In this segment from the Motley Fool Money radio show, host Chris Hill asks Million Dollar Portfolio's Jason Moser and Matt Argersinger and Supernova and Rule Breakers' David Kretzmann what most interests them in the weeks and quarter ahead. Their answers: the potential for gene therapy, the shifting outlook for Twitter (NYSE:TWTR), and Amazon.com's (NASDAQ:AMZN) relentless expansion and how it may affect auto-parts retailers. As a bonus, they offer up some stocks and industries they think remain value priced despite the long bull market that many investors fear is just about to end.
A full transcript follows the video.
This video was recorded on July 14, 2017.
Chris Hill: Earnings season kicks off in earnest next week. Let's just go around the table. David Kretzmann, let's start with you. It can be a company, an industry, as we head into this earnings season. What are you most curious about?
David Kretzmann: This isn't directly related to earnings, but it's something I'm paying attention to closely. Just this week, an FDA panel unanimously recommended that the FDA approve the first-ever gene-therapy treatment. This is a treatment that genetically alters a cancer patient's cells to fight the cancer. In other words, a living drug. This was a test that was done under Novartis, one of their drugs. In a study starting in 2015, 63 patients, this was a type of leukemia, received treatment, and 52 of them, about 80%, are in remission now. So just a phenomenal number. For gene-therapy companies like Juno Therapeutics or bluebird bio, they're on the smaller end of the spectrum trying to develop that technology within the biotech space. I'll be paying close attention there.
Hill: Interesting. Jason?
Jason Moser: Twitter's earnings come out on July 27. This has been one we've been following closely in MDP, we still own shares there. There seems to be, at least, a growing shift in the view on how these guys are doing. There was a very interesting data point I ran across recently. Recent eMarketer data showed that Twitter actually tied with Instagram as the No. 1 digital platform for influencing America's purchasing decisions. That kind of made me do a little bit of a double-take there.
Moser: Twitter is an influential platform. I think that probably has more success on the brand awareness side, just because of the nature of the platform. But it seems like Jack Dorsey is doing what he said he was going to do when he returned. He's making more measured decisions that are geared more toward the long-term success of the business, versus just cowering to Wall Street's demands for immediate profitability and user growth and whatnot. I think they're figuring out new ways to define success for the business. So this could be a situation where patience really does pay off. I think we've seen very clearly that Twitter is not a platform that's just going to be able to go away, or even be disrupted a la Facebook versus Snapchat. Like I said, we still own shares in MDP. We're still optimistic. I haven't sold any of my shares, and I'm usually a glass-half-empty guy, Chris, so take that for what it's worth.
Hill: Is there any talk that you've seen of Twitter being an acquisition target? Because it seemed like a year or two ago, the drumbeat for that was pretty loud.
Moser: Yeah, I think the drumbeat was a little bit louder, because that was seemingly the only light at the end of the tunnel. Now that there seems to be some more light at the end of the tunnel, I think it becomes a more attractive acquisition target if you know that what you're buying is not in a state of disrepair. And it seems like, at least, Twitter is not in that state of disrepair, which certainly could make it a more attractive target. Honestly, I would love to be able to see these guys continue to go their own way. I suspect, if we see a good quarter here, if they play out the rest of 2017 in a positive way, I imagine that drumbeat will only grow louder.
Hill: All right. Matty, what are you watching this earnings season?
Matt Argersinger: As we watch the Amazon tentacles keep extending into various parts of the economy --
Hill: That's a good visual right there.
Argersinger: Yeah. I mentioned a month ago on the radio show looking at the auto-parts retailers. I have to say, looking at AutoZone, for example, Advance Auto Parts, O'Reilly Automotive, these have been wonderful investments for decades now. I have to say I think there are some serious challenges ahead. If you look at near-term do-it-yourself mechanics, even auto shops now, I had a follower on Twitter tweet me who runs an auto shop who's buying a lot of his stuff on Amazon now. So those sales are moving online. Then, in the medium term, you have the shared-driving ride-hailing phenomenon that's going to take a lot of private cars off the road. Of course, in the very long term, electric vehicles, less moving parts, and maybe autonomous driving, hopefully less collisions and accidents requiring auto repair. So there's this big, huge amount of challenges ahead, even in the near term for these guys. Full disclosure: I'm actually short AutoZone and Advance Auto Parts in my own portfolio. I'll say that right here. But I think this is one I want to watch. We're on the cusp of some major disruption for these players. So earnings season and beyond, I'm going to be watching them.
Hill: It's interesting, and this is something we've talked about before with other industries, which is the idea that a business doesn't need to lose all of their customers to be in significant trouble. In the case of the auto-parts dealers, if just a handful in terms of percentages of auto body shops, small independent shops, decide, "I know I've been buying directly from them, but I'm going to take 20% of my business and I'm going to take it elsewhere," whether it's Wal-Mart with Jet.com, or you can get the supplies on Amazon, it really doesn't take that much.
Argersinger: Absolutely right. Disruption happens at the margin. I think we always think these businesses are going to go away. Well, they're not going to go away. But if a significant part of the business is going away, then they're not going to be great investments, and that's how disruption happens.
Hill: So the market has had this amazing run for the last seven or eight years, which is great in general for anyone who's been invested in the markets. What this means in the business media is, speaking of drumbeats, as we were just a moment ago, the doom-and-gloom drumbeats are just getting louder. Maybe it's just me, because I spend a lot of time consuming business media. But it seems like I can't go 24 hours without someone coming out and saying, "It's all going to end; this is just like 2000 all over again," that sort of thing. I don't believe that, but I do believe that even though the market in general has had a great run, there have got to be some areas of value out there, whether it's an industry or a stock. And if we could just go around the table, David, is there something you see out there that you look at and think, this really isn't that pricey?
Kretzmann: I'm looking at retailers and restaurants. Obviously, Amazon is causing a lot of disruption and chaos, especially in the retail space.
Hill: Because of the tentacles?
Kretzmann: The tentacles. You can't ignore the tentacles. That's just such a solid visual. But if I can find solid operators that have a consistent record of generating free cash flow or growing over time, having experienced leadership, then I'm pretty interested. Cheesecake Factory is one that I'm keeping an eye on. Tractor Supply Company. And I'll disagree with Matt here, I think AutoZone is actually pretty compelling right now. I actually bought shares recently for my own portfolio.
Argersinger: Whoa! All right. I like it.
Kretzmann: AutoZone is trading at the lowest valuation since the Great Recession. I think people are placing a lot of blame on the company's struggles, when in reality, it's just, I think, warm weather that's causing it, and I think people are jumping the gun a little bit on AutoZone. We'll see what happens.
Hill: Jason, before we get to whatever you think is undervalued, do you want to cast the deciding vote when it comes to AutoZone? You can stay on the sidelines.
Moser: I'm going to defer my decision until a later date.
Hill: Smart man.
Moser: I just run straight over to my MDP Best Buys Now list for this, because it's really hard to pinpoint anything in this market that is actually undervalued. With that said, I think there are companies out there that present some interesting opportunities. I think, when you run into a frothy market like this, you want to focus on quality names. Facebook is one that, whether you use it or not, the fact of the matter is they have 2 billion users now and the scale to do pretty much whatever they want. Interestingly, Instagram is becoming the new Facebook. I'm seeing this through my kids and their friends. They're not interested in Facebook profiles, but boy, they're all signing up for Instagram. And really, that's just fine by them, because Facebook owns Instagram. I think with a young founder in Mark Zuckerberg, who seems like a genuinely good and grounded person, I think the world is going to benefit from having him, and he seems to have a lot of good ideas in where he can take this business over the long run.
Then, another one we have there is Nike. I think Nike is a global sports behemoth. Everyone knows the brand. The move to direct-to-consumer is happening faster than I think Dick's Sporting Goods and Foot Locker would like. Companies like Nike are benefiting. They brought in $2 billion in sales last year through their own apps alone. We think in MDP it's a pretty low-risk way to get some 8% annualized returns over the coming five years. So Facebook and Nike, a couple of ideas.
Argersinger: Like Jason, I'm giving a nod to our MDP Best Buys list. On there is Disney, and I've had it on there for a couple of months now. A company of Disney's quality, its extension across the world in terms of entertainment branding and all kinds of things like that, I know investors seem to be hung up on the networks business and how that's kind of flattening out and the ESPN subscriber losses -- I get all that. But think of Disney as this entertainment IP powerhouse that can find all kinds of ways to deliver that entertainment in whatever form. I think you look at a company that trading for around 18 times earnings, roughly a market multiple for a company of Disney's quality -- that to me screams undervalued.
Hill: It's interesting, because when you look at what not just ESPN but all the networks that have any kind of sports-rights deals, they've all paid exorbitant fees, whether it's for the NBA, the NFL, whatever it is, they're all paying up, and they're all paying increasing amounts. But just like we've seen with individual sports teams that go through ebbs and flows with their own budgets, where you can look at your favorite sports team and think, there was a point in time where they were handing out checks to athletes like they were candy, and they sort of ratcheted that back. I feel like, yeah, it's a tough time right now from a budget standpoint for ESPN, for Fox Sports 1, CBS, all of them. But I feel like the next round of sports-rights contracts, I feel like there's a good chance it's going to be corrected.
Argersinger: Yeah, and the world gets a little bit more rational about those contracts, for sure.
Chris Hill owns shares of Amazon and Walt Disney. David Kretzmann owns shares of Amazon, AutoZone, Facebook, Nike, The Cheesecake Factory, Tractor Supply, Twitter, and Walt Disney. Jason Moser owns shares of Nike, Twitter, and Walt Disney. The Motley Fool owns shares of and recommends Amazon, Bluebird Bio, Facebook, Nike, Twitter, and Walt Disney. The Motley Fool owns shares of O'Reilly Automotive and has the following options: short August 2017 $250 calls on O'Reilly Automotive and long August 2017 $220 puts on O'Reilly Automotive. The Motley Fool recommends AutoZone, Juno Therapeutics, and Tractor Supply. The Motley Fool has a disclosure policy.