case in point, on top of which you've seen the housing market be pretty volatile over several different cycles there for anywhere. So if you're an anywhere shareholder, right, you've been sitting there, particularly been in it for a long time, waiting for some catalyst to change the path, to change the direction of the stock. Compass, in contrast, let's again just revisit its share price journey, down over 60% since the go go days of IPOs, right, which was 2021. It's not alone in being down, particularly since it positioned itself as sort of a tech stock at the time, talking about a proprietary insights platform. It is up 38%, as you said, year to date. Now, Compass has been known for making acquisitions over time, as you said, acquiring regional brokerages. And there's been some debate in the market as to whether comp paid too much for some of those. And secondarily, a lot of those acquisitions Compass has done using its stock. And so shareholders have been diluted along the way. So just sort of couple of facts to have in the back of our mind as we, as we unpack this a little bit further.
- [07:05]
B
And then how about the deal itself? Why is it good for Compass, do you think?
- [07:09]
A
Well, I think there's a couple of reasons and I went through a bunch of research and I got to say the Wall street analysts were pretty quick to put notes out on this one. So number one, and this is not unique to this deal, lots of companies make deals for this reason. It's just to expand your reach. It's just to get bigger and get the benefits of scale. So Compass right now has about 40,000 agents, I will say though anywhere has about 300,000 agents, anywhere is much bigger across all of the different brands you lay down. And the merger actually makes Compass much bigger in terms of its geographic presence. It would then be present in all 50 states here in the US but it also gets compass into nearly 120 countries. So it adds a bit of a global flavor to it.
- [07:50]
B
Yeah, exactly. And the other thing that works is synergy.
- [07:55]
A
Yeah, yeah, always synergy. And I always talk about synergy when it comes to our merger moments. Compass could see over $225 million. That's from consolidating overlapping tech. We talk about you don't need multiple teams and things like finance, you know, to sort of overhead, the infrastructure. And ironically, in this case, if you think about where you go to see real estate agents in person. Right.
- [08:17]
B
They've got their office.
- [08:17]
A
They've got their offices. So there's argument here that perhaps they're not going to need as many offices between the two of them. The other piece here that's very interesting and again is not unique to this deal. We often see it in these merger moments is there is a path here for Compass to diversify its revenue base because Anywhere does do a couple of other things. It has title, escrow, mortgage and relocation services. And together those generate over a billion dollars a year for Anywhere. And then talk to me a bit about Karters, because you did flag that as we were having this conversation earlier.
- [08:49]
B
Right. That's one of the valuable lead generators for agents and for Anywhere. Yes, exactly. And so they'll. That'll be acquired as part of the deal. And the thought in terms of expanding is, as we're talking every day, data is gold. And the more data that they can put into these lead machines to train AI, the better their leads get.
- [09:09]
A
There's one last piece of this, which is us nerding out on the capital structure, because that's what we like to do. And Anywhere actually does have a decent amount of debt on the business and about $150 million of annualized interest expense. Another reason that you've seen the share price struggling over time. Compass, on the other hand, debt light. But the combined company does mean that Compass is going to have to take some of it on.
- [09:32]
B
Right, exactly. And we may have seen that reflected in the share price reaction because we saw anywhere share price go up over 46% on the news. But of course, Compass was down nearly 16% on the announcement.
- [09:45]
A
And we've seen this a couple of times. Right. When I think about the footlocker Dicks deal. Right. And that was a similar example in the sense that the company being acquired, which had been struggling, we saw the share price skyrocket because shareholders of the Target were saying, this is fantastic. We've gotten out, we've got a way to make money. And the buyer, in contrast, seeing their share price come down, the market's way of saying, we're just not particularly excited about the, the other side of this deal.
- [10:10]
B
And those are the numbers I want to get into a little bit about how Compass is changing the way listings come to market. And so traditionally when a house is listed, it's put out on the mls, the Multiple Listing service. And that's a database used by real estate agents. So the listing happens and the information gets posted everywhere, publicly. It can go on Zillow and to other companies. But Compass has been changing up the way they do it. They are taking an approach with three phases. So the first one is a, is it private exclusive phase.
- [10:41]
A
I love that.
- [10:42]
B
And so Compass is using an internal platform when a home is listed and only Compass agents and their clients can see that listing. And so the idea behind it is they can test a price, they can get interest in the home without it actually being listed. And you know, when houses get listed on the market, the days start clicking.
- [11:01]
A
Yeah.
- [11:01]
B
You know, and also you don't get to see a price reduction history. Maybe they can see how much they can get for it in this private listing, but if they're not really getting that much, they can lower it without it looking like an official reduction.
- [11:12]
A
Smart.
- [11:12]
B
Phase two is coming soon. And so that's when Compass posts the listing publicly on their website, but that data still isn't distributed out to the mls. Then the third step after that is actually putting it out into the MLS the traditional way. And then that information goes out to all different Realtors and to Zillow, for.
- [11:32]
A
Example, where I spend an inordinate amount of time just, you know, scrolling through real estate. I love this stuff.
- [11:38]
B
Exactly. And so, but this change, which is as of February, in about 30 years, 35% of Compass's listings is not working for everyone's business model because companies like Zillow, for example, want that data.
- [11:50]
A
Interesting. Well, that sort of tension is just going to grow because as these two businesses, Compass and Anywhere, come together, the combined market share is meaningful. Together they'll account for about 18% of domestic home sales volume. But this was really eye opening to me. Just to give this some context, even as we say this is a big deal, even as we say that it's consolidation even as we say that there are implications for the way in which companies purposes model of the private or coming soon category could grow into perhaps anywhere's listings. This is extraordinary. There are roughly a hundred thousand real estate firms operating in the United States today. It truly is a cottage industry still. Well, we're going to keep an eye on this because more consolidation typically you tend to see when you've got an industry as fragmented as this one, somebody at some point in time does tend to turn up and it's often private equity. I say this in hush tones that tends to try to consolidate these. Now, the Compass Anywhere deal won't close until the end of next year, second half of 2026. And just in terms of more context folks, for the audience today, this is a timely deal, John, whether intended or not by Compass and Anywhere who who knows how long these negotiations have been happening. But we did see news coming out today that housing sales seem to be nudging along again with the prospect of mortgage rates coming down as a result of the latest Fed rate cut and the prospect of more new home sales unexpectedly jumped in August. That's real movement because we've been talking a lot about how the housing market has been pretty stagnant. So we're going to keep watching this one. Well, let's take a quick break and when we come back, buyer beware. We answer your question on pump and dump schemes. John, we have a question from the audience.
- [13:33]
B
That's right, DJ in El Paso wrote, and I've been following news about meme stocks and I keep hearing the phrase pump and dump around this. What does that mean?
- [13:41]
A
Okay, dj, this is a really timely question because a DOJ lawsuit against several social media influencers Influencers is in motion on this topic. More on that in a moment. First, a couple of definitions and stay with me because it is really worth getting through this to understand some of the extraordinary stories out here on this topic. A pump and dump is a market manipulation scheme and it works like this. A group of insiders at a publicly traded company, or sometimes just a few bad actors from outside of it, artificially pump up the price of a stock by spreading hype. And they do that through misleading press releases, through spam emails or unsolicited phone calls to potential stock buyers, chat rooms, or even viral TikToks. And as unsuspecting investors rush in, the price shoots up. That's the pump. And then comes the dump. The people behind the scheme start to sell their shares at those inflated prices and once they cash out, once the hype disappears and the stock collapses, it leaves regular investors who bought on the upswing holding the bag. Now this isn't just theory. There's a couple of examples I'm going to go through. In 2003, Jordan Belfort, the so called Wolf of Wall street was sentenced to four years in prison for running pump and dump scams. Now throughout the 1990s his firm Stratton Oakmont had been running the schemes on penny stocks, leading to investor losses of about $200 million. Now penny stocks are shares of smaller companies that typically trade over the counter instead of on major exchanges. We talked about this in a previous episode and I'll post the link to that specific episod. Information on penny stocks is typically limited, which makes it harder for potential investors to verify the claims made by the people behind these scams. And penny stocks tend to be thinly traded, which means it doesn't take too much to move the price when buying starts to pick up. More recently in 2022, the securities and Exchange Commission announced charges against eight individuals in a hundred million dollar securities fraud scheme in which they use the social media platforms Twitter and Discord. Seven of the defendants had together collectively nearly 2 million followers and co founded a Discord based forum which got over 250000 members over time. Prosecutors said that these individuals would then tout stocks online, imply they were holding onto their shares in anticipation of gains, but in fact they were selling or planning to sell. And again this was with stocks that were thinly traded small or micro cap names. Now earlier this month Bloomberg reported that the case was still in process in a federal appeals court. So pump and dumps, that's the definition. They're illegal, they're risky and they're a reminder of the old market and even life. Saying if it sounds too good to be true, it probably is.
- [16:31]
B
Hear, hear. If you have a question for Ann, send us an email or voice memo to BrewMarketShow. Morning Broadcom.
- [16:37]
A
Well, it's 4:00pm on the east coast. There's the bell. The market's wrapping up and we don't have a ticker tape machine but we're gonna throw it over to our ticker. Our producer John.
- [16:48]
B
That's right. Today the major indices, the S&P 500, the NASDAQ and the Dow were all down about a third of a percent. And some market headlines, shares in Lithium Americas were up over 90% after a report that the US government will take a 10% stake in the mining company as part of a renegotiation of a two and a quarter billion dollars Biden era government loan for the company's Thacker Pass lithium line, which is expected to begin production in 2028. If this sounds familiar, back in July, the Department of Defense became the largest shareholder in rare earths miner, MP materials mining stocks were up today. Albemarle shot up over 5% and Sigma Lithium was up over 7%. And shares in Alibaba, the Chinese e commerce conglomerate, surged over 8% to their highest level in nearly four years after CEO Eddie Wu signaled that the company will expand its investment in artificial intelligence.
- [17:38]
A
Unbelievable. What's going on with these government stakes? One, we're definitely going to keep watching. We did talk about their MP Materials deal. We did talk about, about Intel. We're going to keep watching this one closely and as those details unfold, we're going to come back and dig into that. Now. Just a final thought. I wanted to touch on one headline which caught my eye and it didn't seem to be a market story at first blush, but I'm shining the light on it because I think fundamentally, it really is. The story that broke today was news that AI, several artificial intelligence models, are now advanced enough to pass the very difficult Level 3 Chartered Financial Analyst exam. This sounds a bit nerdy, but the CFA exam is notoriously difficult. It takes thousands of hours of study. You know, a very small proportion of people pass it the first time. And the fact that AI can now pass this is really meaningful. And I'll, I'll say why for the markets. I've actually spent quite a lot of time talking to chief financial officers, asking them about the realm of accounting and what happens if AI displaces human accountants? Where do we find the next generation of talent that's going to grow up with the judgment, for example, to become CFOs? The same question could be had for those of you who are lawyers out there and you've been studying being hard for the bar. What happens in a world where AI can pass the most difficult legal tests? What does that mean for the hiring of human lawyers and training them up to become chief legal officers, for example? And the extension of this example could go on to marketing as another example, to engineering and to product development. So watching this, which feels like a bit of an inflection point, is something I think is well worth doing. And as we move through covering the markets, as we move through covering consulting firms, accounting firms and others that are public, this is one aspect of labor force management and succession planning. And talent nurturing that we're going to keep an eye on. That's it, folks. That's it for today's Brew Markets Daily.
- [19:27]
B
Brew Markets Daily is hosted by Amberry and produced by John Curto, Tarkat, Belle Teef and Emily Milian. Our technical director is Uchena Waugu, audio assistance by Brittany Dottocco. And the president of Morning Brew Inc. Is Devin Emery.
- [19:38]
A
Wake up tomorrow with the Morning Brew newsletter and tune in to Neil and Toby on Morning Brew Daily. We'll see you back here tomorrow, same time, same place. Sam.