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The Wall Street Skinny
February 07, 2025
This Week on The Floor
Big announcement from The Wall Street Skinny this week!
Kristen is so excited to share that she is expecting her fourth (!!) child due this summer. Her husband is almost as excited about this as he is about his team, the Philadelphia Eagles, playing in the Super Bowl this weekend đ
Curious to know if itâs a boy or a girl? Click here for the reveal!
Honeywell breakup news: how to understand & why it matters
Golden age for active managers: are the 1980s back for hedge funds?
Speaking of Philadelphia, we had the chance to interview billionaire and legendary Philadelphia investor David Adelman last week about sports investing, commercial real estate, and building a new world-class arena in downtown Philly.
He shared his number one piece of advice to new investors starting out in this clip below:
Markets Recap / Deal News
Interviewing this week? Hereâs some content for your conversation.
Why Bigger Isnât Always Better: Honeywell Breakup
In the world of Wall Street, bigger isnât always better.
In fact, the so-called conglomerate discount often leads to a drag on valuation when large, diversified companies trade below the sum of their individual business units.
Why does this happen?
1) Complexity Overload: Investors often struggle to value multi-industry giants accurately due to their sprawling, disjointed operations.
2) Lack of Focus: A jack-of-all-trades approach can dilute strategic direction and resource allocation, limiting growth.
3) Hidden Gems: High-performing units are sometimes weighed down by underperforming divisions, hiding true value.
The solution? Strategic spin-offs.
When conglomerates break apart, the newly independent companies can achieve higher valuations, focus on core competencies, and improve operational efficiency.
Honeywell International Inc is a great example, announced just this week.
Fun fact: Jen represented a ton of the Honeywell relocations to Charlotte when they moved their headquarters a few years ago!
Per Bloomberg, following pressure from activist investor Elliott Investment Management (who amassed a $5Bn position in the company â its largest position ever in a single stock), Honeywell announced it will split into three publicly traded companies by 2026.
Hereâs how itâs playing out:
Spin-Off Structure:
Aerospace Division: $15bn in 2024 sales. Post-breakup, it will become a pure-play supplier to the aerospace industry and could achieve higher valuations compared to its current position.
Automation Business: With $18bn in revenue, this division includes warehouse robotics, smart energy equipment, and industrial automation.
Advanced Materials: The company is continuing with its previously planned spin-off of its advanced materials arm.
Why This Matters:
Activist investor Elliott estimates the breakup could generate a 51-75% stock price upside over the next two years, as each division would achieve a valuation closer to its industry-specific peers.
Bloomberg Intelligence projects a $32bn boost to Honeywellâs enterprise value once the spin-offs are complete.
Short-Term Pain, Long-Term Gain
While the split is expected to unlock value, Honeywellâs financial guidance suggests some near-term challenges:
2025 Adjusted Earnings Guidance: $10.10-10.50 per share, falling short of Wall Streetâs $10.94 expectations.
Soft Cash Flow & Sales Forecast: Organic sales growth and free cash flow guidance also missed estimates.
Investor Reaction: Shares fell 6.4% after the announcement, but analysts remain optimistic about long-term upside.
RBC Capital Markets analyst Deane Dray notes that âdeal purgatoryâ â the period between announcement and execution â could limit short-term stock gains until the separation is finalized.
Historical Context: Conglomerates Under Pressure
Honeywell is not alone. The conglomerate model, once celebrated, has been under attack for years. Companies like GEand RTX saw their share prices rise after breaking apart their operations:
GE spun off its energy and health businesses and is now worth more than it was as a conglomerate.
RTX emerged stronger after separating its Otis and Carrier divisions and merging with Raytheon.
Are the 1980s back for Hedge Funds?
How are Hedge Fund managers going to beat S&P returns in 2025?
We interviewed Aaron Cowan and Evan Cohen of Suvretta Capital Management, a $3bn equity long-short hedge fund, to get their quick fire takes on investing in tech and financials in the new political and regulatory climate.
Watch the 5 minute interview below, or scroll down for the full transcript of our conversation!
Jen Saarbach
We are joined here by Aaron Cowan and Evan Cohen of Suvretta Capital Management. Youâre a $3 billion equity long short hedge fund. Guys. What's going on in hedge funds? What are we seeing? What is the theme for the next year or two?
Aaron Cowan
Well, look, I'm incredibly optimistic. I think, you know, you have a new administration coming in place. Whatever you think your politics are, theyâre pro-business. And pro-business tends to lead to good things.
Given that I'm a little bit old, Iâm in my 50s, I remember the 80s. Frankly, I think this is analogous to that period of time. You know, you had a Democratic administration under Carter that had high inflation, you had a hostage crisis, people just didn't feel as good in the 70s. And then all of a sudden, Reagan comes in and unleashes a lot of business opportunity.
And if you remember, the 80s [were] sort of a go go period of time with LBOs, takeovers, and yuppies. And I think we're going to go back to that. And that tends to tends to be a really good time for equity returns.
And conversely, I think a lot of investors got a little scared by what happened with the inflation crisis in the early part of â21 and â22. I think they unfortunately probably went into some lower vol, lower return strategies. Now I think it's going to be a more exciting period of time and youâre going to need to have more long-biased equity exposure such as a fund like ours.
It's going to really interesting. I think returns are going to be good and itâs going to be fun.
Kristen Kelly
How do you get people to invest in active managers when you can do so well in passive strategies? Especially if this is going to be like the â80s all over again?
Aaron Cowan
We pride ourselves in trying to do about two thirds of the S&P return on the upside one third on the downside. Last year we were up 39%. And that way we outperform the indices.
Look, there's an argument to some passive and some active, but look at what happened yesterday, right?
If you were sitting in just AI trades, you got absolutely destroyed. And you need to move around. But the AI trade now with DeepSeek is going to move from beingâŠlook at it this way: with the iPhone, that was the hardware layer. And then you had all these applications created. So Uber didn't exist, then became a big business subsequently because you had the iPhone.
I think what's going to happen with AI is now youâve built a hardware layer, which is Nvidia. And now you're going to do applications. So the stock we're incredibly excited about is Tesla, because they have two killer applications: full self-driving, and they're going to have robots. So the application of AI these days is going to become more relevant than the infrastructure layer.
You need people to be able to move into those areas --- hopefully before it becomes obvious ---and that that's the benefit of hopefully active management.
Evan Cohen
That's right, we try to own the best companies in sectors with economic tailwinds. That's the advantage we have as a flexible, active asset manager that you just don't have as a passive investor.
Jen Saarbach
That makes a ton of sense. Is there any sector outside of tech and AI that you guys are excited about right now that isnât getting as much press?
Aaron Cowan
Yeah, we're excited about financials. Because if I'm right, you're going to get a boom. What happens when you have a boom? A lot of companies are going to go public.
Because you had an administration that was not business friendly, you had Lina Khan at the FTC, there has not been a lot of M&A, so a lot of the private equity firms have very old portfolios that they need to start monetizing, because if they want to raise new funds, they need to be able to get money back to their LPs. So I think the financial areas can be great.
We own Goldman Sachs. We own Bank of America. And again, there were also threats of regulation in the banking system. I think that's not going to happen as much now with the new administration.
Jen Saarbach
Interesting. Do you think the bank balance sheets will get more freed up as well on the regulatory side?
Aaron Cowan
Well, there's threat of this Basel III, which would have required more capital. That's not going to happen.
So if you go to a bank [like] JP Morgan, there's thousands of compliance lawyers. I think it was under Obama, you have the CFPB created which is justâŠit's basically an unelected agency that was trying to annoy banks. In my opinion, that will probably disappear.
Theyâll be able to do things and get more pro-business. I think pro-business, it's good for the financial sector. You know, we also own Apollo.
The one big pool of assets is 401(k)s. And you think about it, most 401(k)s invest in mutual funds, which have daily liquidity, even though most people don't need the money for like 50 years.
There will probably be deregulation in favor of allowing for one case to hold for private assets, which would be great for the private equity firms. So one of the ways we're playing that is to own Apollo.