Some Days, the Business World Is Full of Surprises

On this Market Foolery podcast, host Mac Greer is joined by Motley Fool Total Income's Ron Gross and Million Dollar Portfolio's Matt Argersinger to discuss several notable items and what they mean for investors: Target (TGT 1.28%) is offering the retail sector some rare upbeat news with a boost to its earnings forecast, plus guidance for rising comps; Uber has given up on beating its top rival in Russia and is joining forces with it instead; and despite all its troubles, Snap Inc. (SNAP 6.70%) was blessed with an analyst upgrade. 

A full transcript follows the video.

This video was recorded on July 13, 2017.

Mac Greer: It's Thursday, July 13. Welcome to Market Foolery. I'm Mac Greer. Joining me in studio, we have Matt Argersinger from Motley Fool Million Dollar Portfolio and Ron Gross from Total Income. Guys, welcome!

Ron Gross: How you doing?

Matt Argersinger: Thanks, Mac!

Greer: Guys, I'm doing well. Facebook live today, so look sharp. Bump it up!

Gross: Stand up straight.

Argersinger: I always look sharp.

Greer: Let's start with some sharp news, some good news from a retailer. You don't hear that sentence very much. Target, Ron, boosting its earnings forecast. Target also said it expects to see "a modest increase in comparable-store sales."

Gross: Well, well, well. Took me by surprise. If you recall, last quarter's results were characterized by an analyst, and I stole this, as "less bad." Less bad is, theoretically, somewhat good. And we seem to see a follow-through here now with Target. Does this make a trend? I say not yet. But we see a follow-through. The details are light, because this is not an earnings release, it's just an earnings guidance boost. But they are seeing an improvement in traffic. And that is somewhat surprising to me. I didn't expect that. The answer is, why? We're not at back-to-school season quite yet. We're in the doldrums, the lows of the summer -- we had Amazon (AMZN -1.14%) Prime Day. 

I don't know why the reason, and it's a little bit head-scratching to me. I'm happy for Target. I shop there. I think it's a fine experience. I also am quite a bit of an Amazon shopper as well and will continue to be. It's good for them. They continue to see a challenging economic and competitive environment, and by that, I'm sure they mean Amazon, although they don't mention Amazon by name.

And we see Amazon's success with Prime Day this week -- incredible increase in sales over last year, and they continue to take industry by industry and knock it down and become a thorn in the side of so many different industries. I think probably apparel is next, through Amazon Wardrobe. Target has really been able to maintain its composure with respect to apparel for a while. We'll see if that continues.

Amazon could go anywhere. We see them talk about concert tickets and pharmaceuticals, and who knows where they could go?

Greer: OK, I want to stick on the subject of Amazon. Matt, when we're talking about Target, what is Target's best defense against Amazon?

Argersinger: I think that's an impossible question to answer, because I don't think they have one. I'll use one example, they have Target Restock, which is Target's experiment with next-day delivery that they're rolling out and testing in their hometown of Minneapolis. As an Amazon Prime member, I can get same-day delivery in over 5,000 cities around the world right now. So Target is testing a next-day service in Minneapolis, and they think that's their foray into online delivery?

Greer: So I'll put you down as skeptical.

Argersinger: I think I'm fairly skeptical. I think today's reaction, the market investors are looking for any kind of positive news that can get from retailers that have been so beaten down, traditional retailers. So if Target comes out and says, "We're going to have a modest increase in same-store sales," modest to me means "We're not negative, and maybe it's 1%." I think that's, unfortunately, the best that companies like Target, the big brick-and-mortar stores, are going to have to worry about. Target is in the midst of this $7 billion capex program to improve stores, improve the labor and pricing and get online. That's something that Amazon doesn't have to do. They're already out there. They already have the biggest network effect. I just don't know, I can see Wal-Mart making aggressive moves. I think Target's even farther behind Wal-Mart.

Gross: I think with respect to the $7 billion program, it will be interesting to see if, A, the private brands, the store brands that they're launching, gain any traction. They seem to be very excited about it. The recent one was Cloud Island, which is baby, nursery type items. They're very excited about the potential. I'm personally less excited about what that could do for the business. They're also excited about opening about 100 smaller locations in cities and college campuses. That could be, I think, something. But it seems like that's what everybody's trying to do these days. Everyone can't be successful at it, but maybe smaller boxes are the the way to go for the future. But $7 billion is a lot of money. When I was an activist investor, if I saw companies throwing billions of dollars at something to try to revamp or save a business, it always put a question mark above my head.

Greer: Have you gone to the Target out in Merrifield, Va., where the escalator carries your cart?

Gross: I have not, no. I didn't even know there was a Merrifield --

Greer: It's like voodoo magic. I'm not saying that's going to protect them against Amazon. I'm saying that's worth the trip.

Gross: That's what they have? That's their competitive advantage? Amazon has no escalators?

Greer: Amazon has no escalators. There's another interesting competitive advantage, potentially. I don't think this is enough, but I was talking before we were taping here with Emily, our colleague. And she said that Target, there's a huge amount of discussion on this moms' online group about how moms love to go to Target to escape.

Gross: OK, that's fair.

Greer: Is there a business model there?

Gross: [laughs] For a much smaller footprint, a much less market capitalized company, a much smaller company, perhaps.

Argersinger: People who wants to escape or ride an escalator, that's Target's business plan now.

Gross: That's called a library.

Greer: OK, so I hear a lot of skepticism. When you look at the stock, it has been a rough, rough go. It's lost in the market over the one-, two-, and five-year periods. I guess if you bought it back in 1989 and held, you're probably happy. But when you look over the next five years, is this a market-beating stock?

Gross: It's tough for me to say it is. And if I can't say it is, I usually default to saying it isn't, or I don't know, you should stay away. Theoretically, it's cheap, based on traditional valuation metrics, at only 10 times earnings while Wal-Mart is 11 times, Costco is 16 or 17 times. However, it just remains to be seen what happens with earnings here. I just don't have visibility there. And therefore, it's impossible for me to project how this all shakes out, and therefore retail in general is something that I would stay away from. There's much more certain places I can put my capital.

Argersinger: I think you can go probably dip in and dip out of these over the next five years. Obviously a lot of these stocks are going to get way cheaper. A lot of them are cheap. So you can probably play a short-term bump. But holding for a five-year period? I don't think you're going to beat the market.

Greer: Let's switch gears and talk some Uber. Matt, Uber is merging with Yandex (YNDX) in Russia. Yandex is Russia's leading search engine and also operates Yandex Taxi. What does this deal mean?

Argersinger: This deal is, for Uber, another step back from a major market they were trying to compete in. You recall they did something similar with China, when they realized they were spending way too much money and the biggest competitor was winning. The same is happening in Russia. Yandex Taxi, which has been around for a long time and does something over $1 billion worth of gross bookings a year, has been really a thorn in Uber's side the whole time they've been trying to compete in Russia. So Uber is throwing up its hands and saying, "Let's do the same thing we did in China. Let's form this partnership. We're going to take a minority stake in it." Yandex is going to have the majority stake, and the CEO of Yandex Taxi is actually going to run the business.

So from Uber's perspective, it's a chance that they can still spread the app, the network, but maybe take more of a private equity interest and get rid of all the additional costs and marketing they would have to do to compete with Yandex.

For Yandex, I think this is a great deal. It gets them a major investment in a very important service and feature, an online feature, something that, according to Bloomberg, is going to have something around 35 million rides a month, the combined company. So I think it's another great feature for Yandex. And maybe we can talk about the qualities of investing in Russia's leading search engine, but this is certainly a boost for them.

Greer: Yeah, we were talking about that, because you are a former Yandex shareholder, correct?

Argersinger: I am.

Greer: Does this make you more interested in potentially buying some Yandex again? When we were talking before the show, I was asking you about corporate-governance issues in Russia, and to what extent, how does that stack up versus investing in China? Because I would just be scared, at any point, Vladimir Putin could say, "You know what, you've made a little too much money. I'm going to take some of that."

Argersinger: I used to compare Yandex to Baidu in a lot of ways. I actually think Yandex, from a corporate-governance perspective, if we're just looking at the company itself, is much better than Baidu. But unfortunately, the authoritarian situation in Russia is a little more stringent than it is in China. And Yandex was faced, a few years ago, the Kremlin came out and said, "We're worried about the flow of information and the warehousing of data that companies like Yandex have." This cast a pall on the company. We also have sanctions against Russia. U.S. does, many European countries do, and this hurts Russia's economy. Yandex depends on Russian advertisers for most of its core revenue.

So there's a ton of risks to owning something like Yandex. If you have a steel stomach, though, and you like the combination of emerging market and technology, you could do a lot worse than Yandex. It's a dominant position in Russia, 60% of Russia's internet search. It's held up well against Google. But you have to have a stomach for risk.

Gross: Can we talk about Uber for a second on the heels of that? I feel like the bloom has certainly come off the rose recently. They've expanded their app into 70 markets; they've had to pull back, as we've talked about, China being the most high-profile one, now Russia. The cultural problems the company has had, the CEO, a lot of operational and cultural problems. I feel like the company is entering a difficult time. Anecdotally, for the first time ever, I downloaded the Lyft app, which I had never even thought about before. And I don't know if the rest of America or the world is feeling the same way. Am I reading it wrong? Do you think there's a hit to valuation?

Greer: I have a contrarian take there. Obviously, Uber has had a lot of problems. But if I'm using Uber, for 98% of the people using Uber, everything that's going on is internal politics; it's corporate-culture stuff. It doesn't necessarily affect their Uber experience. So part of me thinks maybe this is the time -- well, you can't buy Uber yet, because it's not an IPO, but maybe the public sentiment has swung the other way too much.

Gross: Interesting. I feel like even the drivers are disgruntled, and they have been for quite some time. I don't think they like the way they've been treated. Lyft, I think, pays more. They prefer to work for Lyft. It's going to be interesting for me to see, pre-IPO, what happens to valuation, and if things start to come down a bit.

Argersinger: I also believe that you have to think, as a consumer who's looking to catch a ride, something as simple as that, you're going to want to generally try to go for the most convenient and closest person. If that's Uber, if that's Lyft, or it's one of the dozens of other ride-hailing apps that have come out -- I think Uber, in a way, it's not so much that the brand has been damaged by what's been going on with corporate culture there, but in terms of there's other competitors in this space, and it's not exactly the most proprietary technology, ride-hailing. There's other competitors, as Ron pointed out. Isn't it a matter of "I just want a convenient ride that's quick, safe, secure"? If that's Uber, if it's someone else, it doesn't really matter. I think their window of opportunity to be the dominant player might be fading.

Gross: I will say, on my first Lyft ride ever, I was charged double. And I'm not sure if I made the mistake or if they made the mistake, but they responded to my complaint, credited my account almost immediately -- great customer service.

Greer: I've had a really good experience with Lyft as well. But I do Lyft, I do Uber, I go old school and do Red Top Taxi.

Argersinger: Yellow Cab?

Greer: I can't go there. I have my standards.

Our final story. Let's talk Snap. Speaking of a stock that has had a rough, rough run, Ron. Shares of Snap up on Thursday after an analyst upgrade. Ron, you're a guy who used to work on Wall Street, so I'm going to put this question to you.

Gross: Don't remind me.

Greer: As an investor, what do I do with news like that? If an analyst is upgrading a stock -- in this case, Snap -- how much should that mean to me?

Gross: In general, analyst upgrades are not as important as I think the rest of the world thinks, especially from an institutional-investor perspective. Institutions, for the most part, do not care about the buy, sell, or hold recommendation. They like institutional research for the analysts, industry knowledge, and perhaps even more importantly, the access to management that analysts have, because companies like to speak to management to help them understand the business better. That is more important than anybody's opinion of buy, sell, or hold, because all of these mutual funds and hedge funds have their own analysts that will decide if it's a buy, sell, or hold. So that's on one side.

On the other side, we do see stocks move when analysts upgrade or downgrade. So there has to be some kind of effect, whether it's someone institutional and partly retail -- individual investor, for me, it's hard to say. I'm sure there's been studies. But it's not nearly as important as some people think.

Specific to Snap, I think the bigger and more interesting story is that Morgan Stanley analysts -- Morgan Stanley, the company that was the lead underwriter of the Snap IPO -- downgraded Snap's stock recently. You don't really see that very often, a company who, on one side of the business takes the company public and is recommending it as a result of taking it to the market, and shortly thereafter the analysts saying, "We think we may be wrong here, and we're downgrading the stock." It takes guts to do that.

Greer: And you don't see that because they don't want to jeopardize that relationship?

Gross: They don't want to jeopardize that relationship. Back in 2003, Eliot Spitzer, the attorney general of New York, came in and put a very stringent, important wall in between analysts and investment bankers and said, "You have to operate separately; there can't be this conflict of interest." Whether there still is to some extent, we could probably argue in a whole other show. But for the most part, that conflict has a wall in between it, and it takes guts for an analyst to do that, because the next time Morgan Stanley goes out to pitch business and says to a company, "We want to take you public," that company is going to say, "Are you going to support us with research? Or are you going to come back a month later and hit us?" And that creates some tension between research and investment banking at the major banks.

Greer: As we wrap up here, let's talk Snap. Before that upgrade, the stock had hit a new all-time low. It's lower than its IPO price. It has a bit of a competitive problem named Facebook. Going forward, when you look at Snap, it's trading still near its all-time low. What do you think about the next one to five years?

Gross: I feel the same as I did the day it came public. Unless you're really a social-media expert and you have some way to look out five to 10 years to see how these things shake out, then you really have no business being an investor in it, because it's just speculation at that point, and not investing, and I stand by that.

Argersinger: I would have to say yeah, I totally agree with Ron. I don't know Snap as well as a lot of investors, but I would say the cascade of pessimism now that's surrounding it compared to the uber-optimism of several months ago, it makes me think there might be an opportunity there at some point.

Gross: That's fair.

Argersinger: It seems overwhelming. I don't know if today's upgrade is anything like that, but I'm just saying, at some point, there's probably going to be some value here. If Mark Zuckerberg wanted to pay $3 billion for this business at some point, and I know it's valued at much more than $3 billion now, there's obviously value to the company, and Zuckerberg is doing everything he can with Facebook and Instagram to compete heavily with Snap. But there's a value here at some point that might be compelling, if the pessimism builds too much.

Greer: OK, so, my desert-island question. On a desert island, you have to buy one of these two stocks for the next five years: Snap or Target?

Gross: Without a doubt, I would buy Target, because at the very least, I think I would lose less money.

Greer: [laughs] OK, we're all about losing less money. Matt, where are you going?

Argersinger: I might take a flare at Snap, just because I'm almost convinced that Target is going to underperform, and maybe with Snap I have a chance at multibagger returns, or losing everything, and that sounds more exciting to me.

Greer: OK, there you have it, guys. Thanks!

Argersinger: Thanks, Mac!

Gross: Thanks, Mac!

Greer: As always, people on the show 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. Thanks for listening, we'll see you tomorrow.