On this episode of Market Foolery, Chris Hill enlists the help of Motley Fool analysts Jason Moser and Taylor Muckerman to shed some light on news from Canada's largest railway operator, a weak Hollywood box office, and a $1 million offer from Zillow (NASDAQ:Z) (NASDAQ:ZG). Tune in to learn more.
A full transcript follows the video.
This video was recorded on May 30, 2017.
Chris Hill: It's Tuesday, May 30th. 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 Tuesday, gents!
Taylor Muckerman: I'm feeling refreshed.
Hill: Are you?
Muckerman: A little bit.
Hill: Nice. Nice, long weekend?
Muckerman: Three days, yeah, not too bad.
Jason Moser: Three days, a little bit more than two, not quite four.
Hill: Not to brag, but my long weekend had three days in it. We've got some housing news, we have some entertainment news, but we're going to start up north. Canadian National Railway (NYSE:CNI), which is Canada's biggest railroad, averted a work stoppage at the last minute. They were up against a deadline with the Conductors Union. That's a union you don't want to mess with if you're running a railroad.
Muckerman: No. There were about 3,000 of them that they were dealing with.
Hill: They struck a deal. This is, I don't know the terms of the deal, but it seems like one of those, "OK, well played". If you have one job and your one job is running a railroad, then guess what, you need conductors.
Muckerman: They're not autonomous just yet, so yeah, you're going to need those 3,000. And I think the country of Canada, and even to some extent the United States needed this deal to happen, because of the sheer size of Canadian National Railway. You would have certainly seen the impact flow through the entire economy of Canada. And with the frack sand and coal they've been moving for the United States to the export terminals, we would have felt it, too. So, good thing all around. There's been some great news out of the company lately. They've been moving record volumes as a company, like I said, frac sand moving down south from the Wisconsin area, you see the Permian and Texas in general, the shale down there is using more frac sand than they ever have. So, that's been a huge boom for them. And coal, surprisingly, making a comeback for them. Terminal coal, so it's being exported from the United States, not necessarily being used here. Great last few quarters for this company.
Hill: How many other businesses do you think picked up the phone or sent an email in the last couple weeks as they were getting closer and closer to this deadline, saying, "You guys are going to get a deal done, right? You're going to strike a deal with the conductors? Because we need our stuff shipped."
Moser: I think the bigger question beyond this though is the implications of technology, as we move forward five or 10 years from now, on industries like these. We're already seeing, to a degree, where autonomous vehicles or robots or whatever it might be, displacing people. Amazon's warehouses, that's the easy example. They bought that robot company Kiva.
Muckerman: Yeah, in 2011 or 2012.
Moser: Now you can google the YouTube video and see how they work. They're moving these things all over the place. It's funny, I showed my mom and dad these videos over the weekend, they've never seen it and they were like, "Holy cow!"
Muckerman: Yeah, they're the size of a hub of a lawn mower.
Moser: Yeah, it's like a glorified Roomba. You don't need to negotiate with them, you just tell them what to do and they do it. And whether it's warehouses, or, one day it's going to be cars, one day it's going to be trains, whatever it is, this is going to be a monumental shift over the rest of our lifetime, seeing how this plays out, and seeing how it changes the focus of our economy. I think we're more and more becoming an extremely service-based economy where most of the jobs out there are in the service industry. And that's not necessarily where everyone wants to be, because really, the differentiator there is being able to provide exceptional service on a day to day basis, and that's really hard to do.
Muckerman: Yeah. You mentioned companies making calls. One person in particular might have been making a few calls, and that's Bill Gates. He's the largest shareholder of CN Rail, following in the footsteps of his buddy Warren Buffett getting into the rail business. Earlier this month, the government of Canada allowed up to 25% individual ownership. At first it was capped at 15% of the national railways there, CP Rail included. So now, if he wants to tick up from the 13.5% he's at now, maybe he drives it up a little higher.
Hill: And this is a stock that's done well, particularly if you look over the last couple of years. CNR has done a nice job of rewarding shareholders.
Muckerman: Long-time Stock Advisor rec, it was one of the first Stock Advisor Canada recs we ever made, doing very well. CP Rail is up for the same deal at the end of 2017 with the same union. We'll see if they wait until the 11th hour in December.
Moser: Here's a thought. You talk about the rise of machines all the time. I mean, I think there's some legitimacy to that, Chris, I hold your same fears to a certain degree. What's to say that the makers and programmers of these robots that will one day take over our entire economy, go in there and program a, "Every two years, you're going to stop working." So, instead of going in there and saying, we want to negotiate new terms or we're going to go on strike or whatever, what's to say the programmer can't just go in there and make that sort of happen on their own? It's going to happen regardless, it's going to be happening from one part of the transaction or another. So, I don't know. You have to at least think about it.
Muckerman: The computer scientists go on strike.
Moser: Exactly. It's a strike by proxy, right? It seems like it could actually be plausible.
Hill: That's part of the investing equation that I think a lot of people are taking for granted. There's this assumption that once these railroads are autonomous and you just have machines driving them, then they don't have to pay these 3,000 conductors, and then automatically their costs will go down and their gross margins go up. First of all, if I'm one of these other companies that's working with CNI, and they get to that point somewhere in the future, I think I'm picking up the phone and saying --
Muckerman: You're recouping some costs.
Hill: -- I see your costs are going down, what about my bill?
Muckerman: Your public filings show that you're doing alright.
Hill: Memorial Day weekend is the official start of the summer movie season, and the blockbusters that opened last Friday included Baywatch and the fifth -- yes, the fifth -- Pirates of the Caribbean movie.
Muckerman: Swing and a miss.
Hill: Oh, what a miss. The lowest Memorial Day weekend box office this century. Let that sink in for just a moment. It's the lowest total since 1999. The total for all of the films -- not just those two, but Guardians of the Galaxy, every film -- was $172 million. Not that I expected Baywatch or Pirates of the Caribbean to --
Muckerman: The Rock! Every movie he's in turns to gold!
Hill: We love The Rock! Who doesn't love The Rock?
Moser: Baywatch is going to be that guilty pleasure where people will go, there's nothing better to do, so I went to go see it. But I think that's one of the bigger problems with movies these days. There's been such a Renaissance of the TV era that ... God, I just don't find movies compelling. There's nothing out there where I feel like I have to go see it, aside from the Disney film of the year, where I'll typically be taking the family to see that on a rainy day or something. Just, going to the movies today, it's kind of like what e-commerce has done to physical retail, it's like, if I don't have to go, I kind of don't necessarily want to go, if I can find a good movie that I want to watch in the comfort of my own home.
Hill: Nell Minow was our guest on Motley Fool Money last week. She hinted at this when she was talking about this summer's slate of movies and talking about The Mummy with Tom Cruise. Normally, Tom Cruise is as sure fire a hit as you can have in Hollywood, particularly when it comes to action movies in the summertime. But based on the trailers and that sort of thing ... The thing that I find interesting about the business angle of this story is the reaction from the studios, which appears to be, "Let's lash out at Rotten Tomatoes. Let's lash out at the critics," and that sort of thing.
Muckerman: You have to pay off the rating agencies.
Hill: [laughs] Yeah, exactly. But, in the same way that there are some retailers that blame the weather when they don't really have great cause to, I looked at this and it's like, you know what, people are going to the movies. People will absolutely shell out money to go to blockbuster movies, or movies that don't fit, I mean, you look at Hidden Figures and what that did, or a movie like Get Out, Jordan Peele's movie, which was just such a huge hit relative to the cost of making that film. But people aren't stupid. They can see that movie is getting bad reviews, they can see, to your point, Jason, "You know what? I'm not going to shell out money to go see Baywatch in the theater, I'll watch it when it comes out on Netflix or Amazon Prime."
Muckerman: Or the fifth Pirates of the Caribbean.
Hill: Yeah. But if you actually make good movies with great stories and compelling characters, people will actually go see them.
Moser: Yeah. And part of this, it seems like I always looked at this, if I don't have to go, then why would I go. I can't help but ask myself the question, am I just getting lazy? There's probably something to that. But I do also think that Hollywood in general is even lazier. I think they're just making crappy movies. And I think that's proof.
Hill: Some of them are.
Moser: Yeah. I think there are more poor movies out there than good movies. Hidden Figures was a good example. We rented that one night on Amazon at home because we could. And I loved that movie, I loved everything about it. It was a great story, it was inspiring, it had everything there. And it's not an intellectual film, it's not a blockbuster summer hit, it just tells a good story in a simple way, and we're not seeing nearly enough of that these days. I think all of the eye candy that comes with a lot of these stupid movies is just that, it's eye candy. And after a while, it all bleeds together. I don't know what any of the stories are. Pirates of the Caribbean? Seriously? Five of those pieces of crap? Seriously?!
Hill: You know what, I could understand the business case for those movies better than I can for some of the others.
Moser: They have a track record of some success, and they can tell a lot of stories from them. I make fun of that one, but I get it.
Hill: Yeah. Somewhat lost below the headline of what a disappointing Memorial Day weekend this was for the box office in general is the fact that that franchise for Disney just crossed the $4 billion mark.
Moser: Yeah, I know. I mean, I make fun of it, and I don't mean to extrapolate my tastes on the general population. Clearly it's been a successful move for them to make those movies. But then you start talking about the dollars and cents of it from the consumer's perspective of going to see a movie. At some point, those two converge, because you have to go out there and see the movie for it to make sense. It just seems like a lot of those eye candy movies cost a lot to make. You see some of the budgets on those movies, and invariably, it seems like the movies that I like the most tend to have the lowest budgets.
Muckerman: I think Baywatch was $60 million. It's on the beach, what the heck are you spending all this money on?
Hill: It's the marketing. That's the thing, if you're an investor and you're looking at, whether it's Disney or Lions Gate or any of these films, a lot of times when a budget number for a film gets reported, it is simply the production budget, it is not the marketing budget. And for a lot of these movies, the marketing dollars outweigh the production cost.
Moser: Sure. And let's not forget, if we didn't get Pirates of the Caribbean and Captain Jack Sparrow, then we would not have gotten the Lonely Island's clever take on that with Michael Bolton, which still stands up as one of the greatest music videos of all time.
Hill: Zillow is offering $1 million, as Dr. Evil would say, to anyone who can improve the Zestimate algorithm. This announcement was made just one week after Zillow was hit with a class action lawsuit over the Zestimate proprietary home price tool. What do we think about this?
Hill: I think the move to acknowledge that Zestimate is not perfect, and to say, "We're going to give you or a team of you a chance. People out there, we want to improve this, we want your help, we're going to reward you for helping us." I think that's a good move. The class action lawsuit, I don't know. The timing does seem curious.
Moser: Taylor, do you have any thoughts on that?
Muckerman: If I knew anything about coding algorithms, I would give it a shot. [laughs]
Moser: See, I think the answer is even simpler than that. Just take off the Z.
Hill: Just make it the estimate?
Moser: Just make it the estimate.
Hill: We've made fun of the Zestimate. I've made fun of just the word, and certainly it's improved over time, and Zillow has come out and said, "Look, it's gotten better over time, it's within 5% of whatever the actual sale price is of a home, so it's getting closer." And I get all that. This strikes me as something they came up with very early on in their tenure as a company, and someone said, "Instead of offering an estimate, we'll call it the Zestimate, and that'll help differentiate our company and our brand." And somewhere along the line, they couldn't let go of it.
Moser: Yeah. I think the biggest question in regard to the Zestimate today is, what is ze point? I would never fault a company for wanting to get better. And I mean, that's what I think this is, honestly. I do think they are doing this in order to improve, to get better. Zillow is a company that we still own in Million Dollar Portfolio, and we've kept it under the microscope because we want to continue questioning its market opportunity and the role it plays in the housing market. So, I think from that perspective, yeah, that timing is interesting, but regardless, they're trying to improve it, and I think that's great. I think in regard to the Zestimate, it's more trouble than it's worth, financially and otherwise. The point you made, I think, is spot-on. I think in the very early days, it was a great brand builder, because it was difficult to take seriously, but by the same token it was new and different, it shed a new light on the housing market and how we could deliberate prices and the value of things that are out there.
The problem is now, the Zestimate holds no bearing whatsoever in the actual transaction. Having gone through just selling two houses and buying one, the Zestimate never came into play, at any point, in anything we did. If you have an appraisal, an appraiser comes to your house and gives you an appraisal, and then you look at him and say, "Well, yeah, but the Zestimate says ... " they're going to laugh you out of your own house. They're going to tell you, "That has nothing to do with anything." And I understand, the point they make, they always say that the Zestimate is a starting point to determine the home's value, it's not an official appraisal. That's the point. It's not an official appraisal, and that is what matters.
The two things that matter the most are what the house is listed for and what the appraisal is going to say. The Zestimate doesn't mean anything. And I think in a lot of cases, probably most cases, because a lot of people don't know as much about the process of buying a home, because it's not like you're just going to a store, there's a lot involved with it, a lot of figures and parties involved, it's not something where it offers any value. It can create some misguided expectations. I think some people might look at the Zestimate and think, "That house is listed for $500,000, but the Zestimate says $560,000. Let's go buy that thing right now and make $60,000!" And obviously we know it doesn't work that way. I think the class action lawsuit ... I think they're probably is some merit there to it. I think, personally, that Zillow could probably do just as well to eliminate the Zestimate altogether. I don't think it's something that would hurt their business, I think it's probably something that, in the long run, would help it, if instead of the Zestimate, maybe they just focused on the actual facts, look at tax records, what homes in the area are selling for. Leave the appraisals to the appraisers. Unless they have a road to actually become a part of the transaction, then I feel like the Zestimate is more trouble than it's worth.
Hill: I think they need to bump up the timeline on this contest.
Muckerman: When are they due?
Moser: I feel like I just won the contest, Chris. Send wiring instructions after we finish.
Hill: There are actually two rounds to the contest. You have until October 16th of this year to compete in the qualifying round, and then the top 100 entries are going to be invited to participate in the final round, which is slated to begin February 1st, 2018, and will end January 15th, 2019.
Moser: So you're saying it's going to be a while.
Hill: I'm saying they might want to bump up their timeline a little bit.
Muckerman: A year and a half to figure this out?
Hill: Yeah. A little more urgency, I think, would benefit our friends at Zillow. A couple of housekeeping notes before we wrap up. FoolFest is this week. This is our biggest investing event of the year. This Thursday and Friday here in Alexandria. If you're coming, say "Hello", because we'll all be over there, and we love meeting our members, but we especially love if they're also one of the dozens. That's always great.
Moser: Yeah, absolutely.
Hill: I think I mentioned this last week, if you have a chance, check out Industry Focus, the episode they published on Monday was a behind-the-scenes episode, very fun stuff. Check that out. Last but not least, Jason Moser, you were down for the Annual Member Guest.
Moser: I was.
Hill: How did it go?
Moser: The Doublegate Member Guest in Albany, Georgia. It went very well. I was telling you, this was the seventh year in a row where I go down there and play with my dad in this tournament. So it's less about the tournament and more about playing golf with Dad. It was the seventh straight year, and the tournament is three days. In all seven years, three days, we've never had one drop of rain fall on us during the tournament.
Hill: That's amazing.
Moser: It's just beautiful weather, sunny all day, lovely golf course. It's a wonderful step away for me, and I enjoy being able to spend time with my dad on the golf course and my mom at home, and whenever I get a chance to play golf, it's a good thing.
Hill: He's an investor. Any advice from Dad?
Moser: Actually, he's the one always asking advice from me, he's needling me for the next great stock idea. I think, it's interesting, you play with a lot of people in these tournaments. You talk about what you do and where you work. Part of the discussion would be around stocks, but it seems like a lot of the discussions we have were based around housing, and how housing is doing in many areas. And I think whether you're up here in Northern Virginia where we have a very healthy housing market, it sounds like there's a pretty good market down there in Georgia as well, and it struck me, talking a lot about housing, and thinking about how with the turnover in Washington D.C. and these concerns of potentially overturning Dodd-Frank legislation, or at least relaxing lending regulations for the mortgage market, we were looking at home price growth here in March, which was up something like 5.8%. It was a nice, healthy growth rate, but it was less than half of that growth rate during the housing bubble. And it struck me in thinking, we're probably going to hear some politicians try to frame this as a weak housing market, and say, "It's not even half of what it used to be." But you have to think about it, the other way to look at that is, it shouldn't have been like that in the first place during the housing bubble. To me, where we are right now with housing, is direct proof that what we're doing is working and we need to keep on doing it.
Hill: Maybe we sit every member of Congress down and have them watch The Big Short, and be like, "Folks, before you jump in with your two cents on the housing market, watch this movie."
Moser: And buying a house is beyond just property. There are legalities involved, there's a lot that goes on with it, and it's also extremely local. I think it's very difficult to look at the U.S. and say "The U.S. housing market," because it's always going to be local, and some places are always going to be better than others. But I think that's an even greater argument for making sure we have a certain set of rules and standards that we can adhere to on a national basis that at least helps makes some sense of it and keep good records so that in the days ahead -- when it comes to a mortgage, after you sign those closing papers and you own the house, that thing goes off to investors. Those guys need to know that it's a good investment.
Hill: That's why I like any time Robert Shiller is on CNBC, and they're coming out with the housing index that bears his name, and it's the top 20 markets. And he's always very quick to point out, "Yes, here's the average across these 20 markets. But then, if you look at the individual ones, if you look at San Francisco and Seattle, you'll see they're quite different from other major areas of the country."
Moser: A very good point.
Hill: 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.
Chris Hill owns shares of Amazon and Walt Disney. Jason Moser owns shares of Walt Disney. Taylor Muckerman owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon, Canadian National Railway, Lions Gate Entertainment Class A, Lions Gate Entertainment Class B, Netflix, Walt Disney, Zillow Group (A shares), and Zillow Group (C shares). The Motley Fool has a disclosure policy.