The Ball Is In Comcast’s Court :Paul Sweeney

This comes after an increased bid from Disney seventy one billion dollars to acquire those uh century Fox assets. Here to tell us more, Paul Sweeney expert when it comes to all things Internet and media related. He is our director of North American Research for Bloomberg Intelligence and our Internet analysts. Paul, what do you make of this particular move by Disney? Is this the coda? Is this the

final final bid? You know, we'll have to see. The ball is definitely in Comcast court here, but you know, this is a very aggressive move by Bob Buyer and

and Disney. Not only did they raise the price of their deal by approximately thirty but they also added a cash component allowing shareholders to elect between cash and stock, and that really makes the deal very compelling for sellers, particularly the Murdoch family, who may prefer to take stock and defer some of their their tax gains versus a a Comcast deal which is all cash and which would clearly result in a significant tax liability for the Murdoch

So this is about as compelling a deal as Disney could have come back with. I think it's actually a little surprising how aggressive they were. So again, the ball is really in the court of Comcast and Brian Roberts, and they need to decide how much they want this asset. I'm really confused about the market response to this. Disney shares are up more than one percent, even though, uh, you know, the risk of Disney over paying, the risk of a bidding war ending up with an outcome that

isn't so great is rising. Can you explain why investors are cheering this the power of cash? Um so. I think what's happening here is the original all stock deal that Disney put on the table is actually diluted to Disney shareholders per our analysis. However, as they reduced the amount of equity that they put in deal and increase the cash. Even at today's low rates, the deal becomes less and less dilutive and actually a little bit of

creative here. So depending upon the elections of cash versus stock. So, um, it's actually for Disney from a near term perspective a little bit better believe it or not. And then I think it just kind of goes to I think it reflects effected. I think investors feel like this might be a knockout punch by Disney. Well, taking a look at the shares of Comcast. On the other hand, you know, Comcast investors don't seem to have liked this deal. The stock is down nearly eighteen percent so far this year

today basically unchanged. Do you think that the if indeed Disney walks away with this, that this will be something that will be positive for Comcast? I think so in the short term. You're exactly right. The stock has been

down this year. It's been underperforming given Charter, which is another big cable company, And I think the concern there with Comcast was just exactly what happened, that they would try to use their balance sheet to make a big acquisition and uh and uh, you know, really limit the amount of stock they can buy back or the amount they can invest in some of their other core businesses.

And I think Comcast investors, while they're obviously very supportive of Brian Roberts and its management team, I think they feel like, UM, the Fox assets are not as critical to the future of Comcast as they might be for Disney. As a result, I don't think Comcast shareholders were quite as supportive of the Comcast management team and board as the Disney shareholders have proven to be. UM. So the question then will be, you know, A, what does Comcast do here in response to the Disney bid? And be

if they lose, where does Comcast go next? UM? Do they try to copple together some assets like a Discovery Communications, like some other media companies that might be out there, like some film studios that might replicate in some way, um, the assets that they did not get with Fox. Paul Sweeney, thank you so much for being with us, and I'm sure we'll be following this on an ongoing basis as

this saga continues to play out. Paul Sweeney as US director of Research and senior Media and Internet analyst for Bloomberg Intelligence. General Electric shares are down more than one percent today, following in early two percent laws yesterday after getting kicked out of the Dow Jones Index. This is a symbolic move, but it also could affect gees fortunes going forward in a fundamental way. Sarah pon Sech joins US now she's bloomber Cross Asset reporter um and this

story is fascinating from so many perspectives. But first, can you just sort of paint the picture. General Electric has been in the index for a long time, storied company. Why was it kicked out? Of course, so this is pretty bitter sweet. G E was one of the original down members and now we don't have any of them. But the problem with ge is that we have been seeing it come forth with so many issues lately. I mean, it's lost half its market value in the last year.

This year, it's down already last year it's down. I mean, it's been struggling with weak demand for industrial equipment. It's had cash flow problems. They're also going through an accounting probe right now. So there's just so much right now

that's hurting the company. And it dropped to a point that's so low because the doubt is price weighted that it really didn't have too much weight within the Dow, and the doubts also supposed to represent the economy and the down makers, if you will feel like the economy is moving forth and maybe g E is in the

next part of it. Well, just to be clear, right, the way in which the Dow Jones Industrial Leverage is put together is it is a price of and it's the sum of the actual price of all of the components and the index, and then that price is then divided by something called the Dow divisor, and that is designed to account for stock splits as well as a variety of other kind of changes in the actual stock price.

And it's interesting because this is a very human decision, right, This is not something like g E reached a certain level of sales, you're out. It's not about it. It's not about that, right. It's not rules based, and like you said, it is price weighted, whereas a lot of the other industries are market cap weighted. But it's not a rules based system that either adds stocks or takes

stocks out of the index. Rather, there's actually a committee that sits around and discusses which stocks should be the next one added, But this raises so many questions. It is about just you know, what is passive management and you know with index strategies, is this smart investing? I mean, given the fact that this company's shares has have absolutely tanked, is now the time to sell out and solidify losses and then bringing another name that's done really well that

might not have as many games looking forward? Right. So Stephen Gendell, he wrote an opinion column for Bloomberg this morning, and he made a really interesting point saying, is it fair, uh for a committee to sit around and kind of choose what the economy is supposed to look like going forwards? And he pointed out that the DAL dropped A T and T back in and since then a T and T is we just saw the acquisition with Time Warner. And even before that, the DAL dropped Bank of America,

and since then Bank of America shares are up. So it really comes down to the point of who whose choice is it to really decide who goes and who comes out. American Cotton Oil Company that was one of the original down members just to give it and it's now part of Unilever. After a variety of you know, a sires and sellers and so on. But I mean, it just reflects the ongoing change in the way that the economy is represented in the financial markets right right.

And something that we've been discussing a lot is why Walgreens. We've been trying to figure it out because with Walgreens you can go both ways. Of course, it is actually classified as a consumer staples company, but a lot of people do think of it as a bit of a

healthcare company. So if you look at the waitings and the members of the makeup of the Dow, consumer staples hold about five point seven percent of the entire index, but healthcare, on the other hand, holds about So is this a safe way to get more at retail but not get into traditional retail. Someone I spoke with this morning, she said, you're not gonna add Mazis, You're not gonna add J C. Penny. But is it kind of a

cop out? I also wonder, you know, just with respect to General Electric getting booted, how much the company shares will now decline further just to sort of a de facto response to these indexed funds that are being forced to sell the shares. And so I wonder if this sort of creates a spine, and that includes exchange traded funds, as you mentioned. But Goldman Sacks actually they came out

with an interesting note. I thought it was a bit contrarian, because that's what you would think, um, But an analyst over Goldman Sachs he actually found that stocks that have been removed from the index recently have typically outperformed the rest of the doubt over the next twelve months. And some are saying, in a way, maybe this is good for g E because maybe this takes off that label of ge being that old, sturdy industrial company and maybe

it allows it to move forwards. Actually, Brooks Sutherland of Bloomberg Opinion ort com and was discussing how perhaps this freees up General Electric to think more radically about how to reshape itself and perhaps to a wholesale breakup of the company and really reckoned with some of the problems

that has been facing over the past few months. Yeah, I mean, we'll definitely see going forwards, and it'll be interesting to keep an eye on GEES price just because it has been torn down so much over the past year or even more a year or so. But it's

gonna be good for the shares of Walgreen. Oh yeah, I mean if you look at Walgreen shares right now, Walgreen shares are trading up about almost four and a half percent, so we're seeing it reflected in the share price today and I'm sure going forwards as it's added, I think it's supposed to be effective Tuesday before the open of the market. I'm sure we'll see a bit of a of a booth there. Yeah, And just to give you the perspective, Walgreens Boots Alliance has three hundred

and forty five thousand employees. Compare that to a General Electric three hundred and thirteen thousand employees, So at least in terms of a number of people work for the companies, not dissimilar. And I will just make one additional note that while we're talking about General Electric in the down Jones index, uh, there are other index related decisions that are affecting vast amounts of money right now as well.

For example, with respect to Saudi Arabia and Argentina both looking for their inclusion m ms c I index, which would affect six hundred billion dollars of assets. I mean it's just these and just recently happened with China. That's rights Leather. I'm gonna leave you with that last thought. You know why the US leather company was an original member of the TAO. The Thanks very much, Sarah Ponzac,

Bloomberg News, Cross Asset Reporter. All about general electric investing in small and mid cap stocks, that's the specialty of our next guest, Eric Kubi. He is the chief investment officer for north Star Investment Management. They are based in Chicago. Eric joins us though in our eleven three oh studios. Eric, thank you very much for being with us. All right, step up to the plate and tell us how do

you define small and mid cap stocks? And tell us about the north Star dividend fun This is the symbol is n s d v X right, great, well, thanks for having me here. Um, So we define, uh, small cap stocks as actually being companies that have market caps under two and a half billion dollars. The definition changes. I know, uh, when I first got into business, a small cap stock probably had a market cap under a hundred million dollars. So you you have to keep moving

with the times, um. But we focus actually on the smaller end of the small cap stocks. The billion dollar in under area. Alright. So you know, this is a very important interview to be having right now because the rust of two thousand, which is often viewed as a proxy for smaller companies in the US, has been on a terar. It has more returned more than twice as much as the SMP five hundred and uh nearly three

times as much as the Dow Jones Industrial Index. So I have to wonder, you know, right now many investors are viewing small cap stocks as a haven in from trade tensions because these companies are less exposed to any economic impacts. Do you think that this is an accurate bet so to a certain extent, Yeah, I mean, I think that there are certain characteristics of small cap companies which make them a haven from from what is concerning

the market right now. Most small cap companies don't do much international business, so they're not going to be that affected now. They're not immune because their supply chain still is affected. Um and so I don't think that it's a safe haven per se, but I do think it's a good place to go into. The other aspect is the dollar. The dollar has strengthened quite a bit. Again, that's typically good for small cap companies. That shows the domestic economy is strong, and also they're not exporting, so

the strong dollar doesn't hurt them. Again, largely, I think what's happening is a rotation. Two thousand seventeen was the year of the large cap growth stock. The entire year, twelve months in a row, uninterrupted through January uninterrupted large

cap growth stocks. And since then there's been a rotation into small cap companies, mainly into the Russell two thousand, because people like to index, and I don't think that that's really the right way to do it because within the index, you know, there's a lot of companies that aren't benefiting from the corporate tax cut, that aren't benefiting from the strong dollar. But so we like, we like more specific small cap companies. But it's the easy trade,

is the Russell two thousand. People like the easy trade. All Right, I'm gonna ask Lisa to check your footwear right now, because I want you to talk about a company that I know is in the portfolio. This is Rocky Brands out of Nelsonville, Ohio. How did you find nelson How did you find uh Rocky Brands? That? Do you want my report? Okay, come on. They're they're pretty classic, alright, black office shoes, no boots today. All right. So we found Rocky the same way we find most of our companies,

which is we screen. We're screening for companies in our market cap arena that are had nice dividend yields. We when we bought Rocky, it was over three percent. That's our dividend screen was over three and it was trading extraordinarily cheaply versus book value versus their earnings. UH and UH, what's happened is their business has gone It's had a terrific year. All of their markets are doing really well, outdoor work, Western and military. They also do um a

great business with UH with companies. About two million employees have to wear protected footwear in the country, and they've got a great system for delivering the right footwear that companies need to buy for their employees. So it's been terrific company having a fantastic year. If you go down the list, some of the other names that you identify, McGrath, rent Corps, Brooks Automation, BG Staffing, among others. Just want to get your sense real quick. We have about a

minute here on just the U S economy. From the small business perspective, are you hearing from leaders of the companies that we are peaking and that their profits and potential are peaking, or that this is the beginning of another sort of leg up in this business cycle. Small business optimisms at all time high. When I talk to company managements, they sound very enthusiastic about the near and

intermediate term. Uh, there is some concern about the you know again, some of the tearoffs, how that's going to affect them, what's going to happen to the consumer if there is inflation. But we talked to CEOs all the time, and uniformly they feel great about the future, very positive, and they can hire people and they and they're looking to hire people. And b G Staffing, which is a temporary help firm, is doing a good job of helping companies find people to hire. So employment is terrific and

they're looking to hire people all. Eric kubi thank you so much for joining us. Eric Kuby is chief investment officer at north Star Investment Management, which is based in Chicago. But he checked out here to a sultry New York City where we're enjoying some really Uh maybe maybe he

trecked wearing his Rocky brand boots. Yeah. Maybe, although if you have to take those off and then then then lay them back up again when you're going through security, it might be in might PN conference, I always used slip on there is a profound dissonance in markets these days. If you look at the political headlines crossing UH highlights a deep polarization of several nations and a sense of high drama. If you look at the markets, the drama

is not. They're joining us to talk about uh, you know, just how to view tariff hawk and other sort of uh policy driven news that we've been getting. From an investing standpoint. Is Mark Freeman, chief investment officer at Westwood Holdings Group, and he joins us here in our eleven three oh studios. So at what point, Mark, do you start to change your allocations in light of the tariff discussions that we've been getting in the back and forth

between Jun Ping and and Donald Trump. Yeah. Well, first, great to be with you. Um, I think you raised a real key point, certainly for investors. I think ultimately what we have to differentiate in this in this areas is that ultimately, when do these issues tariffs obviously your

front and foremost. But when do these issues move from being what I would say, impacting the multiple, which is a confidence gauge, and impacting on that, but moved from that to being an earnings factor, because that's ultimately it's when it becomes a much more significant issue for the market. Right now, we're seeing it from a volatility standpoint, and that's why when I say it impacts the multiple, you're

seeing volatility or changes in in that. But when it becomes a much more fundamental issue is when you actually start to see it impact either actual or earnings or perhaps even more importantly, the market's expectation for for what future earnings will be. That that's that that's when it

becomes an important issue. Okay, So just so so that we're clear here, it's about the difference between what investors are willing to pay for every dollar of earnings, that's what they're willing to pay, versus the actual performance of the company. So there are two kind of different things exactly right. Okay from there, all right, now, I want to get to the point about cash because I know you you you help manage the Westwood UH Fund. This is w h G I X right, and this is

the Westwood Income Opportunities Fund. Do you recommend people hold onto a decent amount of cash now or do you want to be fully invested? Well, I think in this environment and our view is as we go forward, that volatility, which has been largely absent prior coming into this year, but that volatility will normalize. And that's just another way of saying returned back to where it was prior to the UH, prior to the to the Great Financial Crisis

and that. But basically the volatility going forward will be higher. So whether it's issues like this or some other items from there, we expect volatility to go back to more normalized level. Under that assumption, we would advocate holding at least some cash. Now we can define what is significant or how much that is for us, that's typically between say six two maybe ten percent cash. We view that as just be it so, and what that allows you to do is to be opportunistic. It's not it's not so,

you just keep it and it's there. But I think the other thing that that's that at the margin, which now starting to matter and which is very different where we've been roughly from the last decade, is now the

rate of return on cash has actually moved up. I mean that is one of the things that the FED, from a tightening standpoint, has has probably impacted the most is actually the rate on cash and is that continues If that continues to drift up, which it seems most likely that FED is very much committed to continuing to raise rates, then that's another. So now the opportunity cost is diminishing on that front. But I think in this

environment and allowing to be opportunistic makes sense. I ask a lot of people this, and I'd love to get your response to it. Almost the last time that you made it significant change to your allocations in your portfolios. Oh goodness. Um, well, in terms of our specific income opportunity strategy, we use up to eight different asset classes

and those are changing literally on a quarterly basis. It's ultimately driven though by the market environment and where we're seeing opportunities and where things perhaps are getting repriced, and so it's moving. It shifts, uh, incrementally, you know, on a quarterly basis, even on sometimes on a weekly basis, but but over time it does change rather significantly. So what's been the most recent significant change that you made

an allocation. I think one of the things is actually is is a couple of a couple of different areas. One look, there is being some repricing on the short end of the Yeld curve, and so we're using that implementing some of our cash we've had, our higher cash balance. We can now use that to add some incremental yield for that UM in another part of the capital structure

of the preferred market. And so there we're not to get too technical, but where we can use what we call they're called hybrids, but they're just floating right securities. They have a shorter duration than a typical preferred, but then they become a floater after either three years five years with a nice reset. And so if our expectations are that short rates and fed rates continue to move up, that's kind of a way for us to participate in

that and still learned some attractive yield. And then the other area we're still in our largest components is still in the equity market. I want to ask you about one area of the equity market, and this is a transportation because I noticed you got a position in FedEx and I was reading a story today that UM logistic costs have really accelerated there, up about six percent year over year, and I would imagine that that's got to benefit a company like FedEx if they can pass along

those increased costs of consumers. That's that's a fundamental part of our thesis, and in terms of owning the name and just kind of give you, um, not not necessarily an anecdotal um. Uh. Example of that is that if you look at the consumer staples sector and many of those companies when they were reporting that, they were saying, look, we knew in demand was a problem, but now we're facing cost pressures. And then more specifically, we're facing cost

pressures on the transportation front. I heard that from the clus, General Mills, others, they've all highlighted that. And so so one company's cost pressures is another company's pricing power. And so if we're like, okay, well then maybe let's take a look at the company that has pricing power, and FedEx I think is a classic example of that. What do you think is the biggest mistake that many investors are making? Today? Oh? Gosh, um, that's that's that's a

that's a great question. Um. To me, it's about I think it would be understanding. Maybe a mistake, but I think in terms of of understanding from a process standpoint, one of the things that we UM have been communicating to UM, to our investors and to others is that, look, don't lose sight of how the process works UM in terms of look, profit the market eventually always follows profit growth. Okay, so profits are item number one. So profit lead the

market and the market UM leads the economy. The problem is the investors to from a from a relationship standpoint, they tend to think of it is exactly the opposite. And that's why so many times you see retail investors are saying, Okay, the time to invest is when the economy is doing really, really well, because then that's going to be good for the market, and then therefore that should be good for for profits. It's it's exactly the opposite.

And so we're really just trying to highlight to people that ultimately, despite look, I'm not saying all these more politically oriented items and things like that aren't important, but it ultimately comes back to the fundamentals for the market, and that then the single most important fundamental for the market is ultimately is profit growth. And what that looks like and following that for going going forward there. I want to thank you very much for being with us.

Much appreciate it. It's much pleasure to having you in the future. Mark Freeman is the chief investment Officer of a Westwood Holdings Group. They are based in Dallas, Texas, and much appreciated. Very interesting conversation. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer. I'm pim Fox. I'm on Twitter at pim Fox. I'm on Twitter at Lisa Abramo. It's one

before the podcast. You can always catch us worldwide on Bloomberg Radio.