In this episode of the Market Foolery podcast, host Mac Greer talks with Jeff Fischer from Motley Fool Pro and Options and Bill Man, The Motley Fool's director of small cap strategy, about today's biggest market news. First, revised GDP numbers and the NASDAQ's subsequent drop, and what to keep in mind when looking at Goldman Sachs' (GS +0.74%) foreboding predictions for the market at large. Chipotle's (CMG 0.72%) CEO is stepping down, and the market isn't shedding many tears to see him go. Shake Shack's (SHAK 0.60%) short interest continues to rise as the company's model continues to struggle. And Uber -- which lost a whopping $1.5 billion this quarter -- is planning to go public in 2019, but there are more than a few reasons to be skeptical about their long-term horizon. Listen in to find out more.
A full transcript follows the video.
This video was recorded on Nov. 29, 2017.
Mac Greer: It's Wednesday, Nov. 29. Welcome to Market Foolery. I'm Mac Greer, and joining me in studio, we have Jeff Fischer from Motley Fool Pro and Options, and Bill Mann, The Motley Fool's director of Small Cap Strategy. Gentlemen, welcome!
Jeff Fischer: Hey, Mac! How are you?
Bill Mann: How are you?
Greer: I'm good. Jeff, you were saying you're a little tired, had a rough night last night?
Fischer: If you want to get into it, I didn't sleep well last night. I'm not sure why. Maybe someone can help me out, tips for sleeping.
Greer: I have a theory. Were you excited about the revised GDP numbers?
Fischer: That's what I was waiting for, yeah.
Mann: It definitely goes into the list.
Greer: OK, well, wait no longer, because the revised GDP numbers are here. GDP, guys, growing at a 3.3% annualized rate for the third quarter. That's the strongest growth since 2014. But it really didn't do much for the market. In fact, the NASDAQ at the time of our taping right now is down big.
Mann: The NASDAQ hates GDP growth.
Greer: The NASDAQ apparently hates GDP growth. And Bill, this comes against a backdrop where Goldman Sachs has come out warning that stocks are at their highest valuation since 1900.
Mann: Not just stocks, but every asset class. Every asset class. And what they're saying is, since 1900, there's only been a few times in which stocks and bonds have really moved in the same direction and become as distended as they are now. And the other time was 1920, which I understand...
Greer: And how did that work out?
Mann: Yeah, I'm not much on history but, [laughs] they didn't call it the Great Depression for nothing.
Fischer: There's no question that we're going to see volatility in bonds in stocks, and I guess almost any investment, Bill. I don't know about real estate. We'll see. I have a long statement I could make, but I want to keep the conversation going, because we're not quite to what I want to say yet. Maybe now we are.
Greer: Let's talk about that, because we have all these different data points. We have a roaring stock market -- until today, at least. We have GDP numbers that are really strong. We have the prospect of tax reform. And we have this ongoing issue with North Korea, which may not be great.
Fischer: Yeah, throw that in there, too.
Greer: Yeah, throw that into the soup. As an investor, what do you do with all that?
Fischer: Janet Yellen and the Fed is talking about this today, how interest rates are only going to rise moderately, slowly. So where we are at is, interest rates are still low, the S&P 500 has a 2.1% yield, which is right around where it has historically been. The S&P 500 trades on estimates from Cap IQ at about 18.5 times normalized earnings for 2018.
Mann: Kind of middle of the road.
Fischer: Yeah. And GAAP [P/E], I'm happy to see, is right at the same level. So, 18 times. The mean P/E ratio of the S&P over history is 15.7 times. So, we're about 15% above that on 2018 estimates. So, as you say, Bill, we're not that far out of line.
Mann: Goldman somehow disagrees with you, though.
Fischer: They do, and they're also looking at the Shiller P/E, which I don't buy into completely. The Shiller P/E is 32 times. The Shiller P/E takes the last 10 years and averages it, more or less.
Mann: So, here's the deal. We're getting ready to go into our ninth year, tenth year following the financial collapse. And what has been in place in that entire time has been asset purchases by governments around the world. The central banks have taken on a huge amount. There's $13 trillion of sovereign debt that has a negative interest rate now. At some point, that has to reverse. At some point, they have to start selling. They will sell down their balance sheets. What they're doing is propping up assets. And I don't know what's going to happen. We have been in uncharted territory for a long time. I don't want to be Doctor Doom about this, but it has to happen. And I think that has something to do with the fact that all of the assets classes are as expensive as they are now. We're not even talking about bitcoin, which I know you don't want to talk about.
Fischer: Yeah. At least, Warren Buffett and other people say to avoid it, it's a sign of speculation, there's no real value there. But I have no strong opinion about it. But, Bill is right. As the quantitative easing of the prior decade, more or less, slowly starts to unwind, what will happen? Nobody knows. You would expect asset prices to not rise as much.
Mann: Classical finance would say that's the case.
Fischer: Yeah. Rise moderately, maybe, which, along with GDP, that's really going to be the driver of value, in the end, of the stock market. But, we also don't know, if the economy gets weak again, are we now addicted to this drug? Will governments come out, assuming that we have a functioning government, and say, "We're going to reinstate QE, we're going to support asset prices," because that's what we're getting used to now.
Greer: Coming back to what all this means for individual investors -- when you take all that into consideration, when you take the Goldman Sachs report into consideration, are you still looking at companies on a company by company basis? Or does the macro weigh on your investment thesis?
Fischer: I think I can speak for almost everybody at The Fool, where we look at a company itself and what it is creating and the value it's deriving from its business. And you can look at so many stocks that did well the prior decade, like, say, 2000-2009, when overall the market did badly. But you had Netflix in there, and Google, and MasterCard and all these businesses --
Mann: Pretty good.
Fischer: -- Fool names, Fool companies, that did really well. So, that's what we're trying to find, regardless of what the economy does. That said, the backdrop of the macro does, of course, play in your mind a little bit. It might direct you to what sort of companies you look at, for example.
Mann: I think there's actually very little linkage between what the price of the market is at any given point and how it performs over the next 10 years. There's not a huge amount of correlation. Simply because all of the other inputs that go into what's going to happen in the future. I think the thing, and Jeff was talking about this as well, the thing that's really hard to get your head around is what's going to happen with those balance sheets. If you believe that they have to unwind, that's not a bullish case for assets. But, people have been waiting now for six or seven years for a pullback in the market and it hasn't happened.
Greer: Bill, we were trading emails this morning, I know one of the things you were fired up to talk about was regulatory concerns with regards to big tech. So, now that we're talking companies, when we look at the last 10 years and we look at this bull market, Amazon, Apple, Alphabet, Netflix, Facebook, have had huge run-ups. But, there's this whole issue of regulatory concerns. And, oh, by the way, we're not just talking about the U.S., we're talking about Europe and the rest of the world. How much does that weigh on you?
Mann: I think we're especially talking about Europe in the rest of the world. I think Europe has been really, really nervous about Google and Amazon. We love these companies, but I think if you pull back the layers from Amazon, what you really can't get away from is, they are anti-competitive in some ways. They just are. And that's something that the U.S. tolerates much more than Europe tends to. So, you can get away with that when you are 0.2% of all commerce. Can you get away with it when you're 2%? Can you get away with it when you're 4% or 5%? And I don't know the answer to that.
Fischer: And keep in mind, Europe does not benefit from Amazon and Google the way the U.S. does, by hosting these U.S. companies.
Greer: Chipotle is looking for a new CEO. Current CEO and founder Steve Ells will become executive chairman, where he will focus on innovation. Jeff, shares of Chipotle trading around $300 today. Back in 2015, trading north of $700. Can a new CEO turn it around?
Fischer: You could say there's no question that they need to make a change, and this may even be overdue, because the company has been stumbling for about two years or so. And I don't think any of us would argue that they had a clear strategy to right the ship and bring customer confidence back into the store and to grow traffic. They've struggled on all these counts. I think they need to refresh, they need someone who's going to look at everything they do and not have any sacred cows, so to speak.
Greer: Is this primarily a story of their foodborne illnesses and all of the health concerns? Or did Chipotle just get over its skis in terms of its valuation and growth?
Mann: First of all, I do want to say, how bad must it feel for Steve and else to announce that he's stepping down and have the stock go up, I think it's been as high as 13%?
Greer: Yeah, that's got to sting.
Mann: As a founder, that's not the way that you want to increase the value of your company.
Fischer: True, although maybe it helps him affirm, "I'm making the right decision, all right." [laughs]
Mann: So, to me, there are a couple of questions here. One is, I think it's very clear that the environment around Chipotle has changed. When they came out, they were special, because they were coming out in an environment where there weren't that many restaurants or chains that were doing something that was similar to what they were doing, Food with Integrity. These were real things. But, I think in 2017, you've kind of lost the plot there. You can walk out from Fool headquarters and find five places within 500 feet that also do something similar to what Chipotle does. So, they had a game plan, and the environment shifted, and they did not. So, I think that's a real thing that a new manager needs to bring to the table. And I happen to think that Steve Ells did a bang-up job for a lot of years, but this isn't an environment he is prepared to deal with.
Greer: So, how about the next CEO? Who are we going to bring in?
Fischer: I would love to see Panera's CEO, Ron Shaich. Is that how you pronounce his last name? I never listen to the show. [laughs] He did a great job.
Mann: [laughs] I knew how to say it.
Fischer: I do listen to the show, it's even worse. Yeah, he did a great job turning Panera around, and I think they've lived up to quality food in a way that Chipotle apparently hasn't.
Mann: That's actually who I was going to say. The other person I was thinking of who is soon-to-be maybe looking for work or a change would be Sally Smith, who is getting ready to be done at Buffalo Wild Wings. You saw the announcement that they're actually going to be taken over by Roark Capital. Previously, she said she was stepping down. So, she's someone who we have known for a long time, have a tremendous amount of respect for her, and she has operated in an environment in which she has made something that was maybe not very differentiated, Buffalo Wings, and differentiated them. And to me, that might be a good step for both parties.
Greer: The one I want to throw in the mix is Patrick Doyle from Domino's, because he scored high on my proprietary Humility Index a few years back when he basically acknowledged, "People think our pizza tastes like cardboard, we're going to make it better." And I love, love, love that sort of humility because then you're looking at all possible solutions. And that's my problem with Chipotle, and I'm a shareholder, but this whole Food with Integrity, and this patting ourselves on our own back, as a customer, that doesn't really help me. I want food that tastes good. And I think there's a little too much navel-gazing there. They have to get rid of that stuff.
Fischer: Bill brings up a great point. That's no longer novel. There are so many places that bring you local, quality Food with Integrity. My wife is an actress --
Mann: So, you're going to throw her out as the next CEO?
Fischer: She's looking for a job, yeah. [laughs] She said at the production meeting last night, which is about 20 production crew, cast, they had dinner and dinner was brought into them and it was Chipotle. And I was surprised when she told me last night that everyone looked at each other with worry. None of them had eaten Chipotle since the scare two years ago, and I haven't either. So, it's amazing how quickly you can kill a brand or kill the trust in a brand. But, they did all eat it, and she said it was great.
Mann: Only three of them died.
Fischer: [laughs] But, that's how much work they have to do still to get people back in those locations.
Mann: They do.
Greer: It's a totally unfair comparison, but I was in Texas for the holidays, and I was going to go to Jack in The Box for breakfast tacos and I didn't, because remember Jack in the Box --
Fischer: I do.
Greer: -- has some of their own issues.
Mann: You know who else, actually, would be a great CEO for them is Cheryl Bachelder, who's the CEO at Popeye's, which was a legit turn around. 10 years ago, it was irrelevant, it was dirty, with the exception of the fact that their chicken is awesome, it had really, really bad name recognition. But now it doesn't.
Greer: Not Food with Integrity.
Mann: No. No. Now, it's my favorite Cajun restaurant.
Greer: Popeye's is? Really?
Mann: Over -- oh, Chick-fil-A isn't Cajun.
Mann: No. But, Popeye's is legit.
Greer: OK, let's keep it on the subject of restaurants, because I know we also love talking Shake Shack.
The hook here is, for the month of November, Bill, the short interest, the people betting against this stock, a lot of people betting against Shake Shack, short interest on the rise. So, when you look at Shake Shack right now, is this another star waiting to fall? Or do you think it has some --
Mann: There's something really interesting about this. For people who are not familiar, who have not tried Shake Shack, Shake Shack is a very high-end burger restaurant, and they do a really good job. It was based in New York. The founder is Danny Meyer. Most of their profits and revenue still come from New York, from the Big Apple. They do much less well outside of New York. So, as you're getting to the point now where New York is a saturated market for them, where do they go where the economics are similar, that they have the same level of pricing power, if you will? And that's the core of the short thesis. It's not that they're a poorly run company, it's not that they're out ahead of their skis. The valuation is really high, and New York is about as good as it's going to get for Shake Shack. To me, those two things at least bear thinking about.
Fischer: Initially -- I should say, I thought you pronounced it Shake Shaich. [laughs] But, it's another Shack, OK, Shake Shack. We've been short shares of Shake Shack...
Greer: Easy for you to say.
Fischer: ...for about a year. And they're down about 15%. But, in this market, that's a good result. It does look very expensive, as Bill said. Trades at about 75 times expected earnings for next year. Even as their employment costs are going up, their promotion costs are going up, traffic has been down the last three quarters with a 3.8% drop in traffic last quarter.
Mann: And that's for stores that have been open for more than a year.
Fischer: That's right, same-store sales. I think it's a young chain to be posting big drops in traffic like that. Bill is exactly right, these stores in New York and Manhattan make $7 million each per year, and newer stores make half that, more or less. And then, further out, locations that are even less central will make a bit less.
Mann: They can't charge that much in Louisville. I mean, they just can't.
Greer: And there are so many good burger places now. This feels a lot like the cupcake craze a few years ago.
Fischer: It does feel saturated. And they do, as Bill said, have a good brand and a good story and people who love it.
Mann: Yeah. You don't have to say anything bad about the operations of the company to come up with that conclusion. I'm not saying Shake Shack is doomed because they're idiots. Essentially, what you're saying is the model is going to struggle as they try and push it out.
Fischer: That's what bears are thinking, and shorts are thinking. They do have $77 million in net cash. They look to grow their store count by 36-40% next year, which would be the biggest jump since they IPO-ed. They're looking to add 32-35 new locations next year. But they're still in the U.S., domestic-owned Shacks. But, they're still a small company, and they're trading extremely expensively on a per unit basis, on earnings, on cash flow, on anything you look at. And it's still, in the end, just a burger chain. I hate to put it that way...
Mann: Do you like investing in restaurants?
Fischer: Almost never, and I've missed some giant winners because of it. But I've also missed a lot of heartache.
Mann: Yeah, I think what we've learned with Chipotle that you've seen over time is that the brand means so much, but I don't know that there's an industry where the brands are more fragile than they are in the restaurant industry.
Fischer: Yeah. And if you get it right, look at McDonald's, life-making fortune. But there are so few of those when you had them up. Cheesecake was great.
Mann: But McDonald's also had a walk in the shadow of the valley of death.
Greer: And it's coming back.
Mann: But, in 1999, in 2000, people were valuing McDonald's based on its real estate. That's how bad the brand itself was at that time. So, yeah, they can come back. It's certainly possible. I would much rather be in Chipotle's place right now than I would be in Shake Shack's place right now, because they have an installed base, and they have a brand that is known, and it's recoverable.
Fischer: Even, now, the story has changed completely. As we've seen, and Panera has done so well, is that you have to be in the customer's pocket, on an app, and make it easy to order and deliver and pick it up. So, even now, the competitive landscape is getting more and more brutal.
Greer: OK, guys, our final story, Uber. Uber reporting a $1.5 billion quarterly loss. Bill, that seems like a large number to me.
Mann: But, it's a quarterly number, so if you annualize it, it's pretty good. [laughs] It really takes something to lose that much money. I want a chance to lose $1.5 billion a quarter, who's with me?
Greer: I like it. So, the CEO has said that the company plans to IPO in 2019. I don't want to say are they still on track, but how are you feeling about Uber?
Mann: Well, they're going to have to IPO. For one, they're going to have too many shareholders. Remember when...
Fischer: Facebook.
Mann: Yeah, I was going to say Google, but it was Facebook, when they came public, it was simply because they had too many shareholders of record to remain private. So, Uber is coming public one way or another. It's just going to happen.
Greer: And what about the business?
Mann: It's a mess. It's a mess with huge optionality. It's one of those businesses that, and this is terrible for a podcast, that I kind of feel like I don't have to have an opinion on. It really could do either. But you would have to say now, with their core business, that it's really big, and they're still not making profits. And, to me, that's an issue.
Fischer: And there's some argument to be said that some companies have profitability in their DNA. They become profitable early on, and that's how they run the business, and that's how they grow it. Google was an example, it came public profitable. eBay, Facebook, a lot of great companies are profitable when they come public. Then again, some others are not, like Amazon. But, the size of these losses, and the way they've grown the business to date, which is chasing market share, it may make it more difficult for them to become a steadily profitable business. It may be hard for them to turn that corner and make their foundation.
Mann: Yeah. The thing I can't get over with Uber, and I can't get around this, is that this business was founded based upon ignoring and breaking the laws and regulations. It was, right?
Fischer: Yeah.
Mann: So, that's what's in their DNA. Of all the businesses that have been beset by scandal, by managerial scandal, Uber was the one that surprised me the least, because when they started -- and I'm not saying this wasn't a benefit to a lot of people, but they said, "Look, the taxi regulations are really stupid and anti-competitive, so we're just going to do something else, we're just going to ignore them."
Greer: Kind of a Napster sort of thing.
Mann: Kind of Napster, yeah. So, I don't know. Do I have to know?
Greer: You don't have to know.
Fischer: No. We'll look forward to seeing the financials when they file their statements.
Greer: Great service, not necessarily great investment.
Mann: Yeah. If you love red numbers...
Fischer: The other thing is, there's no switching cost at all. I haven't used Uber for a long time. I switch to Lyft and I'm just as happy.
Mann: They're just the same cars and the drivers.
Greer: Yeah, for the most part. Lyft has been great. Lyft is my go-to now.
Fischer: Happier drivers, maybe, perhaps.
Greer: You think so?
Fischer: Well, I haven't researched this to know if it's true, but one Lyft driver told me that after eight hours or so, Lyft makes you take a break. They say, "You have to take six hours off," or whatever, "Go get some sleep." Uber has no such governor on their people, and they can drive 30 hours in a row, and so it goes. If that's true, they should change that.
Greer: That's what I'm looking for, someone who's been driving for 30 straight hours.
Mann: [laughs] Yeah, exactly.
Fischer: [laughs] That's stamina.
Greer: Do I get a discount if someone has been driving for three days?
Mann: "I can drive to Dallas Airport in my sleep. Watch this. Do you mind?"
Greer: "I'll pay you to let me drive for you, because I've been driving for so many days,"... I hope that's not true.
Fischer: So, if there's no switching costs, what are your margins going to be in the end?
Greer: Yeah, that's not good.
Mann: It's still a pretty powerful network.
Fischer: It's a powerful network, I can't deny that.
Greer: OK, so I'm going to count you both as cautiously pessimistic on Uber.
Fischer: I want to be bullish, in fact, but you have to have good management...
Mann: You can't be cautiously pessimistic. Pessimistic is cautious. You have to be...
Greer: No, but it's not unbridled.
Mann: [laughs] Unbridled pessimism, there we go.
Fischer: I'd be more drawn to Lyft, just because they avoided scandal for the most part. And Airbnb, which may go public as soon as next year. They've also had their own basket of shakes.
Greer: That's a whole 'nother show. Well, guys, we'll keep an eye on it. Jeff, Bill, thanks for joining me today!
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 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!
