On this episode of Market Foolery, Mac Greer trots out the theme of "Yes, No, Maybe So" for Motley Fool analysts David Kretzmann and Matt Argersinger, as they each share trends that they feel bullish on, bearish on, and one that has them sitting on the fence.
A full transcript follows the video.
This video was recorded on May 24, 2017.
Mac Greer: It's Wednesday, May 24th. Welcome to Market Foolery! I'm Mac Greer, and I'm joined here in studio by David Kretzmann from Motley Fool Supernova and Rule Breakers, and Matt Argersinger from Million Dollar Portfolio. Gentlemen, welcome! How are you feeling? Are you feeling it?
David Kretzmann: Ready to go.
Matt Argersinger: I'm always feeling it.
Greer: Good. We're going to try something a little different this week. We're going to do our "Yes, No, Maybe So". The way this works, and this time we're going to talk themes and big trends that are going on. We're going to begin with the yes. That's something or someone or something happening that you're feeling bullish about. Then we're going to go to the no's, you don't like that so much. Then we'll end up with the maybes, something happening out there that you're not quite sure about. Let's begin with, what are you saying yes to, Matt Argersinger?
Matt Argersinger: Mac, I'm saying yes to U.S. airlines. Never thought I would be on podcast or anywhere talking about my love for U.S. airlines. But, I was at the Sohn Conference a few weeks back, you and I talked about it a few weeks ago, the trend is so favorable right now for U.S. airlines. There's consolidation in the industry, the fact that the top four airlines now control 80% of the revenue, pricing power is back, there has been a massive swing toward profitability. And yet, the stocks, for the most part, are getting very low valuations in the market vis-a-vis other transportation industries like railroads, for example, or shipping.
Greer: And why is that? Just a lot of skepticism because of the history?
Argersinger: Right, you're talking about decades of poor profitability, bankruptcies, in a lot of cases, a highly competitive market. So, investors have gotten used to assigning a very low earnings multiple to the airlines. I think that's going to change. I think, with the pricing power that's back, airlines are already really profitable. We know that Warren Buffett, Berkshire Hathaway, has made an investment in a basket of airlines. I just think it's turning for the better, in the same way that railroads turned for the better a little bit over a decade ago. Another part of it is lower fuel costs, which we're going to talk about a little bit later in the podcast with my other theme. But, I think all of that points to very positive things for the airlines. So, taking a basket approach to the industry, or maybe buying one or two airlines, is probably a good bet today.
Greer: Do you have a favorite of the group?
Argersinger: I would go with United Airlines. Not because of what happened ...
Kretzmann: Because he's a sadist.
Argersinger: We all know about the incident that was all over the news, it was horrible. But, of the four major airlines, United stands out to me as the cheapest, has some activist investors interested in it, management changed recently, really turning toward the better in terms of margins. And it has a little bit of a gap between that and a Delta Airlines or Southwest Airlines, in terms of margins and multiples. So, I feel like there's a little bit more upside with United Airlines, so if I had to buy one of the major four, I would probably go there.
Greer: OK. David Kretzmann, what are you saying yes to?
Kretzmann: I'm going with online grocery shopping. This is still, in the U.S., a very small, emerging category. But when you compare the proportion of grocery market sales that are online, in the U.S., it's just 1.4%. In Japan, it's 7.2%. In the U.K., it's 6.9%, and in South Korea, it's over 16%. To me, that leaves a lot of room for that category to grow. I'm not saying that within five or 10 years, 50% of grocery sales will be online. But I think there's a lot of room for that to run in the U.S. We have some start-ups like Instacart, which have partnerships with Safeway, Whole Foods, and a lot of others. I just see room for this category to grow. Some projections show this category growing from about $9.5 billion in 2016 to over $15 billion by 2021, so about a 10% annualized growth rate. All in all, it's still a very small category. Most consumers still don't buy a whole lot of stuff online. If they do, it might be stuff like breakfast cereal or chips from Amazon. Frozen and fresh food continues to be the big question mark, like, can a company crack the code where customers are comfortable having someone else buy and deliver that stuff from the store? And no one has really cracked that code here in the U.S. yet.
Greer: You just mentioned Amazon. If I'm an investor and I hear that, and it all sounds great, but what do I do with that information? Do I invest in Amazon? Or is there a pure-play that specializes in that online delivery?
Kretzmann: There's not really a pure-play at this point, at least that I know of. Instacart is still a private company. They've expanded very quickly. I think Amazon is one way that you can get some exposure to the company. But their AmazonFresh initiative is such a small percentage of the company, you don't want to invest in Amazon only with that thesis. But I think Whole Foods is actually a company that could continue to benefit here. They've been an early partner with Instacart, with their 365 stores, the smaller stores, they're getting closer to customers. They only have four of those stores right now, but they are planning to continue to open some more of those stores. And as they get closer to customers, that should improve delivery times, and the ability to offer that type of thing. Whole Foods is one that I see moving in that direction. They've been rolling out a loyalty program in a few different markets. So far, that loyalty program is really driving a good chunk of the sales in those stores where they're testing that concept.
You can take a similar argument here to why we like restaurants doing the same thing, transitioning to digital and the loyalty program, whether it's Starbucks or Chipotle or Panera. You see that loyalty program and that digital presence really driving up volume and throughput in the stores. You're seeing a lot of repeat customers coming back. I think you can extend that same argument to grocers. I think Whole Foods has finally recognized that digital is a pretty key piece of that experience, whether it's delivering groceries itself or meal kits similar to Blue Apron, they're doing some early tests there. Again, I wouldn't invest in Whole Foods solely because of that. But the company continues to produce a lot of cash, it's not going anywhere anytime soon. And Ron Shaich, the founder and CEO of Panera, is going to be joining the board of directors of Whole Foods, amid this latest board shakeup within the last month or so. I think having his presence on board, having John Mackey as the sole CEO, moving away from that dual CEO structure, I think you're going to see a lot more focused initiative from Whole Foods, moving toward digital and online ordering.
Greer: You've had things like Peapod that have been around for a while. People used Peapod eight years ago. What makes this become more mainstream? Because, obviously, you have people getting their groceries online, delivered, it's a nice service, but it's not necessarily a huge service right now.
Kretzmann: Right. With a lot of e-commerce companies, a lot of it comes down to timing. We make fun of Pets.com as an IPO darling of the late 90s that totally fizzled out, and it was a poster child of people getting so caught up in the dot-com craze. But, PetSmart just made the largest e-commerce acquisition ever buying Chewy.com, which sells pet food online.
Greer: Not the Mexican food restaurant.
Kretzmann: Not the Mexican food restaurant, no. As far as I know. That might be a diversification opportunity. But, I think timing plays a big role in that. As people get more comfortable with the technology and the thought of ordering things online as that user interface improves and shipping times and quality and the assurance that you're going to get what you paid for, I think people are just getting more comfortable with all of that. So, I think we are shifting toward that time where it won't be crazy to buy fresh or frozen food online anymore.
Greer: Matt, what are you saying no to?
Argersinger: I'm saying no to oil. I know that's pretty broad. By the way, this is what I'm reading. I'm no expert on the oil industry itself. I talk to really smart Fools like Paul Chi about this all the time. But I'm pretty convinced that within the very near future, I would say less than five years, we're going to hit peak oil in terms of prices and production. This stems partly because of things that are happening right here in the United States. OPEC, as we all know, we're all familiar with the oligopoly that for years and decades set the world's oil price, they're waging a war with U.S. shale producers, and they're losing pretty badly. Starting in 2014, OPEC tried to keep production levels high, trying to drive prices lower to knock out shale. It didn't work. Recently, they had an agreement to cut production to try to get prices back, that's kind of working.
But, all the while, shale producers here in the U.S. are getting more efficient, they're being able to produce more oil and earn profits from that oil at very low prices. In most cases, according to Bloomberg Intelligence, most active wells that we're already drilling can earn profits at oil prices as low as $30. And oil prices are at $50 today. Some reports have oil production in the U.S. going up by a million barrels a day this year and next year. So, if you're OPEC, or you're an oil dependent economy that depends on how oil prices to balance budgets and do all kinds of things, I would say you're in trouble unless you diversify your economy. I would also say, if you're the big oil producers, like an ExxonMobil, a Chevron, or an oil services company like Halliburton, I think you have to prepare your company and the industry for dramatically lower oil prices. This is before we even start talking about solar power becoming more efficient and cheaper, or other alternative energy sources, or the transportation, electrification of vehicles, which is all going to reduce demand for oil. So, I have this feeling that there's going to be a pretty big disruption in this market that still, by the way, makes up a pretty big chunk of the S&P 500. So, a lot of us indirectly are invested in a lot of these oil companies. And I think the returns are going to be pretty poor going forward.
Greer: So, you're saying no to ExxonMobil and the like?
Argersinger: I think so. It's going to be hard to pinpoint losers, and a great company like ExxonMobil might be able to diversify its business. But I would say if you're any large producer that's going to be dependent on exploring, drilling, or producing oil over the next five to 10 years, you're in trouble.
Greer: That five to 10 year period, that seems pretty important. If that plays out in the next five years, that has a certain set of implications. If it's closer to 15 or 20 years, then investors could still make a lot money, right? I'm always a bit skeptical, when people talk about the death of Big Oil, it reminds me of when I was in elementary school and people said we would adopt the metric system, and there was this big push, and then it just went away. In case you haven't noticed, the U.S. is not using the metric system.
Argersinger: You're right. Saying this is going to happen within five years is probably really aggressive. But I would say, unlike the metric system, there's a real desire for a lot of industries and human beings and governments to move away from oil if we can for alternative sources. At least, I hope that's the case. So, I think there's a lot of forces coming from a lot of different places that are saying, "We need to be using a lot less oil." And it's remarkable that the culprit for lower oil prices is coming right here from the United States, which, a decade ago, we never would have said that. So, I think it's pretty much inevitable now.
Kretzmann: Something interesting in the Wall Street Journal from a couple days ago which will be fascinating to watch, is, in China, the most popular vehicle category -- and it's growing in terms of market share -- is SUVs. People in China who aren't used to driving tend to gravitate toward SUVs, which are safer to drive. So, electric vehicles up to this point haven't really grabbed hold in China in terms of market share, and people are going for these big, gas-guzzling SUVs. So, theoretically, over the next few years, we'll continue to see demand for gasoline or oil that way. But, obviously, there's a lot more that goes into oil demand than just driving. But, that will be a pretty interesting trend to watch in China, because China has been making a push to move toward cleaner energy, a lot of the cities deal with some pretty major pollution problems. But, even so, people are going to SUVs right now in China.
Greer: Texas and China.
Kretzmann: Peas in a pod.
Greer: OK, David, what are you saying no to?
Kretzmann: I'm saying no to fitness trackers. I'll just say that this isn't saying no to wearable devices as a whole. But fitness trackers themselves, something you put on your wrist to track your sleep, your heart rate, your running speed, your distance and all of the, I think that's a future and not a product. It reminds me of Garmin 10 or 15 years ago, where you have these dedicated GPS systems, but lo and behold, it gets integrated into virtually every phone and device out there, and you don't need a separate GPS system. I think fitness trackers are just something that, they won't necessarily go away. I think that feature will be integrated into smartwatches or glasses or whatever wearable devices we have. But, between 2009 and 2015, U.S. navigation system sales dropped from $15.5 million to $10 million. Garmin's share price over the last 10 years is down 10%. And I think, you'll see something similar play out with Fitbit, which, for 2017, they're guiding for the revenue to drop, they're back to losing money and burning cash. Since Apple entered the smartwatch market, it still surprises me that people give the Apple Watch so much grief, because ever since Apple entered the market in 2015, it's never dropped below 50% market share. Right now it has 63% share of that smartwatch market.
Greer: But is that one of those stats where there were four watches sold and Apple sold two of them?
Kretzmann: No, you have a good amount of competitors now. You have Samsung, Fitbit has come out with a few different smartwatches. But ever since Apple entered the market, they've dominated it. And I think that goes back to my previous point, where, when you buy an Apple Watch, it's fitting into an existing ecosystem. And I think that's similar to GPS, where it's a key feature, but people aren't going to buy a product just for that feature.
Argersinger: I love the point -- if you're an investor listening to this podcast, I think David just said some really smart things. Watch out for products and services that are merely features, that aren't part of an ecosystem, or a product that can do a lot of diverse and versatile things for you. There are a lot, you can look in business all the time, and see situations like that. Maybe there's a cyber security firm like FireEye, I'm throwing out just one that has underperformed lately, where maybe what they do is more features, it's not necessarily the one-stop solution for my cyber security. I'm just making one example here. But, those exist all the time. They key to investing is really finding those companies that are actually building the platforms and ecosystems that consumers are going to keep coming back to and that keep getting richer, whereas companies that just do one or two things really well tend to get gobbled up pretty fast.
Greer: And Apple has deep pockets. They don't have near as much riding on the smartwatch as Fitbit or a pure-play has.
Kretzmann: Yeah, Fitbit is really going back to the drawing board, and they're reinventing the company. They're saying, "We're a data company now, we're going to try to sell the data that our customers are tracking." To me, it's just not a very compelling vision for the company. I see them in a similar position to Garmin five or 10 years ago, where yeah, they did that one thing really well, and they were the leader in that market, but at some point, that feature will be in everything, it won't be differentiated anymore.
Argersinger: Right. Imagine if Kevin Plank at Under Armour 20 years ago said, "You know what? I'm just going to make the sweat wicking undershirts, that's all we're going to do. Under Armour is going to be the best in that." Well, it wouldn't have been long before Nike, Adidas, or someone else did that or bought Under Armour. But, no, he said, "We're going to create a brand that does a lot of different things, that goes in a lot of different markets." And you can see where their success has been, doing that.
Greer: Let's close out with our maybe-so stock. Matt, this is something that you're still kind of noodling over, you're conflicted about. Sorry, it's not a stock, it's a trend or theme or something happening. What are you a maybe on?
Argersinger: I actually don't know what this theme should be called. Is it autonomous vehicles? Is it mobility disruption? Is it the shared car revolution? However you want to call it, I guess mobility disruption might be the best catch-all phrase. I've listened to Chris Hill's interview with the RethinkX's founder, Tony Seba, from last week's Motley Fool Money radio show, twice now. Because I think it's mind blowing, the future that Seba has laid out in his research firm, and about what's going to happen in, he's pointing out five or six years, where we're going to be at a point where everyone is using shared vehicles, for the most part. That electric, autonomous vehicles are dominating the roads, we don't need parking lots, we don't need car dealers, we don't need auto producers like Ford, because maybe Tesla or one other company is going to be making all the vehicles we use anyway and no one is really going to care.
Greer: And it's really more of a service that you could potentially be a member of and subscribe to, and your car comes by and picks you up, and then you're done with it, and you don't own your own car.
Argersinger: Right. And why do I care what the car might look like or how it performs? It just gets me from point A to point B in a very comfortable setting, and I'm good. There's a lot to love about that future, and I'm excited about it, frankly. But, what you have to assume, and we talked about this before the show, Mac, is you have to assume that people are really going to be willing to give up private car ownership. And maybe that works, if you're someone who's living in the city, and having a car is a hassle and an expense you don't want to deal with. But if you live in a lot of parts of the country and you want a car to drive a few hours to see someone or go somewhere or go camping --
Greer: Or if you're in a rural area, there's no way.
Argersinger: Right. There's not going to be a car sharing service network that can get to you, yeah. So, there's a lot of things you have to assume. And, by the way, the big elephant in the room is the government, the state governments, federal, local. There's going to be a lot of regulations passed to enable these autonomous vehicle networks to happen anyway. So, I'm excited about the future. Whether or not it happens in five or six years, I'm very skeptical of that. Even 10 years seems really a stretch. But it's coming, I just don't know when the timing is going to be, and who's going to win and who's going to lose from this. There are so many implications. The average consumer, if you explain to them this future, I think they're like, "What? That's not going to happen." But that's kind of how disruption happens. It can happen quickly.
Greer: Yeah. And I was skeptical, we were talking about this beforehand, and I think the tricky part of this is for people -- and we all fit into this category -- who know how to drive, who grew up driving, making that transition, for me, at least, is very difficult, because I love driving, I love the psychology of being able to drive when I want, where I want. But, my kids, if they never learn to drive on their own, and this is the world they know, so what?
Argersinger: Right. And I think Seba's point is a good one. It's just, when something happens so dramatically, where the cost drops 10X and it just becomes something that's so much more convenient, and if walking out of our front door every morning and getting into a shared car that pulls right up, and not dealing with traffic, and not dealing with having to park the car, and being dropped right in front of our office or wherever we're going, it's a compelling future. And if that's the case, I think it can happen pretty fast. But there's so much that has to happen before we even get to that point.
Greer: And there's going to be that period, that transition period, where some vehicles, I assume, will be autonomous, and some vehicles not. If that's the case, I'm still driving, because I don't want to get in the car that's autonomous and trust that technology, realizing that there are human drivers on the road. I don't like that.
Kretzmann: I'll piggyback off this and ask a question. Any guesses for the top three-selling vehicles in the U.S. last year?
Greer: The Ford F-150, that's the truck, I think, worldwide.
Argersinger: Always in the top three.
Greer: The Honda Accord?
Kretzmann: Nope. No. 3 is Ram trucks, No. 2 Chevy Silverado, No. 1 Ford F-150. So, when I think of autonomous driving, I never think about a truck. But literally the top three-selling vehicles in the country are trucks. I don't know if anyone really wants an autonomous truck, necessarily.
Argersinger: And, good luck, the guy who just bought the Ford F-150, good luck convincing him that he's going to get into an autonomous sedan at some point.
Kretzmann: "Here's your Prius."
Argersinger: Right. I agree.
Greer: Are both of you guys there with the technology right now, if a Google driverless car pulls up right now and says, "I'll take you to Dallas Airport," are you good with that?
Kretzmann: I would hop in, sure.
Argersinger: [laughs] What Mac said about other humans still being out there driving around ... I would, though, I'd be willing to give it a try, for sure.
Greer: But you would feel better if they were all autonomous?
Argersinger: Oh, absolutely.
Greer: I would too. I'll take that bet.
Kretzmann: Get rid of the human error whenever possible.
Greer: Yes. OK, David, what are you maybe-so on?
Kretzmann: I'm going with bottled and sparkling water. This is kind of a safe one, I'm leaning more yes than no on this one. It's probably no surprise, but looking at global bottled water consumption, it went from 212 billion liters in 2007 to 391 billion liters this year, that's estimated for this year. In the meantime, carbonated beverage sales in the U.S. have stagnated since 2010. You've seen Pepsi and [Coca-Cola] continue to struggle with that. They've been transitioning more and more to waters and juices and teas to ramp up their own growth. Even SodaStream has made a resurgence here in the U.S. and around the world since its repositioned itself from a pure soda alternative, where it would have these funky syrup flavors, and instead going the sparkling water route, saying, "These systems aren't to make soda, they're to make sparkling water." And lo and behold, they've done pretty well. One company in particular that I've continued to watch in this space, it's a really funky little company, they don't have conference calls, the CEO is probably the quirkiest guy you'll ever see running a public company, it's National Beverage, FIZZ is the ticker. The company has a couple segments now. They have a carbonated soft drink segment, with brands like Shasta and Faygo, kind of these offbeat --
Greer: Shasta, wow, there's a name I haven't heard in a while.
Kretzmann: They also have the Powerplus brands segment, and the main driver with that is LaCroix, however you want to say that.
Greer: Either is acceptable on Market Foolery.
Kretzmann: We might do both, we'll see. But, right now, LaCroix is at about 9% market share, but it's the fastest growing sparkling water brand out there. They have the top two spots. A little boots on the ground research here, our local Whole Foods near us at HQ, any time you walk in, there's often a huge LaCroix display, either at the front of the store or at a pretty prominent location in the store. Another local store here in town, Balducci's, I walk by it just about every morning, there's a massive LaCroix display right in the front door. So, the stuff is selling like hotcakes, at least in Old Town Alexandria. And just looking over the past four quarters for that Powerplus brands segment, their case volume sales were up 31%, 46%, 40%, and 49%. So, they're putting up some staggering growth. The main question I have here is, is this a sustainable lasting trend, or is it still more of a fad? And I'm leaning more toward it being a trend, because I think as people become more health-conscious, they probably aren't going to go back to soda any time soon. But, I'm wondering, with the individual brands within that category, like LaCroix, are they actually here to stay, or can one of these bigger players just recreate it?
Greer: I'm a skeptic here, because I love water. I love sparkling water without the sparkling part. The word for that is water.
Kretzmann: You and me both.
Greer: So, when you're competing with water, isn't that tough? That feels like really ... maybe they're not competing with water. Maybe sparkling water drinkers would be drinking soda otherwise?
Kretzmann: I think a lot of people who are trying to transition out of soda will go to LaCroix or sparking water.
Greer: It's like that nicotine patch.
Kretzmann: Something like that. Personally, I've tried it, and they don't really taste sweet, so it hasn't been very appealing to me. But I'm not a soda drinker, either. But I look at that sales growth, and over the past year, their sales growth has accelerated to 15%, and their earnings are up over 70%, so their margins are continuing to tick up. So, it's that LaCroix brand, for National Beverage, anyway, is driving those sales. But then, thinking a little bit bigger picture, you have the energy drink market, with Monster and Red Bull, and that category has almost doubled in the U.S. since 2010. So, I look at that and I kind of scratch my head. It's not just a clear trend toward healthy drinking. That's why, for me, it's still a little bit up in the air, especially when you're looking at individual brands like LaCroix -- how much staying power do they actually have?
Greer: OK, we will leave it there. Matt, you are yes on airlines, no on oil, and a maybe on autonomous vehicles. David, you are yes on online grocery shopping, no on fitness trackers, and a maybe on sparkling water. Bottled water, too?
Kretzmann: Sure, we'll throw that in there.
Argersinger: How about some trends there, huh?
Greer: Yeah, that was good. I threw my own in here at the end. I'm a yes on love and marriage, I'm a no on cynicism, and I'm a strong maybe on wearing Crocs out in public. How do you come down on that one?
Argersinger: That wins. You won, Mac.
Greer: Would you wear Crocs in public?
Argersinger: I don't own a pair of Crocs, and I probably wouldn't wear them anywhere.
Greer: [laughs] David?
Kretzmann: I go the comfort route. If they feel good, I might just do it.
Greer: Good. That sounds like a no, though.
Kretzmann: It depends who I'm with. [laughs]
Greer: [laughs] Matt, David, thanks for joining me! As always, people on the show may have interests in the stocks that 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. Thanks for listening, we'll see you tomorrow!
John Mackey, CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. David Kretzmann owns shares of Amazon, Berkshire Hathaway (B shares), Chipotle Mexican Grill, FireEye, Monster Beverage, National Beverage, Nike, Panera Bread, SodaStream, Starbucks, Tesla, Under Armour (A Shares), Under Armour (C Shares), and Whole Foods Market. Mac Greer owns shares of Apple and Chipotle Mexican Grill. Matthew Argersinger owns shares of Amazon, Apple, Berkshire Hathaway (B shares), Chipotle Mexican Grill, Starbucks, Tesla, Under Armour (C Shares), and Whole Foods Market. Matthew Argersinger has the following options: short December 2017 $800 puts on Amazon, short July 2017 $17.5 puts on Under Armour (C Shares), and long January 2019 $45 calls on Nike. The Motley Fool owns shares of and recommends Amazon, Apple, Berkshire Hathaway (B shares), Chipotle Mexican Grill, Fitbit, Ford, Monster Beverage, Nike, PepsiCo, Starbucks, Tesla, Under Armour (A Shares), Under Armour (C Shares), and Whole Foods Market. The Motley Fool owns shares of ExxonMobil, Panera Bread, and SodaStream. The Motley Fool recommends Chevron, Crocs, and FireEye. The Motley Fool has a disclosure policy.