Another Win for Retail

In today's episode of the Market Foolery podcast, Chris Hill talks with Million Dollar Portfolio's Matt Argersinger about the biggest stories in the market. Target (TGT -0.67%) rose 3% on a good report, but how good was the report really, and what does it mean for the retail sector this year?

in other news, Evercore analysts predict that Microsoft (MSFT -1.96%) could reach a $1 trillion market cap by 2020, but a few other companies will probably hit that mark well before the tech giant does. And finally, the market went on a tear last year, but it could be on track to do just as well -- if not even better -- in 2018.

A full transcript follows the video.

This video was recorded on Jan. 9, 2018.

Chris Hill: It's Tuesday, Jan. 9. Welcome to Market Foolery! I'm Chris Hill. Joining me in studio, from Million Dollar Portfolio, Matt Argersinger. Thanks for being here!

Matt Argersinger: Hey! Thanks for having me!

Hill: We're going to dip into the Fool mailbag. We're going to get Matty's look ahead for 2018. But let's start with retail. Yesterday, it was Kohl's. Today it's Target. Shares of Target up 3% this morning. Holiday same-store sales came in higher than expected. They raised guidance for the fourth quarter and the full fiscal year. Nice.

Argersinger: Starting to be a theme here in the retail space.

Hill: Yeah, it's starting to be a theme, and it's going to make it all the more horrible for any significant bricks-and-mortar retailer that comes out and doesn't put up these kind of numbers, or doesn't do better than expected, because it's not going to be one of those situations where you can just say, "Well, it was just one of those years."

Argersinger: That's right. And I'll be the first to admit, I was probably way too pessimistic, as probably a lot of us were, looking at traditional retailers. And they've had a great holiday season. Part of me thinks, thinking about the stock price, that it's mainly just because expectations got so bad. So everyone was feeling that Target, Kohl's, you name it, was going to have a horrible season, comps were going to be negative, guidance was going to be terrible. And if you stand back and look at the numbers, it's not as if these are world-beating numbers. We're talking about comps growth of 3%.

If you look at Target's full year 2017, comp sales were only up about 1%, and they're guiding for low single digits in 2018. Not phenomenal numbers. And their digital sales are growing 25%, which you would expect they would. They've made a lot of investments there. To me, it's still a relatively muddled picture of what retailers can expect now and going forward. But I have to say, the numbers they put out this holiday season, certainly expectations got way too negative, and they're obviously crushing those expectations, and so stocks are up.

Hill: I'm glad you mentioned the online sales, because I looked at that number, and I think I might have had at least a similar reaction to you, which was, 25% growth in e-commerce -- that's pretty good, but I think it's only pretty good. I think, if you're a Target shareholder, you're looking at that number and thinking, what can we do to push that higher? Because they're not in the earliest stages. They're not working off an incredibly low base, and yet they are still -- I don't want to say they're far behind where they should be, but they have to get that number higher.

Argersinger: Oh, yeah. Wal-Mart is growing at, like, 2 times that. As a Target shareholder, I am worried about that. Because this extremely important part of the business, still a relatively small part of revenue, it should be growing a lot faster. I think the overall e-commerce market is probably growing in the mid-teens. So I would expect Target, starting from a relatively small base compared to others, should be growing faster.

Hill: I was saying this to you this morning, that the most recent episode of Motley Fool Money, we did our preview for 2018, and we had five analysts on the show. You were not among them. I'm curious to get your take on the market in general, and what you're going to be watching for in 2018. Once again, we start the year on this incredible streak, this bull market that will stop at some point but shows no signs of slowing right now.

Argersinger: Yeah. You look back at 2017 quickly, the market was up 21.8%. Great. One of the best years of this eight-, going on nine-year bull market that we've had. The two portfolios I manage here at the Fool, they were up 31%. Any time you have a year like that, you're saying, "Obviously, 2018, next year will not be as good; it can't possibly be as good." It felt like everything went right in 2017. The volatility was so low.

At the same time, if you look at the U.S. economy, strongest we've been probably in two decades by some measures. You have this tax bill that was recently passed. That's only going to help most corporations earn more profits, generate more cash flow, either reinvest in the business, make acquisitions, buy back stock, pay higher dividends. Those are helpful to investors. And if you look at the valuation of the market, it's probably extreme, historically, we're at high levels. But if you factor in the earnings growth we're going to have this year, the low interest rates that are still low and will probably stay low for a while, valuations aren't actually that stretched. So you can make the argument that 2018 could be as good, if not better -- I'm scared saying this -- but it could be better than 2017.

Hill: I'm glad you mentioned the valuation. I've noticed something -- I look at financial media every day, I noticed something pop up here and there over the last few months among some talking heads and some analysts, which is conflating what's happening with bitcoin and cryptocurrency and the run of the stock market, and attempting to make the case that the market is just like it was in '99 and 2000. And that's, essentially saying, this is going to end just as badly as that time around. And I just go, wait a minute. First of all, those are two completely different things. Set the bitcoin cryptocurrency stuff aside for the moment. If you want to just focus on the valuation of the market and some of these companies, let's do that. And when you do that, it's not as scary as back then.

Argersinger: No, it's not. If you go back to the late '90s, the mania was the stock market. Now, the mania is crypto assets, which I don't fully comprehend, and I don't think most people do. But to me, you have to compartmentalize that and look at the overall stock market. The stock market, 20 times earnings roughly, depending on how you look at it. Maybe 18 times forward earnings for the S&P. It's high, relatively, on a historical basis. Not outlandish.

Hill: Anything in particular that you're watching? Any predictions you want to make that can be reckless or otherwise?

Argersinger: Two predictions, I don't think either are reckless. I'm not in the Jason Moser camp of making these outlandish calls. But one prediction I do have, and we already talked about it, this rally we're seeing in retail, probably justified on the fundamentals, better-than-expected results, stocks got very cheap. But I would caution investors getting optimistic about any of these companies. They're facing a severe -- maybe it's not severe, but I think they're facing the early stages of a crisis, which is the idea that the consumer is shifting from one that is focused on cost savings, and shifting over to someone that's focusing on time savings.

What I mean by that is, someone's time and convenience are now more valuable than saving 10% or saving $1 by going in buying something at the store. And I think that's a very powerful dynamic, I think it's rolling across the consumer landscape, and I think it favors the online retailers so much. So if you're a traditional retailer, like a Target, for example, who hasn't made as big of strides as a Wal-Mart, or if you're a Kohl's, I think you're going to be behind the 8-ball, and as an investor I wouldn't get excited about them. I certainly wouldn't think this is a turning point or an inflection point for traditional retail.

Hill: Particularly when you look at what's happening with commercial real estate and the different classification of malls. This is a point that Carl Quintanilla from CNBC made at the end of the year on Motley Fool Money, saying, when you run the numbers on different classifications of malls, we're absolutely going to see more store closures in 2018.

Argersinger: Yeah, exactly. And one more point on that, if you look at the billions that Target or Wal-Mart had spent on their e-commerce, either through acquisitions or investing in their businesses, not a dent in Amazon's (AMZN -1.35%) share of holiday retail sales online this past season. So in a way, they're fighting a losing battle at that stage. And of course, we know the pressure on the core business is just going to get heavier.

Hill: [email protected] is our email address. I want to say thanks to Mark Hardisty, who's a longtime listener and Fool member who sent a great note last night with an update about him and his wife, Isabelle, also a longtime listener. So thank you to Mark for sending that.

From Matt Holzman in Denver, Colo. "Given your past conversations that you've had about the first company to hit $1 trillion in market cap, I'd love to know what you think about this story," and he sent a link to the story on the CNN Money from a few weeks back about an analyst at Evercore who thinks Microsoft could hit the $1 trillion market cap by the year 2020.

Let me go through the top five or six in terms of market cap. You have Apple (AAPL -2.19%), $894 billion. Alphabet (GOOGL -1.82%) (GOOG -1.80%), $770 billion. Microsoft, just over $680 billion. Amazon at $600 billion. Facebook, $546 billion. And Alibaba at just underneath the $500 billion mark at $486 billion. So Microsoft, it's $683 billion. My first reaction is, yeah, I think they could absolutely get to $1 trillion by the year 2020.

Argersinger: They could. The stock would need to go up 15% a year for the next three years to get there by the end of 2020. I do think Microsoft eventually gets there. That seems fast to me, just because, when you look at Microsoft, even though the cloud business is growing like bonkers, and it's definitely going to be the leader in that space, overall, for Microsoft, revenue and profits are kind of flat. Not growing appreciably. And that might be the case for a little while longer.

You also have to remember, Microsoft is buying back billions of dollars' worth of stock, which actually works against the $1 trillion idea, because they're taking chairs out of the marketplace. The stock price itself might have to actually go up more than 15% to actually get the $1 trillion in market cap, just because they're buying $10 [billion]-$15 billion of stock back every year. So there's a little bit more of a hurdle there. I would say, Matt, I think Microsoft gets there. I think three years is a bit of a stretch. I'd say, if you look at Apple, you mentioned their market cap, they're only 12% away. Apple, one good year, maybe one good half-year away from getting to $1 trillion.

Hill: I was going to say one good quarter, but I think you're right, they need two.

Argersinger: My favorite in the race, even though it's had a nice run -- it's just that Apple has also had a nice run -- but Amazon has been my favorite in the race because the business is growing at above 20%. I think it deserves the extreme multiple it's getting. And if you look at the implied cash flow that Amazon could generate if it did invest the way it is, it's going to get to $1 trillion, maybe not by 2020, because that would require, for Amazon, about 25% return per year, which is a little high. But I think it gets there.

Hill: I think the first two on this list, Apple and Alphabet, I think by 2020, that's as close to a sure-thing bet as I think you can get.

Argersinger: Yeah, feels like a lock. Apple is so close. Google, we're looking at, if it goes up 15% in the next two years, it gets there. It's fun, it's going fun to see which one gets there.

Hill: Alibaba, Tencent, do you think either one of those? They're both so enormous. And I don't own shares of either of them, but it feels like either one of them could -- maybe not leapfrog Apple or Alphabet, but it's entirely possible that they could leapfrog the others.

Argersinger: They could, because the growth rates for those companies are much faster. I think Alibaba is growing at 40%-45%, Tencent is similar growth rates. And the market that they dominate is --

Hill: Kind of a big market.

Argersinger: Kind of a big market. Now, the ability for them to stretch outside of that, as an Amazon or Apple can, that's a little bit questionable. But the market they're leading in is so vast, and the growth rate is going to stay high for a very long time.

Hill: Thanks for being here!

Argersinger: Yeah. Thanks, Chris!

Hill: 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!