In this episode of Market Foolery, host Mac Greer talks with Million Dollar Portfolio's Jason Moser and Hidden Gems Canada's David Kretzmann about today's biggest headlines in the market.
After months of speculation, Amazon.com (NASDAQ:AMZN) is concretely breaking into the healthcare space, along with some powerful buddies, but investors will probably want to hold off on selling off their healthcare stocks. McDonald's (NYSE:MCD) reported its best same-store-sales growth in six years, continuing a long and strong turnaround trend. Alphabet's (NASDAQ:GOOGL) (NASDAQ:GOOG) self-driving-car unit, Waymo, is teaming up with Fiat Chrysler (NYSE:FCAU) to buy thousands of self-driving minivans, and the future of self-driving cars gets a little closer. Click play and find out more.
A full transcript follows the video.
This video was recorded on Jan. 30, 2018.
Mac Greer: It's Tuesday, Jan. 30. Welcome to Market Foolery! I'm Mac Greer, and joining me in studio, we have Jason Moser from The Motley Fool's Million Dollar Portfolio and David Kretzmann from Hidden Gems Canada. Guys, happy Tuesday!
Jason Moser: Hey!
David Kretzmann: Hey, Mac!
Greer: How you doing?
Moser: Doing pretty well. If I was any better, I'd be twins, Mac.
Greer: I've never heard that.
Kretzmann: I can't top that.
Greer: I have to think about that, but I like it.
Moser: There are a lot of other ones. They're probably not fit for radio. We'll talk about it maybe after we're done taping.
Greer: That's good.
Kretzmann: It's a good Tuesday, though.
Greer: It is a good Tuesday, and lots to talk about. We're going to talk McDonald's and self-driving cars in a minute. But let's begin with a big deal in healthcare. On Tuesday, Amazon, Berkshire and JPMorgan Chase announcing a partnership aimed at cutting healthcare costs and improving services for their U.S. employees. The three companies will create an independent company that will focus on technology solutions and will be "free from profit-making incentives and constraints." Now, David, this feels like a big, big, big story.
Kretzmann: Yeah. I'm guessing that Jeff Bezos put in the "free from profit-making incentives and constraints" there. Yeah, this is a really interesting deal. They're really just focusing on their own employees in the U.S., so we don't want to extrapolate it too far right away, which I think some people are doing. And certainly, it could expand and develop down the road where they begin to serve and address employees outside of their own respective companies. But for now, this really seems more like a big but internal experiment with these three companies. But make no mistake about it -- this is the Avengers or the Justice League. These are big, powerful hitters.
I'm actually going to look to Manoj Bhargava, the founder of 5-Hour Energy. He has a mental model here where he looks at experts and invention of a field. Three quick points here that I immediately thought of when this deal was announced this morning. Manoj Bhargava, he's a very successful entrepreneur. No. 1, he says, most inventions aren't from experts; they're from people outside of a field. No. 2, experts are good at telling you what not to do, but they're terrible at telling you what to do. And No. 3, learning the past way things are done won't help you create something new.
And that really resonates with something Jeff Bezos mentioned in the release. JaMo, I know you put this out on Twitter, but Bezos said success here is going to require a beginner's mind. So I think it's very telling that there isn't a healthcare company among these three players in this deal. So that's immediately what I thought of. These are three very successful companies in their own fields. None of them are healthcare companies, and they're trying to tackle this healthcare issue with their own employees.
Moser: Yeah, I think this is a fabulous first step in trying to tackle perhaps one of the biggest problems in our society today, in the exploding costs in healthcare. And obviously, healthcare is something that we're going to always have to deal with and address, as long as we walk the face of this Earth. The idea that they're going to keep this at least in their universe at first, with their three companies, to essentially serve as an incubator for ideas and building something from the ground up. Cutting costs, improving service, that's right in Amazon's wheelhouse. I think having Jeff Bezos as a part of this is going to be crucial, really, because he takes such a long-term approach there. And obviously, we know where everybody else stands, Warren Buffett, and obviously JPMorgan.
I think, though, before you start predicting the end of healthcare stocks out there as we know them, let's think about this for a second and be a little bit more rational here. This is a big deal. It's not something they're going to be able to change overnight. This is going to require a lot of trial and error, a lot of iteration. I think there are plenty of healthcare companies out there today who would be wise to view this entity as an opportunity, as a partner, as opposed to saying, "No, we just want to go our own way," because I think that latter decision there would be quite damning for a number of reasons.
Greer: Let's talk some more about that. When you look at these other healthcare companies today, here are just a few names. CVS, Cigna, Express Scripts, UnitedHealth, MetLife, all down big. These are companies that are not free from profit-making incentives. They have to make a profit. Jason, to your point, if I'm an investor in one of these other companies, what do I do with this news?
Moser: Aaron Bush made a good point earlier when we were talking about this around their desk -- all these companies you just mentioned, they're not founded based on altruism, right? They're not out there solely trying to make the world a better place. There is a profit angle that needs to be considered. I think the bottom line with a lot of these companies is, they have a role to play here, but it's more about figuring out a way to wring the inefficiencies out of this model, figuring out an easier way to get from point A to point B. I think one thing you could say with our healthcare system today, there are a lot of hands in the cookie jar. I think it's trying to sort of bring this process up with the times. Technology has done such a great job in disrupting and changing everything to this point. And it's done that, in a lot of ways, with healthcare. But there are also a lot of ways where it's still falling short. One of my favorite companies out there, we talk about this all the time, Teladoc, bringing in that virtual healthcare angle. That's one healthcare stock, Mac, that's not down today, and I think that's probably for the reason that it's focused very much on that, bringing more efficiency to an inefficient system.
Kretzmann: I think if you're a healthcare provider, you certainly want to take this seriously. But as investors, you don't want to jump the gun so quickly. I think we have a great case study looking back to June last year when Amazon announced acquisition of Whole Foods, and you saw tons of grocers drop 5%-10% pretty much the day of, and certainly in the following weeks after that deal. It really does show the power and weight that Amazon has. All they have to do, really, is put out a press release that they're entering an industry, and people panic. But looking at Wal-Mart as an example, right before that Amazon Whole Foods acquisition was announced, the stock was at $80 a share, dropped down closer to $70 a share or so within two weeks or so after that announcement. Today, it's close to $108 a share. So I think it's certainly a good thing as a consumer. There needs to be more competition. I think these healthcare providers will feel the fire, will feel the pressure. At the end of the day, I think it's a good thing. But I wouldn't take this too far just yet as an investor.
Moser: Yeah, I made a point the other day on Twitter about how valuable the experience of going through the Great Recession was. For as scary a time as it was, there was a lot to be said for actually witnessing it and coming out on the other side and recognizing that the world didn't exactly come to an end. Someone had asked, what were some of the lessons I took away, and I think one of the bigger ones was really being able to recognize the babies that are actually being thrown out with the bathwater. There are some bad players, but when you have a wide-reaching exodus from something like healthcare because you see Amazon's coming in there to change the game, not everybody out there is a bad player. There are actual gems out there that do serve a role and could benefit from partnership and helping take this market forward. I think looking at this market, recognizing the big players in the space, the ones that have those competitive advantages, I think UnitedHealth Group is one just by its sheer size alone, but not to mention, when regulations change, that's going to be one of the companies that will be very quick to roll with the changes. So just because there's this big spate of bad news out there doesn't mean every player in the space is one you want to steer away from.
Greer: Guys, let's talk some McDonald's. McDonald's reporting better than expected earnings. Jason, best same-store sales growth in six years thanks in part to Value promotions, new menu items, mobile ordering and delivery. What do you think?
Moser: I'll tell you, Mac, this success is not due to me. I cannot remember the last time I went to McDonald's. With that said --
Greer: I love McDonald's.
Moser: -- I have to say, this has been one of the most fascinating turnarounds to see. I feel like, whenever we see a CEO out there that's really firing on all cylinders, as Ron Gross would like to say, we feel like saying, "That's the Steve Easterbrook of that company," or, "That's the Steve Easterbrook of that industry," because Steve Easterbrook is the CEO that really took McDonald's in the middle of this big downturn and turned that ship around completely. McDonald's has been one of the best turnarounds we've seen in quite some time. And I like the business in a sense that, you're focusing on food, that's a good repeat sales business. Fast food, the value proposition there. And really, the McDonald's story all boils down to being able to take this worldwide brand and modernizing it and really bringing it up with the times. And I think Easterbrook has done a very good job with that, focusing on things like mobile ordering and delivery and really, you mentioned this before, bringing the quality of those stores backup and making the experience a nicer one.
Greer: The renovated stores are really nice. We end up stopping at McDonald's a lot on road trips, and stopped at one a year ago, and I placed my order and went and sat at this table, and someone brought me my food. Table service! And it was a really nice store. And that changes the way that I feel about the whole company. I'm a shareholder, I should say, and I've been a shareholder for the last year. It's been a great stock.
Moser: It's a little bit of a lesson from Ron Shaich and Panera. I feel like he's played a big role in helping to reshape this food service industry that we're dealing with today. You have to be able to step up your game, or I think other players are going to go right past you. And with McDonald's, maybe not the biggest growth story in the world. But again, they're going to be returning somewhere in the neighborhood of $25 billion to shareholders through 2019. Share count is down about 20% since 2013. They'll continue to pay a dividend, and that dividend will continue to grow. So, while maybe there's not a big growth story there, I think this is a decent income play for investors looking to hang on to one that'll give you steady-eddy returns for some time, at least as long as Easterbrook is at the helm.
Kretzmann: Yeah, I think this is another great lesson or case study that you don't want to necessarily extrapolate something that's happened in the last couple of years out for the next five years. A few years ago, fast food was really left for dead. Fast casual was the in thing. In the past couple of years, fast casual has struggled, sit down restaurants have struggled, but fast food has really been where the bulk of the growth has come with restaurants. I think these things will ebb and flow. It's not that one segment of restaurants is going to swallow the others, but there'll be ongoing innovation and give and take there. So, that's just something to keep in mind, especially when you have a brand and a company like McDonald's, which, even in their challenging days a few years ago were still producing solid free cash flow. It was really just a matter of getting that leadership and that strategic vision in place, and Steve Easterbrook has certainly delivered that.
And speaking of delivery there, they now have delivery rolled out in more than 10,000 restaurants globally. They mentioned that the average check size for delivery is one and a half to 2 times the average order size from non-delivery. So a lot of nice areas that they're innovating there, a really impressive story.
Moser: It's crazy to think about, probably three years ago, where we were looking at McDonald's and just thinking doom and gloom, and were looking at Chipotle (NYSE:CMG) and thinking, "This is the future." And now, today, well, well, well, how the turntables have ...
Greer: The turntables have turned. Something like that.
Kretzmann: Who knows.
Moser: That was my effort at it.
Kretzmann: Almost had it.
Greer: Well, at on point, you know, McDonald's had a stake in Chipotle. Maybe they, what, buy Chipotle back?
Moser: We've all, I think, lobbed that back and forth here around our desks at least at one point or another. And I think that would be the ultimate irony. I think, at some point or another, we end up seeing Chipotle go back private. I just feel like that's a concept that's probably going to do a little better out of the public markets, out of that scrutiny. But that would be an interesting opportunity for McDonald's to try to jump back in there and say, "Fool me once, shame on me -- " wait. [laughs]
Kretzmann: Well, that's an interesting thing with Chipotle. Looking at this McDonald's case study, it really was just a matter of getting that leadership in place. Chipotle this year is looking for a new CEO. If they can get someone like a Steve Easterbrook who can come in, recognize the strengths of the concept and then fine-tune it in certain areas, maybe in the next five years, Chipotle outperforms McDonald's.
Moser: I'm actually surprised they haven't named someone yet. It seems like it's been a while. I wonder if they're having difficulty finding someone that wants to take on that task or someone they feel like is suited for the role. It's kind of confounding to think we haven't really heard anything yet.
Greer: I'm telling you, my million-dollar idea for Chipotle, and this does violate the Food With Integrity, but Jason, we've talked about this -- at the end of the day, people just want a good burrito. They want a good meal. They don't sit there and say, "I'm really looking for something that has integrity." People don't think that way.
Moser: I absolutely agree.
Greer: So here's what I want. I want a guilty pleasures sub-menu at Chipotle. You have queso, you have other stuff that's not great for you, but you've already told me, guilty pleasure. Then, with the queso, you can bust out the Velveeta.
Moser: I was going to say, our queso is 100% Velveeta.
Greer: That's it! It's a guilty pleasure! But if you're going to go queso, it has to have the tasty taste, it can't be this horsey queso they rolled out before. Guilty pleasure.
Guys, let's wrap up with some big news from Alphabet, a.k.a. Google. Do you think most people know that Alphabet is Google now?
Moser: I think it's becoming a little more widespread. My kids know it, but they also have that one on the short list of stocks they want to own.
Greer: I still think cereal. I know I'm of a certain age, but if you say Alphabet and alphabets, I'm like ...
Kretzmann: Gosh, I don't even know that reference. It was a cereal?
Moser: Oh my God ...
Greer: Yeah, it was a cereal. I don't know, do they still make it?
Moser: It's just like, we were talking with Aaron earlier, talking about Buck Rogers and Twiggy and he looked at us like we were from Mars. [laughs]
Greer: I'm dating myself. It's because David is a healthy, well-adjusted human being. There's no reason you should know that reference.
Kretzmann: I appreciate that.
Greer: So, big news from Alphabet. Alphabet's self-driving-car unit, Waymo, is buying, quote, "thousands" of self-driving minivans from Fiat Chrysler. Waymo wouldn't disclose the exact number, but guys, we know they already have 600 Chrysler Pacifica minivans in their fleet, some of which are already shuttling people around in Arizona. David, what do you think?
Kretzmann: It shows that the partnership they've had with Chrysler over the past couple of years, obviously both parties are happy. It's not an exclusive partnership, but this will be a big deal, because the vehicles that they're buying retail for close to $40,000. So just 1,000 of those would be $40 million. So Alphabet is serious about plunking down a good chunk of change for this. And of all the self-driving players, I think Waymo is the one I'm most optimistic about, at least with where their technology is at today. Just having ridden in a couple, quote-unquote, "self-driving" cars at CES the past couple of years, seeing what Waymo is able to do. They now have some vehicles where, they still have an employee in the car, but the employee isn't in the front seat, they're actually in the backseat. So, really getting closer to that full self-driving vehicle. Far and away more autonomous than a lot of other things that are on display at CES.
Greer: When you took your test ride, the employee was in the back seat?
Kretzmann: No. That's what Waymo does in some cases in Arizona. When you get in a self-driving car now, whether it's a demo at CES or somewhere else, there will be an employee, or essentially an official driver, in the front seat to take control of the car in manual mode. The car will disengage from autonomous mode, and all of the sudden driver will be in control. And we took a self-driving ride with Lyft in Vegas just a couple of weeks ago when we were at CES, and the driver had to disengage from autonomous mode into that manual mode several times, just because traffic in Vegas is intense and you have people trying to cut each other off. That's what makes me think we're still a ways away from full autonomy, but it seems like Waymo has a pretty substantial head start.
Greer: It feels like voodoo magic to me. I'm going to be the last guy driving my car, Jason.
Moser: We are not a ways away from clever Onion headlines. I was just reading how Tesla just debuted the carless driver. [laughs] The picture is the greatest part of it. You have to check this out on The Onion. it's a guy just sitting there as if he's in a car but there's no car. [laughs]
Kretzmann: Just keep believing.
Moser: I was thinking about that last night. I was picking my daughter up from her rehearsal. They're doing this big show at school. It's a production. They're doing these rehearsals all hours of the day, and I'm thinking about it driving home with her at about 9:15 in the evening, and I'm thinking, at one point or another, that's going to be a big opportunity. That's a big solution. I just have a hard time -- the technology for the cars, I think, is there. You refine that, fine-tune it. I think the bigger hurdle is probably going to be our road system, right? We have to have sort of a standardized and trustworthy road system that can detect driverless cars along with driver cars, cars being piloted by us, by drivers, how they interact. There's so many questions that come to mind. So many ifs that come into play. It's hard to picture it today, but it's coming.
Greer: And for kids growing up, it may not be an issue, because they may never drive a car. But the fact that I know how to drive a car, and I feel like I'm a pretty solid driver, I'm just very wary of the technology. I don't know what it's going to take for me to basically trust a self-driving car more than my own abilities.
Moser: But do you enjoy driving?
Greer: Love driving.
Moser: See, I do, too. I actually do enjoy it.
Greer: I love it. I love parallel parking. My parallel parking is solid. I love the Zen of getting on the open road, turning on some Springsteen. I don't want some self-driving zombie car. I don't know.
Kretzmann: Hey, you dial the clock back to 1900, there was probably a couple guys sitting around saying, "You know, I just love driving that horse and buggy, man!"
Greer: [laughs] Buggy whip!
Kretzmann: Yeah. "I'm sticking with the horse."
Moser: Springsteen going, partying like it's 1999.
Greer: I was going to say, is that so wrong? Yeah, I'm going to be the last one driving.
Kretzmann: I think it'll be a while. Really, the replacement cycle for vehicles that are on the road, it takes a good chunk of time.
Moser: I was going to say, there's at least a decade out there.
Kretzmann: I would say 10 or 15 years, at least, before we have above half, full self-driving cars on the road.
Greer: What I do love about this story is, if I said "self-driving car," the first image that came to your mind would be some sleek, futuristic Buck Rogers-esque the vehicle. And I love that these are Chrysler minivans.
Moser: [laughs] Yes.
Greer: The world is good. That is as it should be.
Kretzmann: Yeah. Waymo wanted a vehicle that could hold more people, so going with the minivan, solid choice.
Greer: Love it. Jason, David, thanks for joining me!
Kretzmann: 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. I should mention that we talked about the big healthcare deal with Amazon, with Berkshire, with JPMorgan. Industry Focus, one of our podcasts, is going to be all over that tomorrow. Wednesday's Industry Focus is going to be talking more about that deal. Market Foolery is mixed by Dan Boyd. I'm Mac Greer. Thanks for listening! We'll see you tomorrow!