In this MarketFoolery podcast, host Chris Hill and analyst Bill Barker take advantage of the slow holiday week to reply to some of their listeners' queries. First up, a beginning investor who wants to know whether he should start with index funds, or jump straight into stock picking.
Next, someone is seeking the guys' opinion about WestRock (NYSE:WRK) as a play on e-commerce. (Never heard of WestRock? It's the nation's No. 2 maker of cardboard boxes.) They also discuss the news that Roger Federer has left his lifelong sponsor Nike (NYSE:NKE) for a $300 million endorsement deal with Japanese apparel maker Uniqlo -- and why Nike was probably smart not to try to match it.
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 July 2, 2018.
Chris Hill: It's Monday, July 2nd. Welcome to Market Foolery! I'm Chris Hill. Joining me in studio, from Motley Fool Asset Management, Bill Barker. Welcome to the second half of 2018!
Bill Barker: Thank you! It's good to finally be here!
Hill: [laughs] How was the first half, from an investing standpoint? It seemed like it went OK. Some hiccups here and there.
Barker: It depended on whether you were invested in tech or not. I don't have the exact stat in front of me, but I read an article that the information tech sector was up 10%, which was some 99% of the total amount. All of the returns that you got were in tech. So, if you had a pure tech portfolio -- which, I imagine some listeners may be very heavily overweighted in information tech -- they're probably pretty happy.
Hill: What about the folks you work with, Motley Fool Asset Management? I'm assuming there are some information tech stocks in those funds.
Barker: It depends on the product. I think The Motley Fool Global Opportunities fund, which is overweight tech, had a pretty good first half of the year. Small and mid-caps did better than the S&P 500. So, that was good for one of our other funds.
Hill: This is going to be an all-mailbag episode for a couple of reasons, one of which is, it's a quiet week. We have Independence Day smack dab in the middle of the week, not a lot of companies reporting earnings, and it's going to be a short week for us here on Market Foolery. We'll be here today and tomorrow. Excellent opportunity for listeners to check out some of The Motley Fool's other podcasts, like Motley Fool Answers or Rule Breaker Investing. Let's go to the mailbag. By the way, you can always email us, firstname.lastname@example.org.
Question from Roy Ben Daniel in Tel Aviv -- going international right off the bat. "Do you have a word of advice for the beginning investor -- investing in index funds or individual companies? Thanks."
Great question, and I think one of those questions that a lot of beginning investors ask. Not just, how do I get started, but, where do I start? I think, in general, all things being equal, we're fans right off the bat of the index fund, particularly if you can get it at a low cost, which you should be able to do.
Barker: Right. Low-cost has gotten lower and lower and lower with competition. The index fund or index funds ten or 20 years ago largely would have translated into the S&P 500 being an index, and the one that more money was aggregated around in the funds space. There are a lot of index funds now with the popularity of index funds. Really, that should be the popularity of low-cost investing. A lot of people have created more and more refined, and sometimes very specific, indices. I think that the S&P 500 index fund -- or, if you want to go broader, the Vanguard Total Market index fund -- are great places, fantastic places to start, because they give you broad diversification and low cost. Those are two great things when you're a beginning investor.
Individual stocks, you can make a lot more mistakes. Risk and reward is the equation there. You're taking a lot more risk on if you're just buying one or two or three stocks. It might be more fun, it might keep you more focused on what your investment is doing, but it also carries with it the risk that you are not properly diversified.
Hill: Ultimately, for anyone who's interested in investing in individual companies, we're fans of, get to the point, when it is financially feasible, where you have a diversified portfolio. So, not just the anchor of an index fund, whether it's a Total Market or an S&P 500, that sort of thing, but, you have a portfolio built out with, ideally, north of ten stocks, I would say.
Barker: Yes. If you're an individual investor -- sorry, a beginning investor, learn about yourself.
Hill: Only individual investors are listening right now.
Barker: There's not a party. Are there listening parties for this podcast, do you suppose?
Hill: No. And there are not institutional investors, there aren't, like, someone is playing this Market Foolery episode in a conference room with a dozen or so analysts on Wall Street listening at once.
Barker: That's sad.
Hill: [laughs] It's a couple of things, I don't think sad is on the list. Sorry, I interrupted you.
Barker: You did. I think we were trying to provide useful advice, rather than these tangents that you always insist on going on when I show up.
Hill: Sorry. Well, it is part of the official Market Foolery Twitter feed description --occasional tangents. For anyone out there who's like, "I just don't like the tangents," that's fine, just know that that's baked into the description of this show.
Barker: Right. So, keep your costs low, be diversified. When you're a new investor, that's a little harder to do than when you have a little bit more experience. You can get excited by seeing one or two stocks go up or frightened by seeing one or two stocks go down. Know yourself when you're investing.
If you have, say, most of your money in an index fund, and you use part of your money to get more lessons, both about yourself and about the market through buying individual stocks -- certainly our site, our newsletters, various things, help individual investors learn about potential good opportunities on individual stocks. I think that's more interesting than following the broad market, but most investors are going to benefit from just having a broad market index fund and buying and holding for decades.
Hill: I said this is going to be a mailbag episode. We're actually going to provide three ways you can submit questions here on Market Foolery. One is the email address, email@example.com. We also have a Facebook group for all of The Motley Fool podcasts. If you're on the Facebook and want to join, you're more than welcome to join us at Motley Fool Podcasts.
Barker: And I've got your phone number available for --
Hill: [laughs] I don't think you do, actually.
Barker: It's on my phone. Not that I would remember it, but my phone has it.
Hill: Yeah, exactly, because we're at the point in life where we don't remember phone numbers.
Barker: No. Do you know your kids' phone numbers?
Hill: I know the area code.
Barker: [laughs] It's sad.
Hill: There are more digits than that, I realize, but I have those first three down cold. Question submitted through the Facebook group from David Stansfield in Colorado -- "Do you have any thoughts on WestRock? I own it for the long term." WestRock, a company we don't talk about all that often. I think when Mike Olsen was on the podcast last year, we ended up talking about WestRock.
WestRock is one of the largest paper and packaging companies in the world. This company has popped up in the past when people have looked at the rise of e-commerce, not just Amazon but all kinds of e-commerce. If more and more things are going to be shipped, then, in theory, you're going to need more and more paper products to ship them in. So, a few times in the past, people have asked, "Wait a minute, who's making all these cardboard boxes?" WestRock is one of those companies. Any thoughts on WestRock?
Barker: At the moment, I'm a fan of WestRock, but maybe not for the reasons why the question came in. They have agreed to buy KapStone Paper and Packaging, which is a longtime holding of our small and mid-cap fund. KapStone is up 52% for the year, very much unlike WestRock, which is not up. They paid a premium to agree to acquire KapStone. The deal hasn't finalized yet, so there's still some chance that it might not get approved by the regulators for some reason, but it looks like it'll go through. The market is pricing that in.
Meanwhile, WestRock has grown a tremendous amount as a company. It's been a serial acquirer. And yet, the stock has not performed nearly as well. That's a function of investing in highly cyclical products or sectors. Paper is not a growth industry, it's very much a cyclical industry, where all the participants are basically at the mercy of the market pricing for paper and corrugated paper, craft paper, it does a lot of different kinds of container board and paper and packaging. But, the market sets the price for that.
It's a commodity producer. There's good and bad management within commodity-producing sectors, but at the end of the day, you're largely just taking what the market gives you. You don't really get the same sort of compounding effects of growth, but if you're good, for some reason, at timing the cycles, you can make a lot of money on the cycle. If you bought this at the beginning of 2016, you've doubled your money. But if you bought it when it first came public, or if you bought it in 2015, it's flat.
Hill: Any time I hear the phrase "serial acquirer," any company that is looking to buy as many competitors as possible, and that's how they're going to achieve growth, the first question that pops into my mind is, how are they doing at the integration? Any time we've seen trouble for companies in that mode of growth, that's usually, if it's not the No. 1 reason they're not getting it done, it's certainly in the top three. They're going out and buying, and they're not really thinking through, "How are we going to wring out the synergies with this company we just bought? How are we going to integrate them and the people from that company into our corporate culture, to the extent that we have one?"
Barker: I can't give you a good answer on that, except that it's a good question to ask when looking at whether you should be an investor in a serial acquirer. There are economies of scale. This is a company that, in 2007, let's say -- go back a little bit before the recession so we're not anchoring on those numbers -- doing about $2 billion a year in sales. $15 billion now. So, tremendous growth at the top line. But the bottom line, it's obviously, where did they get the money to acquire all that stuff? It's issued a lot of shares over that time.
I think the story is a good one here, and they have allocated capital well. But, despite the fact that they are 7X the size in terms of sales, they've diluted a fair amount. They have about 4X as many shares out. It's more like, the earnings per share have a little bit better than doubled in the last ten years.
Hill: Third way you can submit questions is on our Twitter feed, which is @MarketFoolery. Question from Sam Muffley in New York. "I expect you'll find a way to discuss these new Oreo flavors on Market Foolery?" Yes, we will, Sam, and it's via your question. [laughs] That's how we're going to discuss these.
For any listeners who are relatively new -- welcome, thanks for checking us out -- I've made no secret over the past year or so for my utter disdain for the way the Mondelez (NASDAQ:MDLZ) management, specifically in the Oreo division at Mondelez, have gotten drunk with power. You talk about WestRock issuing new shares, that's nothing compared to the way the Oreo executives are spitting out new Oreo flavors with no regard whatsoever to shareholder value.
Barker: A point of clarification: there are times when some of the listeners, some of the fans, write in to you, or post on the Twitter or the Facebook, those kinds of things, and seek our comments. Whereas, on the coffee, I'm a co-conspirator; I believe that Oreos is really your pet peeve. And sometimes I'm here to work you through your issues on that, and sometimes it's other people. A lot of people have had the chance to talk Oreos with you.
Hill: Oh, yeah, I wasn't trying to get across that this is an issue for you. This is entirely my thing.
Hill: And, again, I'm coming at it from the shareholder perspective. In the past year -- and feel free, email, post on Twitter, tell me the most noteworthy thing the Mondelez Corporation, which has a lot of different brands, tell me the biggest headlines Mondelez has garnered for any of their brands. I would argue that if it's not No. 1, certainly very high up the list is Oreos and their limited-edition flavors.
Keep in mind, they're already producing the No. 1 cookie in the world. Oreos is fine, they're just bored over there in the Oreo division, and that's why they're coming out with Pistachio Thins, Strawberry Shortcake, Peppermint Bark, Rocky Road with -- wait for it, here's the kicker -- the Rocky Road flavor? It doesn't have nuts like Rocky Road ice cream does, because they want to sell to people -- it's like, "Oh, you have a nut allergy? Don't worry. Our Rocky Road doesn't have nuts, it has soy nuts." And then they have Mickey Mouse, which is really just birthday cake flavor with --
Barker: Small bits of mice.
Hill: [laughs] No. That would be amazing, but no, I think it's just the original Mickey Mouse logo stamped on the cookie.
Barker: The implication that you get to eat Mickey Mouse is false. False advertising, you say. Whereas everything else, they're picturing what you're going to enjoy eating; when it comes to Mickey Mouse, no such luck.
Hill: Mickey Mouse is an icon, nobody's looking to bite into Mickey Mouse.
Barker: You're just helping people figure that out, I suppose.
Hill: Again, to go back to the investing part -- over the past year, where the market is up, the S&P 500 is up 12%, shares of Mondelez down 5%. They're just fiddling while Rome burns -- and by Rome, I mean their own shareholder value.
Barker: Alright, well, as I say, I'm here mostly to help you work through your issues on this --
Hill: Before we get to the coffee story.
Barker: [laughs] Yes, where we both have issues. It's a tough world for packaged brand foods. Mondelez and Oreos may be distracting from the larger story, which is that this has not been easy times for any of these companies. I don't know whether they've outperformed the competition over the time period that you're looking at, but if they've underperformed, it's not because Oreos is the problem, it's because of the industry.
Hill: Which is exactly my point.
Barker: Get out of the industry, you're saying?
Hill: No. They're in an industry that is struggling right now. We've talked before about how consumer goods -- in particular, packaged food -- is struggling right now. Again, they already have the No. 1 best-selling cookie. Why would you waste any resources on Oreos? If I'm running Mondelez, I'm looking at the Oreo division and saying, "Look, anyone who's working on anything other than simply producing the basics," and by the basics, I mean Oreos and double-stuffed -- I think they're No. 1 and No. 2, so they're fine in the cookie department. Take anyone in that division, any money you're throwing at advertising or promoting these limited-edition things, put it somewhere else, because the rest of your business is on fire right now, and not in the good way of being on fire.
Barker: What I think you need to do is extend an invitation to somebody from Mondelez for one of your many fine podcast and radio shows to talk through the serious business issues of your proposed strategy, which may be a value-creating one, but they may have somebody that would be able to educate you, like, "This is why we're doing this."
And it is free advertising. Part of it is that they're getting, as you point out, much more attention for this than for the other brands -- which, I just went to their site -- Chips Ahoy, Nutter Butter, Ritz, Wheat Thins, Honey Maid graham crackers, Trident, Dentyne, all great brands. These are all things that you haven't bothered to say anything about in your adult lifetime, probably.
Hill: Yeah, that's probably true.
Barker: And yet Oreos, you end up promoting through your bitter recounting of their extended brands.
Hill: I just hate to see companies waste shareholder money, and that's what's been going on at Mondelez for the last couple of years.
Let's get to the coffee store, which comes via Christian Myers, who tweeted it and simply wrote, "Drink up." It is the latest -- and I say "the latest" because there was an increasingly long string of scientific research putting forth and supporting the idea that coffee might be the greatest natural drug on the planet Earth, in terms of health. This comes via an article on Science Daily -- caffeine from four cups of coffee protects the heart with the help of mitochondria. Let me just give you the key quote here from one of the researchers, which is that, "These results should lead to better strategies for protecting heart muscle from damage, including consideration of coffee consumption or caffeine as an additional dietary factor in the elderly population."
Look, you're not a scientist, producer Dan Boyd is not a scientist, the only person who comes close is me. And I take this to mean that this research is saying, "If you're a younger person, you should think about upping your coffee consumption. If you're an older person, you really should be upping your coffee consumption."
Barker: Good point, but, question. I wasn't listening closely because I was looking at something to maybe use to comment -- did you say that you were close to a scientist?
Hill: I'm saying, in a group of you, me, and Dan Boyd, I'm the closest. I say that because my kid is studying to be a nurse. [laughs] I'm not saying it's sound logic, it's just the one I'm going with.
Barker: That sounds to me like you're the closest to being a nurse. Nurses are not scientists.
Hill: There's some science involved there, as I understand it. Regardless, one more bit of research supporting our belief that coffee is the greatest thing in the world.
Barker: Yeah. And those that mistakenly try to "help" others by saying, "Don't you think you're drinking too much coffee?" there is no such thing, is what we're trying to get at. Unless you have hypertension. There are occasions, like if you have hypertension, if you have high blood pressure, then coffee is not beneficial for those things. But, being, as it is, a fruit, it's remarkable that it doesn't get more attention. And this whole new information about Midi-chlorians is especially useful.
Hill: It's mitochondria.
Barker: It sounds like Midi-chlorians, which, as you know, are the power for the Force in the Star Wars movies.
Barker: Midi-chlorians, yeah. Don't remember that part?
Dan Boyd: You guys don't want to go down this rabbit hole, you really don't.
Hill: Did that come up in any of the movies?
Barker: It did, yeah! You apparently aren't a geek, enough of a fan, although Dan might be able to comment here on it. Yes, it's a point of great contention with Star Wars fans.
Boyd: It's from The Phantom Menace, which a lot of people didn't like, and the whole inclusion of it doesn't really make any sense or have any bearing whatsoever on the story, yet it's a central part of this terrible movie.
Barker: The good news is, coffee may help increase your power with the Force, because of this new study, is what I'm hearing.
Hill: Maybe there's a follow-up article on sciencedaily.com that we can look forward to.
The World Cup is going on. Wimbledon is now under way. From a business standpoint, you mentioned something -- you're a big tennis fan -- that's pretty surprising in the sports business world, which is Rodger Federer, still one of the best, if not the best tennis players in the world, despite the fact that he's 36 -- which is not old in real terms, but it's old for a tennis player. He's been associated with Nik for basically his entire professional career. He took the court at Wimbledon, was not decked out in Nike gear. Instead, he's wearing a Japanese brand called Uniqlo. Sources say the deal is worth more than $300 million guaranteed over ten years.
That's astonishing, given his age. It would be one thing if Rodger Federer were 26 or 30. The fact that he has this reportedly 10-year, $300 million deal with this apparel company in Japan, that's a bold move.
Barker: Uniqlo is, I guess, the best-known of the brands under Fast Retailing, which is the parent company that you can invest in. It's a remarkable deal, $300 million. Federer has no obligation to even play. I think there's a clause in there that he gets paid even if he doesn't play. And I don't think he'll be playing for ten years, at least not in the main draws. Whether he ends up going into the senior circuit at some point, I don't know if that would have any interest to him.
In his life, he's made $116 million on court. $300 million for wearing these clothes, and this is just one of the brands that he endorses. I can easily understand why Nike did not attempt to match this offer. They have too many people in house, too many people that would look at that and say, "Well, now I would like a contract like that, too."
He is, more or less, unique for Uniqlo. He's getting their name in the press today, and will continue to do so for at least as long as he's a great competitor in the draws of the Grand Slams, which I think has got ... I don't know. It's hard to say when the end of that would be, but it's not ten years.
Hill: Do you have a prediction for this year's Wimbledon tournament?
Barker: Federer's draw is looking awfully good. Certainly, nobody is guaranteed to win any of their matches, but he looks about as strong to get through the early rounds as anybody, just based on who his competition is going to be. A lot of interesting players coming off of injuries still. I'm hoping Zverev finally puts together a decent Grand Slam. Everybody likes Juan Martín del Potro, and he's pretty healthy right now. It'll be interesting to see if Djokovic can finally string together a full tournament of top-level play. The prediction, I would predict Federer to get into the semi, I'll go that far.
Hill: Have you ever been to Wimbledon?
Barker: I have.
Hill: For the tournament?
Barker: Yeah. Not playing.
Hill: No. No. There was not 1/1000 of 1% that suggested that I thought that you played in even an opening round of Wimbledon. That's not a knock on you.
Barker: My dad almost played in Wimbledon.
Barker: Yeah. He could have if he'd had the money to get over there.
Hill: Didn't want to make the trip? That was back when --
Barker: Yeah, it was back when there was no money in it. He was just out of college. He played in what now is the U.S. Open, at the time was the U.S. Nationals, when they were all amateur events. But it was basically the same quality of competition at that as Wimbledon is, closed to amateurs. He would have been able to play.
Hill: When would this have been?
Hill: I remember you telling me years ago, I think we were talking about, who's the greatest of all time, and any time in tennis that discussion comes up, it almost immediately centers around, here's how many Grand Slam titles this person has won. And one of the people who's high on that list is Rob Laver from Australia. You pointed out to me, the thing you didn't know about the Australian Open is that there was a good stretch of time where a lot of really great players didn't make the trip, because you need so much time to adjust your body clock and that kind of thing. Laver, being native to the country, kind of had that tournament to himself. Still a great player, but it's a little skewed.
Barker: In Laver's case, he won the Grand Slam twice, the only person to ever do that. The data point that Roy Emerson won the Australian Open many times, and that was at a time where he maintained his amateur status, while Laver went pro and was no longer able to play in the Australian and other tournaments until they became open in '68, '69.
So, Emerson piled up a number of his Grand Slam wins and had the record on the men's side for the most Grand Slam wins until Sampras broke it. But it was not considered the standard by which you would judge the greatest of all time, because of the mechanisms there, the Australian being a great tournament but not one that everybody could get to easily, and also his length of time on the amateur side.
On the women's side, another prediction ... boy, always hard to predict. A lot of different winners of the women's Grand Slam tournaments over the last three years. I think Muguruza is interesting. If anybody can predict how Serena is going to do and how her body is going to hold up after having to retire from the French, I don't know.
Hill: The tune-up tournaments, Caroline Wozniacki won, right?
Barker: I guess. I missed that one.
Hill: I think that's right. If that's not an indicator of who's going to win, it's often an indicator of who's going to advance pretty far.
Barker: She has her Grand Slam victory, Halep does, a lot of different players have one or two, and then Serena and Venus have all the rest.
Hill: In hindsight -- for anyone who's still listening -- the point where we started talking about Oreos, that was your clue that the bulk of the investing conversation was done.
Barker: Well, you had an investing point to make.
Hill: I had an investing point to make about that, and we did talk about the business of Nike.
Barker: Are you advising people to go back in time and stop listening at whatever point that is?
Hill: I mean, to the extent that anyone has access to a time machine, there are probably better things to do with that time machine, but yeah, certainly --
Barker: Is seems like a trivial use of it.
Hill: Yeah, I think so.
Barker: Although, frankly, getting those ten minutes back, that's still ten minutes.
Hill: Look, if you have a time machine, kind of like with investing, you don't want to just jump in willy nilly and just, "I'm going to go back in time and do XYZ." No! Test it out! Do the little things! So, yeah, actually, if you have a time machine, go back in time ten minutes or so to when we started talking about Oreos and be like, "Oh, I don't need to listen to this."
Barker: Maybe the whole episode.
Hill: Yeah, I think a lot of people do that. Like, "Oh, it's one of those. I can skip this one and go straight to Industry Focus, where host Shannon Jones is talking about something of actual importance, which is our nation's banking system and the stress tests. I'm going to go back in time, I'm going to listen to Industry Focus, that's what I'm going to do."
Barker: We're wading into the quiet days for the podcasts.
Hill: Why do you think I said it's a short week for us? Bill Barker, Motley Fool Asset Management. Go to foolfunds.com and read more. You don't have to have a time machine, you can just go to foolfunds.com and check out the writings from Bill Barker and Bryan Hinmon and the entire crew at Motley Fool Asset Management. Thanks for being here!
Barker: Thank you!
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!
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Bill Barker has no position in any of the stocks mentioned. Chris Hill owns shares of AMZN. The Motley Fool owns shares of and recommends AMZN, FB, Nike, and TWTR. The Motley Fool has a disclosure policy.