On this episode of Market Foolery, Chris Hill is joined by Motley Fool analysts Jason Moser and Taylor Muckerman. The cast discusses the cybersecurity space in the aftermath of international attacks before turning to the listener mailbag for questions about investments in 3D printing and the housing market.
A full transcript follows the video.
This video was recorded on May 15, 2017.
Chris Hill: It's Monday, May 15th. Welcome to Market Foolery. I'm Chris Hill. Joining me in studio today ... from Stock Advisor Canada, Taylor Muckerman and from Million Dollar Portfolio, Jason Moser. Happy Monday, gents!
Taylor Muckerman: Yes, indeed.
Jason Moser: Happy Mother's Day-after.
Moser: Did you get yourself in trouble yesterday? Or did it work out alright?
Hill: No, I called my mom with the kids, made dinner for the missus, all good things.
Moser: What did you make?
Hill: Well, we had a little bit of a mixed grill.
Moser: It was what she wanted, ultimately, right?
Hill: Yeah, exactly. A little swordfish, a little shrimp, a little sausage. I was talking about this with my next door neighbor, because he was out there grilling as well. I feel like, any time I'm grilling, I'm just thinking, I can basically grill whatever, and I find that my wife is like, "Oh, you don't have to do multiple things!" And I feel like, it's grilling. It's not like a stove, where you have to manage a bunch of different things. No, I can grill three or four different things, that's not a problem.
Moser: Not at all. My philosophy is, when you're grilling burgers or steak, if you're not throwing some andouille sausage, or perhaps some shrimp or something else on there, you're just not leveraging --
Hill: You're being a little lazy.
Moser: -- your grilling infrastructure. I mean, you have to go ahead and --
Hill: I like the business aspect you take to this.
Moser: You have to understand the operating leverage that's in play here. You're going to get that thing started up. Make the most of the time you're putting in it.
Hill: You're hurting the gross margins of the propane.
Moser: Let's not hurt the gross margins. [laughs]
Hill: I think we're done now, that's going to do it for today's edition. We're going to dip into the Fool mailbag, but I think we should start with one of the big stories over the weekend, which is having ripple effects on Wall Street, and that is the cyber attacks that took place affecting businesses around the world. There was the ransomware, a tech which encrypts files and then demands payments to unlock them, and the so-called "Wanna Cry" malware that was spreading around the world and affecting businesses. Maybe not surprisingly, cybersecurity stocks are looking good today. Symantec (NASDAQ:NLOK), Palo Alto Networks (NYSE:PANW), FireEye (NASDAQ:FEYE) shares all up between 4% to 8% today. Again, not a surprise that they're up. But I'm sort of curious about this industry, because I look at cyber attacks as something that's only going to get worse, there will only be more of them in the future. I'm not saying these stocks should be up every day. But what's going on with these businesses, that we're not seeing a bigger bull run on these stocks?
Moser: Do you want to start?
Muckerman: I think it's a very fragmented industry. I'm not sure there's any clear-cut winners. Not just one winner. I think you have a lot to choose from. A lot of private companies in this space, too. So I think the fragmentation might be one reason why. But you see this every time after there's a hack of meaningful size. They pop in the next few days, then they come back down to earth. I don't think a lot of these businesses have the stability you might see, because a lot of them are fairly new. I think there's still some hesitation around who might be the winners here, kind of like 3D printing, which we might talk about a little later --
Hill: We will get into that.
Muckerman: The industry makes a lot of sense, but I still think that some of the companies in there -- just like this industry, a lot of 3D printing companies are privately held, so there's competition behind the scenes that investors might not be witnessing, and I think that probably holds true here with the cybersecurity industry.
Moser: Yeah. I think first and foremost, it is an extremely difficult market to understand. I think it's difficult for investment analysts to understand. I think it's a difficult market for those market professionals to understand, even. But I think you have to ask yourself, what really constitutes a sustainable edge in this line of work? Because really, when you think about it, the nature of the market, the nature of cyber threat, is to always become something that no one has ever seen before.
Muckerman: You have to be fluid, yeah.
Moser: And how do you prepare for that? And how do you determine which company is best prepared for that? Because you really don't know until hindsight, "Well, everybody was prepared for that one, except for that company and that company." So it's just very difficult to suss out the winners. Like you said, I think in general, the concept makes sense. It seems like it would be an opportunity, albeit, we're tending to root against these types of things, but they're going to happen no matter what. But I think it's so fluid and it's so difficult to figure out what constitutes any kind of a sustainable edge there, it makes it really difficult to pick a winner. And it's fragmented, and then you have private opportunities versus public. The tech moves fast, and I think this moves even faster.
Muckerman: And you don't know you need it until it's too late. If you're a company, how are these Palo Alto Networks and FireEyes ... I mean, yeah, they can say they prevented this from happening, because they can see the attacks that were rebutted, but until your company is attacked, you're just like, "We're just paying these people, and we're not really sure what they're doing for us," until something like this happens and everyone freaks out and says, "We have to go pay somebody to help us!" And then a year goes by with no attacks, and maybe it goes by the wayside again until something like this happens.
Hill: Marketfoolery@fool.com is our email address. From Matt Riley, "Haven't heard you guys talk much about 3D printing in a while. I was wondering if you had any thoughts on companies, or the state of that industry."
Muckerman: Personally, I'm not investing in any of the 3D printing companies. If I'm going to benefit from it, GE (NYSE:GE) might be the first place I would look. They made a couple 3D printing acquisitions last year, up to about $1.5 billion. So they're using it in-house, and I'm sure they're going to work their way into providing additive manufacturing opportunities to some of their customers. But first and foremost, they're trying to get in there and reduce their cost by using it to their advantage, rather than trying to compete in the 3D printing market. I think that's where I would bet that it's really going to make a difference, internally for some of these giant manufacturing companies. I think 3D printing eliminated their consumer base business last year, because they just didn't see the future, and it was competitive, and there wasn't a huge market for it. Stratasys (NASDAQ:SSYS) is still trying to achieve some relevance in the consumer space. But I'm going to bet on that in the giant manufacturing space, rather than trying to pick the winners who are trying to sell these machines to folks individually.
Hill: Yeah, it's like the old adage in politics that I think was born out of the Watergate era and All The President's Men, "Follow the money." I think if you look at, maybe related to what we're seeing in artificial intelligence and home assistance and that sort of thing, where you see IBM and then Amazon, Google, Microsoft really starting to pour money into those home assistants, that sort of thing. I think Taylor is right, to see the next move or wave of 3D printing, keep an eye on where GE is spending and where the other big manufacturers are spending.
Moser: Yeah. The technology is super cool, but the consumer implications are not directly tied to us. We benefit from Apple and Ford and GE all using that technology.
Hill: But you don't want one in your garage?
Muckerman: I mean, it requires some technical skill. There's a high hurdle for people, I can't imagine you can just go out and buy a 3D printer and plug it in and reading an instruction manual and then be cranking out a bicycle in the next two weeks.
Moser: And let's think about the level of frustration in having a regular printer. How often do you hit print, and it won't connect, or it's out of ink, or out of paper. So consumer-wise, the applications aren't there. So it's neat technology. I'm thinking that you'll see some consolidation, like you were saying, Stratasys 3D Printing was the other company that is very well-known. A company that doesn't get enough credit for the space is Proto Labs (NYSE:PRLB), because Proto Labs was focused more on the design software and prototype production for smaller businesses, individuals and whatnot making it very easy to get those types of 3D printed products without having to actually invest in that infrastructure. And they're buying some more 3D printing capabilities, as well.
Muckerman: The manufacturers turn to them, rather than trying to sell a product, they're selling a service.
Moser: Yeah. And just like we talked about before, I'll go back to that Jeff Bezos quote where he talked about the toaster, you can just click and buy a toaster on Amazon and in less than a day, have a toaster at your doorstep, or you could go buy a 3D printer, buy all of the things that comprise the toaster and then you print off the toaster, and that's going to be pretty cool, it's probably going to take a while, it probably won't work as well --
Muckerman: And you'll burn your house down.
Moser: Yeah, maybe. There won't be a warranty on that toaster. So there's just no reason to go through all of that other than to say, that's pretty cool technology. Like most things, like you said, follow the money. If this company is going to have the big money and the resources and the wherewithal to use those resources, they're going to.
Hill: In between the GEs and those types of companies spending and investing in this space, and using 3D printers, and presumably at some point in the far future, when a lot of people have these in their homes, when I think about an in-between step, I think about contractors. I think about people whose business is building homes. I think that could be an intermediate step, where you see, whether it's through a Home Depot or on their own, if you see contractors saying, you know what? This is actually worth it to me, for the supplies that I'm using, I don't have to order and keep an inventory of lots of different sizes of screws and nails and whatever --
Muckerman: Pipe fittings, whatever, yeah.
Hill: Yeah. I can just customize what I need on the spot.
Moser: The medical profession, I think that's another one where we're going to see more. Consumers are going to be the beneficiaries here, it's not going to be something where you're going to go print off your hip replacement. But there will be a company that's going to be able to do that in far less time for far less money. And so, yeah, again, you look at the industries that are going to really benefit from this disruptive technology. It's not quite like the internet, in that the internet has given us all of these opportunities in the public markets because of the way it's disrupted virtually everything we do. 3D printing technology is certainly disruptive, but it's just not as disruptive on the consumer front.
Hill: Email from Axel Bruckner in Germany: "I heard you speaking recently about good indicators for a strong U.S. housing market in the future, so I'm curious how you would evaluate Fannie Mae and Freddie Mac. The upside for these stocks seems tremendous compared to the risk." What do you think, Jason?
Moser: I would actually probably beg to differ there. I guess, maybe, he's thinking upside compared to risk, and risk meaning that these are companies that are more or less underwritten by the U.S. government. So, yeah, from that perspective, the risk is, generally speaking, probably pretty low. But I think understanding what these companies do, they make their money from, essentially, fees and net interest margins, so they're more or less like a bank. But they're not stocks that trade on any underlying business fundamentals. I think they tend to trade more on who's in office, and what court ruling recently went in their favor or in someone else's favor. So to me, they're not really businesses as much as they are necessary entities, and we're trying to figure out where they fit in our housing market going forward. Because clearly, something went wrong not too terribly long ago. I think when we look at housing in general, the housing opportunity for investors is absolutely a must in the portfolio. You look at that as one of the bigger picture plays that you need to have in your portfolio one way or another. I would not look at one of these two businesses as a way to do that. I think if you're concerned with one of these businesses, I don't know why you wouldn't just pick a big bank, because then at least you have a bank that's going to be based on profits, and you're going to see dividends, and stocks that trade a bit more on fundamentals. But I think the opportunity is there. If you look at home ownership rate here, going back to 2005, right about when it peaked, it's been on a pretty steady decline since then.
Muckerman: Slow, yeah.
Moser: Yeah, it's reverted all the way back to below where it was in 1995. So, I think there are plenty of opportunities. I think this notion that millennials are not buying houses is misguided. There is data to prove that they are. They're certainly being a bit more particular, a bit more considerate when buying houses. But ownership is one of those things where, yeah, at 20 years old, you're like, "No, I'm not going to buy a house, of course not, I'll tell you I'm not going to buy a house," but then life happens. When you hit 25 to 30 years old, things change. You don't mean for them to change, they just do.
Hill: And that's also one of those narratives that's now four or five years old. There are stories that I've seen online that speak to that, they're parroting that same line, and you read them and think, "I think you're being kind of lazy."
Moser: What do you mean, the line that millennials aren't buying homes?
Hill: Yeah, like "That was the case five years ago and the data proved it, therefore I'm going to just repeat that line." Maybe it's time for some updated data.
Moser: Right. If millennials aren't buying homes, you need to prepare for a home ownership rate more like 40%, and I'm just telling you, that's not going to happen.
Muckerman: Yeah. They're not getting the opportunity. It's not that they don't want to. A lot of new home builds are generally being priced mid-market to high-market now. They're not really getting entry level prices to buy their first house. So they probably want to, but it's a little bit more difficult for them to, because I think new builds are still pre-recession levels. It's on an uphill slope right now. We're still far, far behind in terms of opportunities to buy a brand new house for these folks. And some of the hotter cities where you're seeing millennials move, they're priced out of the market, and it's become a rental society in a lot of these cities, with banks, after the recession, buying up a lot of the inventory and renting it out, and not offering these used homes for sale. And if you're not building new homes, you're stuck in limbo there.
Moser: Yeah, and the economics dictate it. It's all about supply and demand, just like any other market. I was reading about this, I think it was in Minnesota, of all places, you're seeing homes that are going on markets that, they don't last but a couple of days on the market before they're gone. Speaking from recently selling a townhouse of ours in Fairfax here, which is a pretty good sort of entry level price for this area, and I mean, this is an area where housing is a bit more expensive, our house was gone in less than a weekend, because the price was attractive. So you're seeing, in areas where Millennials or first-time home buyers have that opportunity, they're definitely jumping in there. And where there is lower supply, those home builders are going to come in and start building more for those types of buyers. So you look at all of the different ways you can participate in that market, and it's anywhere from retail, like Home Depot, to something like Ellie Mae, which I've talked about a million times on our shows, taking a part of every loan that goes on out there, or something like a big bank where you can get that dividend in --
Muckerman: Timber companies, nice diversifier, softwood lumber.
Moser: Yeah, material suppliers. I look at something like Freddie Mac or Fannie Mae, and I think, well ...
Muckerman: There's better options out there.
Moser: Way, way better options.
Hill: I do, however, like how Axel is thinking about it, just in terms of the upside relative to the risk. Regardless of whatever stock you're looking at, that's a great exercise to go through.
Moser: No question.
Hill: Shout out to one of our longtime listeners, Levi Waddell in South Dakota. This past Saturday, he ran The Brookings South Dakota half marathon. He mentioned that during the marathon, he had saved up a week's worth of podcast. So hopefully we didn't slow him down.
Muckerman: "I have to finish, I can't listen to this anymore!"
Hill: [laughs] Exactly.
Moser: "I have to buy that stock!"
Hill: No, I think it was more like Taylor's, like, "God, as soon as I'm done with this race, the sooner I can stop listening." The geniuses at Mondelez are at it again. They have unveiled the firework Oreo. That's right, it's an oreo with pop rocks embedded in the cream filling. I was about to say that you couldn't pay me to eat one of these. You could. It would cost you a lot more money than you would think.
Muckerman: Just don't drink Coca-Cola while you're eating these things.
Hill: Exactly. I do like, however, what they did along with this -- and a bunch of people have emailed and tweeted about this. Mondelez is offering a $500,000 prize for people to submit ideas for their next limited edition flavor. If you think about what Pepsi did with Frito-Lay, and the contest they had for people to submit ideas for flavored potato chips, that seemed to work out pretty well for them. So just based on what I've seen this morning on Twitter, it's a wonderful mix of people offering legitimately good ideas -- I'm already on record as offering up ham and potatoes.
Moser: Ham and potatoes.
Hill: I say just go totally contrarian. In fact, I'll probably tweet that out to the Oreos people, with #myoreocreation.
Muckerman: What's going to be the cream and what's going to be the cookie flavor?
Hill: I'll leave that to the culinary geniuses to figure that out. I'm going savory, far away from the desert, I'm going ham and potatoes. But if you go on Twitter and type in that hashtag, #myoreocreation, there are some things that look legitimately tasty, and then you have people who are just completely trolling. Just trolling Mondelez with things like --
Moser: Well, it's a very troll-worthy request.
Muckerman: And they probably want some of that for the publicity.
Hill: People are also putting their photoshop skills to work, coming up with packages of Oreos that they've photoshopped to include their favor, my favorite being codeine and cannabis. Sure, why not?
Muckerman: It prevents the coughing, the codeine.
Moser: I wonder ... you're going full savory. I'm not so well schooled on this, are there any savory flavors to this point? Or are they all geared toward the sweet tooth? Oreo is obviously geared toward the sweet tooth in general. But are there savory Oreo flavors?
Muckerman: We had an Oreo happy hour last year at the Fool, and I don't remember seeing anything too savory.
Moser: Chicken and waffles, maybe. But they did that for the potato chips, I'm not volunteering that as a flavor. On the one hand, I like where you're going with this --
Hill: Oh, I'm not going to win.
Moser: Maybe not.
Muckerman: If we talked about it on the air enough ...
Moser: I like that thinking. But the one thing I was looking at, to me, it strikes me that a banana cream pie Oreo makes perfect sense. I figured there would have been this flavor by now, but I can't find it.
Hill: They're trotted out about 60 different flavors. 60 different varieties.
Moser: They have to have a banana cream pie, right?
Hill: Take to Twitter and fire that up.
Moser: Maybe you really take this in a completely different direction and you put up something like an IPA flavor, for all of you craft beer lovers out there. An IPA has a very unique, hoppy flavor. Maybe an IPA Oreo is just what the doctor ordered.
Muckerman: Anheuser-Busch might try to buy Oreo if they do that.
Moser: That's a distinct possibility.
Hill: I just hope that whoever wins this is actually one of the dozens, and after they accept the half million dollar check, they're like, "OK, seriously, just knock it off."
Muckerman: And they send us a box of the flavor that they win with.
Hill: [laughs] Exactly. Alright, Jason Moser, Taylor Muckerman, thanks for being here, guys! 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 going to do it for this edition of Market Foolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening, we'll see you tomorrow!