In this episode of MarketFoolery, host Chris Hill and Motley Fool Asset Management's Bill Barker take a look at the S&P 500's massive weighting in the tech sector, the future of trucking, and developments in the war on cash.
The S&P 500 gets heavier and heavier in tech as the years go on, but with metrics like these, that's hardly shocking. The trucking industry is seeing some labor shortages, and the price of oil is rising -- is now a good time to invest in the space? The war on cash is raging, and its next target may very well be credit cards. Tune in to find out more.
Bill Barker is an employee of Motley Fool Asset Management, a separate, sister company of The Motley Fool, LLC. The views of Bill Barker and Motley Fool Asset Management are not the views of The Motley Fool, LLC and should not be taken as such.
A full transcript follows the video.
This video was recorded on June 6, 2018.
Chris Hill: It's Wednesday, June 6th. Welcome to Market Foolery! I'm Chris Hill. Joining me in studio, from Motley Fool Asset Management, Bill Barker. Thanks for being here!
Bill Barker: Thanks for having me!
Hill: You made it back from Singapore.
Barker: I did, a couple of weeks ago. It's hard to crack the lineup of your show.
Hill: We're going to get to your business takeaways from Singapore, but I'll just say right now, I don't think I've ever seen you more messed up from sleep deprivation as I did those first couple of days you were back. When you got back, initially, I was like, "Hey, let's get you on the podcast!" And after, I don't know, 30 seconds of talking to you, I silently thought to myself, "Oh, no, he can't go in the studio."
Barker: "Has he had a lobotomy?"
Hill: "Something happened to him."
Barker: That wouldn't have been funny.
Hill: No, not at all. Let's start with something that actually got brought up on yesterday's episode with Twitter being tapped to join the S&P 500. There was a listener question about the amount of tech companies in the S&P 500. You and I were going back and forth on this. I'll let you take it from here, but I thought you had an interesting spin on how and why we are getting to more technology companies joining the S&P 500.
Barker: I don't have the data in front of me about how many companies are in the S&P, but --
Hill: I think it's 500.
Barker: Of the tech sector.
Hill: Oh, sorry!
Barker: I'm still a little bit jet-lagged from weeks ago. [laughs] But, I can talk about the earnings, and the earnings component. For instance, let's look at 2010, you're a little bit past the biggest problems of 2008 and 2009. As a component of the S&P index, tech companies were making $26 a share. If you owned a share of the S&P index, that's a certain amount of earnings. They were making $26 a share. Now, they're making about $65-66 a share. So, the earnings of tech in the S&P 500 have almost tripled over that time. That's out of $157 per share, that's how the S&P is measured. $2,500 is the level, if you divide by the earnings per share, $157, that gives you the P/E. It's not half of the earnings of the S&P 500, but getting dangerously close to that. For instance, energy over that period of time has gone down, not just as a percentage but in total. So, it's a bigger part.
Part of the reason why the earnings are as good in tech as they are is that they are not compromised by where inflation is right now, which is in oil, at the moment, and other materials, and also transportation, which has the component of oil in the price, as well. The margins are just getting better and better and better on tech as people use more of it and they sell more product, but the cost of development is reasonably close to static.
So, the margins for the S&P 500 as a whole have never been higher. That leads the bears who have argued, some of them consistently, that margins must contract, they must come down over time to their historical norms. And the argument from bulls against that is, not necessarily the case if tech becomes a bigger and bigger part. There are good reasons why the margins as a whole will maybe maintain the level they're at today, which is comfortably above the next-highest level, which was last year.
Hill: You look at Costco's report last week, when you talk about the price of oil, Costco in their report last week highlighting the increasing cost of transportation and the impact on their business. Where do you see that industry going? I'm not referring to Costco, I'm thinking more along the lines of trucking. There was a story I saw last week about what appears to be a large and growing shortage of long-haul truckers in this country. That seems like something that's unsustainable.
Barker: Well, that is something that the market usually takes care of. If there's a shortage of truckers, then the pay for truckers will go up, and the industry will find people to do those jobs, because supply and demand will meet at some point in the near future. Possibly not the near future, possibly it's going to take longer than that because of the numbers you see on the shortage. So, it's mostly good times for trucking companies. They have to absorb some of this increase in the price of oil. They can't always pass that along, depending on what their contract rates are. But the cost of transportation is one of the things that Costco noted on their margins. Part of it was that they've been more aggressive in pricing and keeping their costs low. The other part was that they are seeing the cost of transport -- obviously, they have a lot of heavy goods going in and out of that store, so, their transportation costs are going up, that's hitting their margins.
Trucking, in part, is not only the health of the economy. That's the good end of it. But, for those that like to cite regulations as strangling things, competition, profitability of companies, one of the things they might point to right now are the new regulations on the electronic logging devices that are measuring how many hours truckers are driving. Previously, there have been regulations, but they have been self-reported. You write in a log, it's kept by hand, and maybe people were cheating.
Hill: Because there's a limit, just for safety reasons. It's like, look, we can't have a single trucker --
Barker: You can't drive 24 hours, you can't drive six days a week. Yeah, there are limits on the number of hours that truckers can safely drive, as determined by regulations which were established in the last Administration but are being rolled out now. They're really only being monitored closely as of recently this year. That is leading to, I was looking at the national rates, what it costs for the van rate per mile, and it's up to $2.19 this year in May, up from $1.69 last year. That's a 27-28% increase in the cost of moving things over the last year.
Hill: I'm not a shareholder of any transportation stock or industry. Is it safe to assume that there are fewer variables that investors need to weigh when it comes to the rail transportation industry as opposed to the trucking industry? Because you can invest in both.
Barker: That there are fewer variables in the trucking industry?
Hill: No, in the rail industry.
Barker: Possibly, because you don't have the price of oil --
Hill: That's what I was thinking mainly of.
Barker: -- being one of the big problems there. You don't have a shortage of conductors, as far as I know, in the rail industry. You can't actually increase capacity in the same way that you can increase trucking capacity.
Hill: Also, I don't think Amazon is looking to get into the rail transportation business just yet, whereas they seem to be sniffing around the trucking industry.
Barker: Sniffing around, yeah. Well, Amazon has mostly been very good. People are moving things directly to the house, and a lot of places are getting better and having to spend more money to increase their online capacity, and where to store things when they're being bought online and then shipped to the stores to be picked up in the stores, and this is creating logistics opportunities. XPO Logistics is one of the companies that's benefited from all of that. It's something that we own in a couple of the funds. It's been good news for a number of companies. It's not so good news for the Costcos of the world. On the other hand, the economy is doing very well, and Costco's same-store sales were up huge, so that mitigates the margin story for them.
Hill: Last thing on this, and then we'll move on. There's a trucking company, publicly traded, called Knight-Swift, ticker symbol KNX. Last night, shares were up around 5% because they had announced a share buyback. That has come down since then. Right now, the stock is flat to ever-so-slightly below the Mendoza Line. Are we going to see a backlash on stock buybacks? This was something that came up at FoolFest last week. Our friend and colleague, Bill Mann, was talking about this. You and I have talked about stock buybacks before. And I'm not even sure I know what I mean when I say, are we going to see a backlash, but --
Barker: That makes two of us. I had no idea where you were going with that.
Hill: I guess what I'm trying to get at is, all things being equal over the last, say, eight to ten years, just for the lifetime that we've been doing this podcast -- so, let's just go back to 2011. All things being equal, Company X announces share buybacks. The average response from the media, from investors, from the standpoint of the stock, all things being equal, it's neutral to positive. I'm wondering if, because all of these companies are getting all of this money from the recent tax break, if we're going to see, maybe a louder drumbeat, whether it's in the financial media, whether it's from actual investors or institutional investors at agitating at board meetings, at annual meetings, wherever it is, if we're going to start to see a little bit of a pushback of, "Really? Are you sure you want to do this? Are you sure you want to spend money on buybacks? Because a lot of you are not very good at this."
Barker: Knight spiked up pre-market in the first couple of minutes of the day maybe on that news. They hadn't really used, since at least September, any of the previous share buyback authorization that they had. Knight merged with Swift to create Knight-Swift. So, they've been spending money on building up the fleet. I would assume that that's going to be, right now, a principal use of any of their money, and that the excess cash goes more toward that.
It's a cyclical business, though, so you don't want to overdo it. Right now, there have been a lot of buybacks fueled largely by the tax cut, because the tax cut was of such a size, you would actually want companies to do something -- even if you're a fan of, "I think companies are just going to go out and build up their business and hire people," 10% more money lying around all of the sudden, you don't just increase your workforce by 10%, or pay people 10% more just because.
Hill: That'd be nice, though. [laughs]
Barker: [laughs] Oh, don't get me started. But, if they're going to do something intelligent with the capital, buying back their shares is one of the things that they can do. I don't think there's going to be any reaction to it. I think that it's a story that, those that oppose the tax cut are going to say, "This is what it's going to be used for. See? I told you so." Stories like that just don't get traction for very long. You can bring it up, but it's going to be buried by ten other things in the news immediately.
Hill: Alright, now that you have regained your sense of sleep balance, how was Singapore? How was Hong Kong?
Barker: It was good. Hong Kong, I went to the CFA Institute Annual Conference. I hadn't been to that one before. Largely, the experience was like being at a conference anywhere else, when you're in a huge conference center. There was a nicer view outside of the conference center windows than, say, in Chicago or Philadelphia, or any number of other places where you and I have been to conferences. But, when you're in one of those places, you're in a conference center. You're not in anyplace in the world other than the hellish zone that is conference centers.
Hill: [laughs] I mean, as hellish zones go, it was probably pretty cushy. It might be boring.
Barker: It had this nice view. I mean, I'm not saying the conference itself was hell, but the conference centers themselves are not things that people go and visit for fun.
Hill: That's true.
Barker: That's all I'm saying.
Hill: There aren't tour buses pulling up like, "Look! It's the Hong Kong Conference Center!"
Barker: [laughs] The content of the conference was pretty good. Like any conference, you go to some presentations that are worth more than others. I had a good time being back in Hong Kong. It was the first time I'd been there in about 20, 25 years, can't remember.
Hill: Without naming names --
Barker: Dave. Sorry. [laughs] I'm sorry, Dave.
Hill: Sorry, Dave, we're about to throw you under the bus.
Barker: All of you.
Hill: Were there any presentations where you're sitting in the audience, and you have to actively stop yourself from standing up and saying, "You're an idiot! The investing thesis you're putting forward is nonsense, it's utter nonsense!" Does that ever go on?
Barker: No. It's pretty egg-heady. It's not like, choose your financial media outlet of choice -- perhaps it's Market Foolery, I don't know -- where somebody just blathers on about something that popped into their head.
Hill: That very much sounds like this show.
Barker: [laughs] And people sometimes just leave that and start yelling at their radio or their car. "Stop it, you people!"
Hill: "Get to the damn point!"
Barker: No, this is more egg-heady. You're much more likely to fall asleep, especially given the jet lag, than to shout out, "You don't know what you're talking about!"
Hill: Fair enough. We got some very nice suggestions from listeners. We have the best listeners. We got some very nice suggestions from people that I forwarded on to you about Singapore in particular. I don't know if you had a chance to get out and enjoy Singapore a little bit more. It sounded like you were at least going to have a slightly elevated opportunity to do that in Singapore as opposed to Hong Kong.
Barker: Yeah, it was a different conference in Singapore. It was a Deutsche Bank-sponsored conference, and I got there for some of the side trips following the main part of the conference, which were well done, thank you to Deutsche Bank. I had a little bit more free time. The only real touristy thing that I went to go do, I put toward the end of my last day there, it was called the Cloud Forest. It was a big indoor rainforest thing, which I got to and paid for and then waited in line. And the line to actually take the elevator up to the top, and then you'd walk down, was like a 75-minute wait, which I had not budgeted. I had not budgeted 75 minutes of waiting in a line to begin seeing this thing. I had budgeted, I think, 45 minutes to do the whole thing.
Barker: Something like that. So, I went there, and I paid, but I didn't get to see really much of anything.
Hill: Wow, so, you made a donation to the Cloud Forest Foundation! That was nice of you. I don't think you get a tax write-off for being stupid.
Barker: Really? [sighs] I was thinking about it. So, that was the most touristy thing. Other than that, I did get to walk around Marina Bay, which was mentioned, highlighted, and that was great.
Part of my experience in both Hong Kong and Singapore is that these days, at least in the business world, there's a lot more in common with where you're from and what those places are today, in terms of the stores that you see and the way that people are living their lives than the last time I had been there, which was a couple of decades ago. Or just going to other parts of this country, which feel much more like going to a very, very different life than going to major foreign capitals feels.
Hill: Let's go back to Singapore before we get to your next trip. In terms of businesses, in terms of investing ideas in general, did either retail or the payment industry come into play here? I'm curious about the war on cash. I'm assuming that, in both Singapore and Hong Kong, the war on cash is alive and well, and that retail, as a result of that, is also alive and well.
Barker: Yeah. I never used cash in Singapore. I didn't have to get cash in Hong Kong, but I thought I had to at one point. I could have gotten around it, but I ended up getting, I don't know, $80 of cash or something and using that for a cab. There was one cab company that didn't take credit cards, which seemed outrageous to me.
Hill: "How dare you?"
Barker: I'm used to not touching cash when I travel now. So, yes, the war is on. It's actually much more complete. In Singapore, there were various, I think Alipay was one of the things that was being promoted by the cab, like, "We take Alipay," or, "We prefer Alipay." To give them a credit card -- the war on credit cards is the next step -- there would be an 8% surcharge for using a credit card in the cab.
Barker: They're just not going to absorb those costs, and they're going to treat themselves to a little bit extra, apparently, because it's not 8% that the credit cards are inflicting on their vendors. So, I did get a taste that there was a lot more non-credit cards transactions going on there than here so far, for the most part. Starbucks has gotten a little bit ahead of the game, but not that many other places where I feel that they've done a good job of promoting the idea of using their app to pay, or using Apple Pay or any of the other things that I think, ultimately, are going to change the credit card industry.
Hill: Really quick, before we wrap up, because our time in the studio is almost up, and Kristine Harjes is going to be taping the Healthcare edition of Industry Focus -- which I have to assume is going to be a much better episode than what you and I are just about to complete.
Barker: How could it not be?
Hill: [laughs] It's a low bar --
Barker: It would be sad if it weren't!
Hill: -- and Kristine is going to clear it by a country mile. Your next trip, you're going back to New Zealand. I think you were there just last year or the year before.
Barker: I've been commuting, yeah.
Hill: Another conference?
Barker: No, this is in celebration of my daughter, who's graduating. Just going on a big family trip, a summer trip to New Zealand.
Barker: Which is not like a summer trip, because it's winter there.
Hill: So, if people email firstname.lastname@example.org with suggestions, you may actually be able to take advantage of them in New Zealand?
Barker: Yes! They probably know much more about New Zealand, although, I've been putting my homework in recently. But, there are so many things to see, how do you decide?
Hill: Here's a tip. I've never been to New Zealand, but here's my tip: try not to pay for things that you end up not doing.
Barker: What are you referring to? [laughs]
Hill: [laughs] I'm just saying. If it's just you alone, you feel a little stupid. Maybe, if you do that with the whole family --
Barker: Multiply that times five?
Hill: -- it's going to be more expensive, and you're never going to hear the end of it.
Barker: Yeah, thanks.
Hill: Bill Barker from Motley Fool Asset Management. Thanks for being here!
Barker: Thank you!
Hill: You can read more from Bill and his colleagues. Go to foolfunds.com and sign up for Declarations. It's the free monthly newsletter from Motley Fool Asset Management. 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!