The Trump Administration Ushers in a Bull Market -- Will It Last?

In this episode of Market Foolery, Mac Greer is joined by David Kretzmann and Matt Argersinger as they consider the incredible gains major indexes have enjoyed since Trump won the election and his administration officially took the reins -- the Dow, S&P 500, and Nasdaq have all traded up at least 10% in that period

The cast also looks at the latest news and results from Lowe's (LOW 1.49%), Home Depot (HD 0.86%), Best Buy (BBY -0.11%), and Etsy (ETSY 2.86%) before turning their attention to the premiere of YouTube TV, the latest combatant to appear on the entertainment battlefield.

A full transcript follows the video.

This podcast was recorded on March 1, 2016.

Mac Greer: It's Wednesday, March 1st. Welcome to Market Foolery. I'm Mac Greer, and joining me in studio we have Matt Argersinger from Motley Fool Million Dollar Portfolio and David Kretzmann from Motley Fool Supernova. Guys, welcome!

David Kretzmann: Hey!

Matt Argersinger: Hey, Mac!

Greer: Guys, let's begin with what's being called the Trump rally. The market opening up big on Wednesday after President Trump's address to Congress on Tuesday. Matt, the stock market keeps hitting new highs, we have talked of corporate tax reform, free and fair trade, big increases in defense and infrastructure spending, we have healthcare talk about reform and repeal and replace. What does it all mean for investors?

Argersinger: Well, it's all stuff investors should love. I'm keying in on, mainly, the $1 trillion public and private infrastructure spending, which, I think, realistic or not, that could boost a lot of spending, bring a lot of cash out into the market into corporation coffers. We love to hear this, and as investors, it's really exciting.

We have to really dial back our enthusiasm a little bit. As much as all this sounds great, it's a lot of luster, and in reality, whether it's Trump or any other president, only about a fraction of these things will probably get done, and certainly not to the level that we think they could get done in the speech. So, when I see the Dow hitting 21,000 today, and it feels like just a while ago we had 20,000, so it's remarkable, we have to understand that this is not, as an investor, a rally I want to chase. I didn't listen to the speech last night and say, "Gosh, I have to go out and buy stocks."

The stock market is already at a high, it's at new highs, and I would say there's so much enthusiasm for what Trump and the administration want to do, you have to realize that so little of that is going to get done. I think we heard so many great speeches from President Obama over the years, or even Bush before him, about these really impressive in the sky figures, numbers, projects, ideas. In reality, it's hard to get things done, and I think Trump is probably going to realize that, and at some point, the market might realize, investors might realize, all those promises, getting the corporate tax rate to 15%, getting $1 trillion in spending, we didn't get quite what we expected.

Kretzmann: Yeah, in general, I think you want to be careful investing based on what a politician says or doesn't say. You want to take it with a grain of salt. Like Matt said, you don't really know what will actually get done and to what degree. But, when we're talking about tax reform, I think another thing in the back of investor's minds is repatriation, the ability for some of these global businesses like Apple or Priceline to have a tax holiday and bring the billions of dollars in cash they have overseas back to the U.S., where they can buy back stock, issue dividends, make acquisitions. I think that's another piece. I haven't had a chance to watch the speech yet, I was in D.C. watching the Warriors game. I'll have to catch up.

Argersinger: Probably a better use of time.

Kretzmann: Maybe. I was in D.C., I was close enough. But, along those lines, I think it's interesting that even with the market hitting new highs since the election, you have Warren Buffett and Berkshire Hathaway really being net buyers of stocks to a pretty large degree. Warren Buffett, in an interview on CNBC on Monday, following his shareholder letter over the weekend, he mentioned that he had doubled Berkshire's holding in Apple in January, and that was as the market was hitting new highs. Now, Buffett and Berkshire own $18 billion plus of Apple, which has been a solid investment. I know we talked about this last week on Market Foolery, Berkshire and Buffett, we see them as value investors. So, I think it's interesting to see them finding what they see as good opportunities even as the market is hitting new highs. That's primarily been with Apple and airlines in the case of Berkshire, but I think that's something worth noting.

Argersinger: Yeah, I thought it was a good point Buffett made, too. Becky Quick asked him what he thinks about the stock market and the valuation of the market, and he said he didn't really see a bubble in the market, because at all times you have to compare the valuation of the market to the level of interest rates. As we know, interest rates are still near historical lows. I would argue -- and this is just me putting my economist nerd hat on -- all the stuff that Trump talked about last night, if even half of that came to fruition, we're talking about a lot of increased investment spending and inflation, because of the nature of the velocity of money that we're talking about. Usually, in periods like that, we see rising interest rates. The Fed is probably going to raise rates this month. Again, I'm not trying to be the wet blanket here, but dial down the enthusiasm.

Kretzmann: I agree with that. Here at the Fool, we focus on individual businesses. I think regardless of who's in power, you want to invest in businesses that you're comfortable owning for many years, regardless of which president or political party is in power. So, that tends to be the focus we take, looking at individual businesses. I think investors can still find opportunities even as the market is rising. But yeah, you want to take it with a grain of salt when politics enters the equation.

Greer: And let's talk about two of those individual businesses, two retailers headed in very different directions, guys. Lowe's up big on Wednesday after the home improvement retailer reported better-than-expected earnings. Matt, Best Buy down on earnings.

Argersinger: Yeah, it is the tale of two retailers. We talk about all the time, what kind of big box retailers, in this era of e-commerce, can thrive? And company like Lowe's and Home Depot, as well, the home improvement space of the market has been so impressive and held up so well. You just can't replicate that experience online. I know this for a fact because I spent a lot of time going to Home Depot and Lowe's going to do things. It makes sense. Lowe's quarterly sales were up 19%, very impressive. Comparable store sales up 5%. Contrast that with Best Buy. Revenue was down 1%, comparable store sales were down 7%, and they're guiding for comps to fall even faster in the current quarter, and that's because, again, a company like Best Buy, and with Target earlier this week, is very vulnerable to the convenience factor that customers are now placing on their time and money. And that's capital that's flowing to e-commerce, Amazon and elsewhere.

Greer: I will say that the Best Buy in store experience, I think, has gotten a lot better. And I've been skeptical about Best Buy. But the problem is --

Kretzmann: Amazon's best showroom, right?

Greer: That's right, that's the problem, it's Amazon. Matt and I were having this discussion this morning, about which retailers are truly Amazon-proof. I think we agree that Lowe's and Home Depot are probably Amazon-proof, right?

Kretzmann: I would say so. If I had to pick one of the two, I would pick Home Depot. Since the Great Recession, when you look at metrics like profit margin, return on equity, inventory turnover, return on invested capital, Home Depot and Lowe's right before the recession and through the recession, they're about neck and neck with all those metrics. But over the past eight years or so, Home Depot has just far and away outperformed Lowe's in all those categories. The stocks really haven't performed all that differently. They have both been great performers. But I think just, long-term, given that Home Depot has generated those superior metrics, I would stick with them. But both of them have been really strong performers, as Matt mentioned. 

Greer: Anyone else on your Amazon-proof list?

Kretzmann: I think you have one that you would like to share.

Greer: I do. We had a spirited debate, because I think Costco, for now, is Amazon-proof. I think you go to Costco for the treasure hunt, this idea that you're going to find something that you didn't expect to find, and also for the food. The food, I think, is incredibly underrated. If you want grilled salmon or to cook out or cook a steak, you go the day of. Now, Amazon, if they build these bricks and mortar grocery stores and that becomes more convenient, then maybe that's a game changer. But for now, I'm going to go with Costco, Lowe's, Home Depot. I think those three are Amazon-proof.

Argersinger: The one thing I'll say about Costco, I know that they announced they were going to raise the membership fee, I would say that's a dangerous game to play. It's getting more dangerous.

Greer: No. I would pay three times as much for my fee. In walnuts alone, I make up that membership fee and buy one bag of walnuts.

Argersinger: I just think the value proposition of Amazon Prime, comparatively, is so much greater if you're a person who doesn't value the food element --

Greer: It's coffee and tea. They can co-exist.

Argersinger: I just, as a person who hates to drive and park and shop anywhere, especially somewhere that's so crowded as Costco, to me, Amazon, my household, they're just winning, it's dominating. I don't think there's room for Costco, especially given a higher membership fee.

Greer: I'm sorry, I'm hung up on the statement "as a person who hates to drive, park, and shop anywhere." Do you go out? You don't like going out?

Argersinger: I do a lot of walking in my neighborhood.

Greer: Maybe you are not the target market.

Argersinger: Probably not.

Greer: "As a guy who hates to leave his house," that's what I hear. OK.

Argersinger: Speaking of not leaving your house.

Greer: Yes, speaking of the company that might not be Amazon-proof, Etsy. If you don't know Etsy, it's a retailer of online crafts and all sorts of homemade good stuff, and other stuff that's not as good. Shares of Etsy -- down big on Wednesday after reporting a greater than expected loss. David, Etsy is adding users and growing revenue, but Wall Street doesn't really seem to be buying the story.

Kretzmann: Yeah, I was actually surprised to see the market's reaction here. I think Etsy might actually be Amazon-proof. Amazon, eBay, and Alibaba have all tried to replicate what Etsy is doing, and none of them have really succeeded. At last count, Handmade by Amazon, which is something that Amazon launched about a year ago, had about 400,000 items listed on the platform. Etsy has over 40 million on its platform. So, Etsy far and away exceeds Amazon. Ebay shut down their thing, Alibaba shut down their efforts. So, Etsy, in this corner, active sellers grew 12%, active buyers up 19%, sales up 25%. The company is free cash flow positive. They are generating cash. They have $270 million in net cash.

I think the issue here, they had some wonkiness with their guidance. They actually reiterated the upper end of their guidance for the next three years or so, through 2018. They're expecting revenue to grow at an annualized pace between 23% to 25% through 2018. But for 2017, they're only expecting sales to grow 20% to 22%. So, for whatever reason, management is being a little bit softer on guidance this year, and they're essentially implying that their growth will re-accelerate in 2018. I think that's probably making Wall Street a little bit nervous. But I do like the long-term story here. What Etsy is doing, with their base of sellers, they're targeting a group that none of these other retailers are doing a good job of targeting. The majority of sellers on Etsy's platform are women who work from home, and half of them don't sell anywhere else other than Etsy, and the ones who do sell somewhere else are usually just going to craft fairs. So, when you go to Etsy, you're not really going there for something that you would otherwise be able to find on Amazon or Ebay. So I think they are carving out a sustainable niche in e-commerce. But quarter to quarter numbers will be a little bit jittery here.

Greer: I've had one Etsy experience, and it was incredibly positive. A few years ago, we went out to CES for Supernova, and a few weeks before we left, one of our copywriters said, "I need Motley Fool jester caps that have a Supernova starry theme." Where do you go for that? I go to Etsy, and sure enough, there's a woman who makes jester caps, and she did an amazing job and turned it around in a week.

Kretzmann: That's awesome.

Greer: Now, I'm not sure there's a business there. 

Kretzmann: Well, maybe not jester caps specifically. The Fool can keep that seller in business. But I think that highlights the dominance, or the advantage for Etsy. You're going to Etsy for a personalizable, customizable thing. When you go to eBay or Amazon, you're usually going for the mass-produced stuff. That's their bread and butter. You have Amazon fulfillment centers, they're just trying to churn things out as inexpensively as they can. You go to Etsy for that handmade touch. So, I think that's where they are carving out that niche. That's why I think they're here to stay. And they are generating, like I said, positive cash flow, and they have a strong balance sheet. I like the vision for the company. They're also, in April, rolling out Etsy Studio, which is focused on the makers and a DIY do-it-yourself audience. So, you'll be able to go there, you have all the listings for yarn and thread and all this stuff to make crafts on your own. They'll also have tutorial videos and things like that. What Etsy is doing, Amazon and eBay and Alibaba, like I said, they have tried to replicate it but they haven't had a whole lot of success matching Etsy's success.

Greer: So, when you say they're here to stay, do you think they're here to stay as a stand-alone company? Or, if I'm an investor in Etsy or considering Etsy, do I really have to hope that they're going to be acquired?

Kretzmann: I mean, it's a small company, so theoretically, it could be an acquisition. There haven't really been a whole lot of buyout rumors that I have come across. But I own a small position in Etsy, and I would prefer -- it is a recommendation at Rule Breakers -- it'd stay independent, because I think they can succeed as an independent company over the next three to five years. We will have volatile quarter-to-quarter results, but I think as far as that e-commerce category grows, I see Etsy being the craft fair moving online. And that's something that none of the other behemoths in e-commerce have done a good job replicating. I hope Etsy stays independent, but they are small enough that one of these companies could snap them up without a whole lot of trouble.

Greers: Guys, for our final story, let's talk television. On Tuesday, YouTube introduced YouTube TV. For $35 a month, you get around 40 streaming channels. That includes the major networks -- ESPN, Fox News, MSNBC. David, YouTube is also partnered with local TV stations, so you could get local sports and news. Now, what you do not get is CNN, HBO, AMC, A&E, Comedy Central. So, there are some channels missing there. A lot of competition in this space. I guess the phrase that pays is "skinny bundle". There are a lot of skinny bundles with Sling and the like. What do you make of YouTube?

Kretzmann: I think the two advantages that YouTube has here, potentially, and they say that they are negotiating with other content partners, so hopefully they can get some of those other partners on board onto this package, but the two things that stick out to me that YouTube can do probably better than anyone else, especially with the current players, they're offering unlimited cloud-based DVR storage. Essentially, you'll be able to record up to nine months of content on YouTube.

So, they're leveraging the dominant Google Cloud infrastructure in business that Alphabet has built up over the years. That's something you can't do with Sling TV. With Sling TV, you can only watch it live. You can't record something, you can't set up to record something ahead of time. You either watch it live or you miss it. I think that unlimited cloud-based DVR aspect, that's a really user-friendly aspect that tears into the traditional linear TV model. I think it makes the skinny bundle model, or that online streaming model, much more appealing and attractive for users.

The other thing that sticks out to me that YouTube could probably do really well down the road is advertising. You could essentially, what Google could offer advertisers is say, "We know this individual, they search for these products, they have these search terms on Google, they have these viewing habits on YouTube." I think Google could arguably do a better job than anyone else of really personalizing and targeting individual ads to users. So, your live TV ads would be different from Matt's, so to speak. I don't know if that's necessarily the plan right now right off the bat, but I think down the road, that is something that could really play to YouTube's advantage.

Argersinger: It's fascinating to watch the evolution of the TV digital streaming market, whatever you want to call it. But in a way, I almost feel like we're coming full circle. If you think about it, when I learned that YouTube was going to have ESPN, I thought, that's huge, that's very compelling. But then, I say, wait, I still want CNN, I like AMC, I still want HBO. So, I start to think to myself, wait, I'm probably going to need two or three skinny bundles. Plus HBO Now, plus Netflix. Then all of the sudden I'm paying over $100 a month anyway, and then it's like, why don't I just stick with my cable subscription?

Greer: I need a keyboard to go with my iPad.

Argersinger: It's interesting. I think, if you really ask a consumer what they want, they want the true à la carte service. Just give me the 15 channels I want plus HBO and plus Netflix. That's what I want. And I'll pay a fee for that. But the bundling continues, and that's something that cable companies have done successfully for decades now. So, it seems like we're coming full circle with the TV market.

Greers: Guys, this really also seems like kind of a play for the future. Piper Jaffray had a recent report that said 26% of teens watch YouTube every day. As those teens get older, and as they make more and more purchasing decisions, maybe YouTube TV becomes their television.

Argersinger: It's already a tremendous brand. If you think about, amazingly, if you think about the Mount Rushmore of online properties, YouTube is absolutely there right next to Google which acquired, brilliantly, YouTube some 10 years ago now. Amazing.

Kretzmann: Yeah, and the Wall Street Journal just reported that the amount of content viewed on YouTube each day is now a billion hours a day. That's up 10 times since 2012. So, the level of engagement that is on YouTube already is staggering. I think this TV offering, I think this is one of the more attractive TV offerings, aside from those properties that aren't included in this initial bundle. But I think with that cloud storage, that makes it very appealing, especially to younger viewers who don't necessarily want to sit down and watch a live show from eight to nine at night. They want to watch it whenever they want. They don't want to watch commercials. So, with that cloud storage, you can watch it when you want, you can skip the commercials. From a user experience perspective, I just think that's far and away above live TV, whether it's through a traditional cable package or online streaming. People just want to watch things on their own terms. I think this skinny bundle offering with YouTube is moving closer to that direction. But like Matt said, it's still not true a la carte. I think, ideally, people would pay $5 for CNN, $10 for ESPN, they'd be able to just pick --

Argersinger: $20 for the NFL games that I want to watch this month.

Kretzmann: Right. And potentially just paying for a game. Maybe I'm not an NFL fan, but I'll pay to watch the Superbowl, or something like that. I think it'll be interesting to see if we move in that direction. I think from a user experience perspective, that's probably what most people would like. But whether or not the cable companies let that happen, they'll certainly be resistant to moving in that direction.

Greer: How about, best thing you have watched recently, as we close?

Argersinger: Let's see ... I watched this show called Travelers on Netflix. I don't know if you've seen it, it's one of those Netflix original series. Really well done. It's a slow starter, as a lot of these series are. But by the fourth or fifth episode, I was addicted, and I think my wife and I binged in like three nights. It was good stuff.

Kretzmann: I recently watched Sneaky Pete --

Greer: Solid.

Kretzmann: -- which is one of the most recent Amazon Originals. Also, The People vs OJ Simpson, that was on Netflix, that was great. As someone who was born in 1992, I missed the OJ story, and now I get it, I get why people are obsessed with it. It's a great story.

Argersinger: I can't believe that.

Kretzmann: I'm catching up on my history.

Argersinger: I watched the white Bronco live with my dad.

Greer: Speaking of catching up, I watched Dumb and Dumber for the first time with my kids.

Argersinger: For the first time? Wow.

Greer: Yes, I have never seen it. Father of the year. My eleven year old loved it. As did my eight year old.

Kretzmann: Quality entertainment.

Greer: Yeah, it's high brow. On a slightly more serious note, there's a new HBO show called Crashing, which is really good. I'm two episodes in. The producer is Judd Apatow. It's very well done. Shout out to that. David, Matt, we'll end it there, thanks for joining me today.

Kretzmann: Thanks, Mac!

Argersinger: Thanks, Mac!

Greer: As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's it for this edition of Market Foolery, the show is mixed by Dan Boyd. I'm Mac Greer, we'll see you next time!