Breathe in, breathe out, and keep investing. In this episode of Motley Fool Money, host Chris Hill and senior analysts Ron Gross, Jason Moser, and David Kretzmann hit on last week's biggest stories -- including, of course, the 5% drop in the S&P 500, and how to stay calm when your portfolio is a sea of red.
More and more major companies are investing in cannabis -- even in America. Square (SQ 2.51%) took some lumps after CFO Sarah Friar made public her plans to leave. Sears (SHLDQ) finally announced some Chapter 11 news. And, as always, tune in for some stocks on our radar. Plus, Chris interviews security technologist Bruce Schneier about his new book, Click Here to Kill Everybody, and the costs of lax security in an increasingly connected world.
A full transcript follows the video.
10 stocks we like better than Walmart
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, the Motley Fool Stock Advisor, has tripled the market.*
David and Tom just revealed what they believe are the ten best stocks for investors to buy right now... and Walmart wasn't one of them! That's right -- they think these 10 stocks are even better buys.
Click here to learn about these picks!
*Stock Advisor returns as of August 6, 2018
The author(s) may have a position in any stocks mentioned.
This video was recorded on Oct. 12, 2018.
Chris Hill: It's the Motley Fool Money radio show! I'm Chris Hill. Joining me in studio this week, senior analysts Jason Moser, David Kretzmann, and Ron Gross. Good to see you as always, gentlemen! We've got the latest headlines from Wall Street. We will dip into the Fool mailbag. And, as always, we'll give you an inside look at the stocks on our radar.
But we begin with the market's wild ride. On Wednesday and Thursday, the S&P 500 fell more than 5%. The Dow Jones Industrial Average lost around 1,400 points. Everyone was freaking out, Ron. Friday morning, the bleeding appeared to stop, the market bouncing back a little bit. There's a lot to unpack here. How'd you do this week?
Ron Gross: Stop me if you've heard this one before: these things happen. We're at the end of a nine-year bull market. We've got extremely low unemployment, high GDP, low interest rates for forever, a really long period of time. At some point, folks, inflation ticks up, interest rates rise, stocks correct. It's actually quite healthy. It might be painful. Listen, I don't like to see my stocks go down, but it's actually quite healthy. If you don't panic, you stay the course, you think long-term, you can actually benefit from it.
Hill: Jason, around the office this week, there's been a lot of quoting of David Gardner, co-founder of The Motley Fool, who said, "Remember, markets go down faster than they go up. But over time, they go up more than they go down."
Jason Moser: Yeah. It feels like they've been doing nothing but go up for a really long time. This is sort of a nice reminder that they do indeed go down, and life indeed does go on. We were talking about this earlier this morning, I think that one of the biggest benefits from coming out of the financial crisis, if you were an investor and you went through the financial crisis, then this is the kind of thing where you can just brush right off your shoulder and keep on moving along. You understand what's at stake here. This is why we invest the way we do. You can't predict when stuff is going to happen. There's not necessarily a rationale for what happened. But it does happen, and you need to be able to maintain your composure, understand that you're going to have some bumpy rides along the way. But, again, when you look at five, 10, 15, 20-year time horizon, the market clearly trends in one direction, and it's not down.
Hill: That's the thing, David. There are a lot of investors who really just started in the last seven, eight years or so. They've never dealt with something like this.
David Kretzmann: This week is a helpful reminder that stocks do indeed sometimes go down. But at the same time, you do have to take a step back and keep this in perspective. The S&P 500 has just fallen back to where it was in July, a few months ago. Obviously, it hurts to see your money go down more than it feels good to your money go up. We tend to react in a sharper way to pain rather than the joy of gain. Really, this comes down to the psychology of investing. When you can keep that long-term time horizon in mind, just remember that the longer you hold, the higher your odds of success over time. There's never been a 20-year stretch with the S&P 500 where you actually would have lost money. And that's going through the Great Depression, the Great Recession, multiple wars, and all sorts of other macro events and worries. The longer you can hold your stocks, and the wider your time horizon, the better off you'll be as an investor. It doesn't take away the pain that you see in a week like this, but with that kind of perspective, you treat a drop like we've seen this week as more of an opportunity rather than something to fear.
Gross: I think it's also important to note that the stocks that have been the highest flyers are the stocks that have come down the most and actually have a bigger impact on the S&P 500 because of how much they've grown. I'm thinking largely about the tech stocks, stocks that you'll often hear called momentum stocks. By the way, if you buy a momentum stock, you'd better understand that momentum goes both ways. [laughs] What goes up does come down. Common physics tells us that. Hopefully, they go up more than they go down.
When these stocks that have been on a tear come down, they come down rather severely. That can create an opportunity to pick up shares as they get cheaper, if you have the stomach for the volatility. Sometimes I see people jumping in a little too soon. They see one day, a company dropped 2%, and they say, "Oh, time to get in, 2% down!" When, in the scheme of things, the stock is up hundreds of percent to that point. 2% is nothing. But, it's important to see what pockets of the market are really bringing the market as a whole down.
Moser: Yeah. I think it's really easy to get into a situation like this and get nervous, particularly if you're relatively new investor. We like to quote Warren Buffett all the time here. There is one quote, I'm going to push back on him a little bit. He said something to the extent of, "Diversification is for people who don't know what they're doing," something to that effect. I get what he's saying there. He's like, "If you know what you're doing, then really, you can go ahead and concentrate your bets and feel good about how you're investing." I think, for the most part, people need to focus on diversification. This is a great example of a time where diversification can help combat the emotions that you likely feel in volatile times like these.
We invest a certain way, obviously, long-term in mind. We have a lot of those growth names in our portfolio. And a lot of that growth has been pulled forward to these valuations today. To see them take a hit is not surprising. But if you have some nice, staid dividend aristocrats, for example, in your portfolio to help counter those high-growth names, then this volatility becomes a lot easier to stomach.
Hill: That was one of the things we talked about last week, Ron. We're seeing interest rates going up, we're seeing 10-year Treasuries at a seven-year high. Another thing we talked about this morning was the speed. It's not just that the market is going down, it is the speed with which we're seeing these drops. I have to believe that at least part of this is that rise in interest rates, and the relative attractiveness of stocks going down ever so slightly.
Gross: For sure. Interest rates are a very, very big part of this. Not only do higher interest rates to make borrowing costs for companies higher, which lends to them having declining profits as a result of increasing costs; but higher interest rates create alternative investments that make the stock market perhaps less attractive than it looked when interest rates were low. If you can earn 3% on a risk-free 10-year U.S. Treasury, maybe you don't want to own a 2% dividend stock; unless, of course, you think there's appreciation potential on top of that to be had. But you start to think about it a little bit and do the math. Certainly, a subset of investors say, "I'll take the 3.5% safe money."
Kretzmann: I think rising interest rates impact shorter-term investors or traders more than it impacts Fools like us, who have a long-term time horizon. We're often investing with the intent to hold these companies for at least five years, and ideally, you'd have 10, 20, 30 years. In the grand scheme of things, where interest rates go from one quarter to another, one year to another, probably doesn't matter as much when you're thinking in terms of decades, not quarters or years. But at the same time, you're seeing all the talking heads on CNBC and TV who do often have a shorter-term time horizon. That's all they talk about. You can't just ignore it. But keep that longer-term picture in perspective. I think the interest rates turn out to be more noise, when it comes to the individual companies in your portfolio.
Just to double down on something that Jason mentioned about diversification, you have to remember that the volatility that we've seen this week is the norm, not the exception, when it comes to the stock market. Build your portfolio accordingly. Position your portfolio in such a way that you can kind of ignore this inevitable short-term volatility as best you can. Keep that long-term time horizon in mind. For some people, that might mean having a little bit more cash on the side to take advantage of market declines like this. It might mean diversifying into some more stable companies, like Jason mentioned. Whatever it is, you want to build your portfolio in such a way that you see this inevitable volatility as an opportunity, not something to worry about.
Gross: I'll just say that during times like this, you often hear criticism of the Fed being too tight on monetary policy, or whatever. They're always to blame. I would recommend to Foolish investors to turn that conversation off in your head. Focus on the companies you own, the companies that you think are great for the next five and 10 years. Let the Fed do whatever the Fed is going to do. It's out of your control anyway. Just stay as a long-term investor.
Hill: It's kind of laughable when you consider that a few years ago, the Fed was being criticized for cutting rates.
Gross: [laughs] Right. They can't win. It's a miserable job.
Hill: Yeah. Sorry, you can't have it both ways. You can't say the economy's the strongest it's ever been, and then in the next breath, say, "But please don't raise interest rates a 15%, because we're so fragile we'll just be destroyed." I should point out that we are taping this in the middle of the trading day on Friday. While the market was up in the morning, who knows where it'll end up? Fingers crossed it ends in the green.
Let's just go around the table. One of the things that we talked about in our planning meeting this morning was, we were kind of hoping to see a little bit more of this. And who knows, depending on how next week goes, maybe we'll get more of that. We're looking for opportunities, particularly if you've got a little cash on the sidelines, if you've got a watch list. By the way, this is why we do stocks on our radar. This is why we have a watch list.
Ron, I'll just start with you. What's a company that you've got your eye on that, if it fell 20% next week, you wouldn't be too upset?
Gross: People think we're disingenuous when we say we wish the stock market would have kept going down, but really, it's true. I've had a lot of cash on the sidelines waiting for opportunities like this. I'm under-allocated in some of those high-tech stocks I mentioned earlier. I'd love to get in on them at cheaper prices. 20% lower would be awesome. A company like Twilio, TWLO. They make applications that arm developers with the tools to embed communications like text, voice and video. Facebook's (META -0.29%) WhatsApp uses Twilio's applications. I'd love to be an owner of that stock, but at the right price.
Moser: It was an easy one for me. I'm already an owner of Idexx Laboratories (IDXX -0.79%), ticker IDXX. I would certainly love to pick up some more shares at a cheaper price. Idexx is the market leader in the pet diagnostics, equipment, and testing market. They get a lot of those big razors, the equipment, into veterinarians' offices, and then they sell those blades, the consumables, in the form of those diagnostic tests and whatnot. I have a veterinarian that uses all of their stuff, swears by it, and my three dogs at home seem to be very happy and healthy, Chris. So, I'm going to take his word for it.
Kretzmann: I'm looking at Match Group (MTCH). Kind of in a similar boat to Ron here. This has been a high flyer. It's been an incredible stock. Still trading for close to 40X forward earnings. This is a company behind a portfolio of dating sites and apps like Tinder and its namesake Match. This is really getting to be a business that's printing cash. Free cash flow has more than doubled over the past four years. Expanding globally. They have a subscription model that they're rolling out with Tinder that seems to be doing really well so far. Finding ways to increase user engagement both in North America and around the world. That's one I'm keeping an eye on.
Gross: I'll just add, the first thing I did when the market started turning south is, I checked our internal system to see if I was cleared to buy the S&P 500 and the Russell 2000. Nothing wrong with buying an ETF, a broad-based index.
Hill: With a nod toward a theme we've talked about for a while now, the war on cash, I will simply say that I would not at all be upset if Visa and MasterCard had really bad weeks.
Shares of Square fell more than 20% this week. Some of that was the market, Jason. Some of it was also due to Sarah Friar, who is the CFO at Square. She announced she is leaving at the end of the year.
Moser: I'm in communication with the investor relations department at Square. I was trying to work out an interview with Sarah. And they were like, "You know, she may be a little bit busy." Well, now I get it.
Gross: [laughs] She's very busy.
Moser: [laughs] Yeah. It was a bit of a one-two punch there. You understand when the market pulls back, a stock like Square is going to pull back even more because there's been a lot of growth priced into that stock price. Losing Sarah Friar is not good. You can't sit there and cupcake it, she really is the most public face for the company, I think even more so than Jack Dorsey.
But I think it's important to really recognize what Square is. It's not just about cheap swipe fees for small businesses around the country and really around the world. You've got Square Capital, you've got the Cash app, and all this other software that they're building out and offering for retail and restaurants and whatnot. This becomes really -- I know we use this word a lot, but it works here -- an ecosystem. And it matters. As you get these merchants using this Square hardware and software, you see some switching costs start to develop there. I think that they are in the middle of growing out something special here.
If you look at Square, where they are today vs. where PayPal is today, through the second quarter of this year, the gross payments volume that has traveled through Square's networks is just under $40 billion. The gross payments volume that's traveled through PayPal's network is close to $275 billion. That gives you a very good idea of the opportunity that's in front of Square. There's plenty of growth to be had there. We also know with PayPal's business model, there's a good blueprint there as to how profitable Square can be if they keep doing what they're doing.
My guess is that Jack is going to be very thoughtful in how he fills this role to make sure that he gets someone in there to keep this company on the path that they're on.
Kretzmann: No doubt, these are big shoes to fill. She's done an incredible job since she joined Square six years ago in 2012. I think there will be more scrutiny from investors and Wall Street on how Square goes about this finding a replacement for her. Still, Jack Dorsey is CEO at Twitter and Square. Sarah, like Jason mentioned, has really been the public face of Square, and almost operating more as a co-CEO alongside Dorsey. Who they find to replace her will be important.
Gross: You had me at cupcake.
Hill: Sears falling again this week on reports that the company is preparing to file for bankruptcy as early as this weekend. Ron, Sears is working on some financing deals that could potentially keep them open through Christmas.
Gross: Here we go! Finally! Right? I think it's, to liquidate or not to liquidate, that's the question. Chapter 11 reorganization or Chapter 7 liquidation. I think Lampert wants to keep this afloat. He wants to get some interim financing to make it through Christmas. He wants to shut a bunch of the stores. He wants to try to reorganize this thing to keep it going. I'm not sure the banks agree. It might be time for them to take whatever they can get in liquidation and just go home.
Hill: Who's lending them money?! At this point? With the way that Eddie Lampert has run that company for the past however many years?
Gross: Reports are that Bank of America and Wells Fargo are in talks with them for emergency financing. That doesn't necessarily mean long-term financing. They do have $134 million of loans coming due, I want to say on Monday. That's when we actually could see the bankruptcy filing.
Hill: Are Walmart and Target (TGT -1.58%) the slight beneficiaries of Sears, if they liquidate?
Gross: I guess so, but I think they've been benefiting all along from the slow demise.
Hill: Our email address is [email protected]. Question from Philip Green, who writes, "There's been a lot of talk about investments being made in cannabis companies from outside the industry. Do you think tobacco companies are looking at cannabis legalization as a strategic opportunity? Seems to me that there would be fewer logistical hurdles on the part of these companies that already grow and distribute a variety of leafy products." David, what do you think?
Kretzmann: Philip called it. This week, it was rumored that Altria (MO 0.03%) is looking to invest in a Canadian cannabis producer, Aphria is the name that keeps coming up as far as the producer they're looking at within Canada. I think the biggest question here is, why did it take so long? It's been almost a year since Constellation Brands first invested in Canopy Growth. They reupped that investment in a huge way in August. Along the way, you have more and more of these multinational companies getting more comfortable with the legal framework of the legal cannabis industry in Canada and elsewhere. You have Coca-Cola (KO 0.61%), Diageo, PepsiCo, all mentioning that they're at least keeping an eye on it, exploring potential partnerships with cannabis companies in Canada.
But I think this is a testament to the fact that these companies are getting more comfortable with the idea that the U.S. federal Government won't intervene with these kinds of deals. So far, Constellation Brands hasn't dealt with any legal headwinds, at least from the U.S. government. It's probably an indication that these companies expect full federal legalization of cannabis to happen in the U.S. sooner than later.
Hill: If you're on the board of directors at Altria, and you see Coca Cola and Pepsi are kicking the tires on this industry, yeah, you have to be wondering why you're not.
Kretzmann: Yeah. And you also have to take a step back and realize that per capita cigarette consumption, at least in the U.S., has been cut in half since 2000. There are clearly headwinds when it comes to tobacco use. Cannabis is potentially a healthier alternative to get a similar high and fill the gap that is being lost with cigarettes.
Hill: Whether it was Equifax (EFX -0.68%) last fall, or Facebook and Google Plus just in the past few weeks, hacking has very much been in the headlines. Bruce Schneier is a security technologist and author of several books, including his latest, entitled Click Here to Kill Everybody: Security and Survival in a Hyper-Connected World. Bruce joins me now from Boston. Bruce, thanks so much for taking a few minutes to talk!
Bruce Schneier: Thanks for having me!
Hill: Click Here to Kill Everybody, kind of a dire title. You tell me, how bad is the problem? It's certainly getting a lot of attention.
Schneier: And it's a different problem that I'm talking about. You're talking about data theft. You mentioned Equifax, Facebook, Google Plus. Remember the Target breach, the Office of Personnel Management. Those are all, somebody stole and misused data. What I'm writing about is something different. I'm writing about the new world of physically capable computers. It's no longer phones and servers and laptops. It's cars and medical devices and power plants and home thermostats and appliances. It's computers that affect the world in a direct physical manner. There, the issue isn't of loss of data there. There, the issue is loss of life and property. Security is not getting better, but the threat model is changing because of how computers are being used.
Hill: One of the things that has been talked about with reference to a company like Tesla is that as their vehicles get more dynamic, get smarter, you've heard people say, "Well, it's not so much a car, it's a computer that you can drive." Knowing what you know, are you more likely or less likely to be interested in driving a vehicle like that?
Schneier: And we're not going to have much choice. It's not necessarily a computer-assisted vehicle like a Tesla. It's a computer-connected vehicle like everything else. I tried to buy a car last year that was not on the internet and I failed. They did exist, but not in the fare class I wanted.
This is a security problem. It's complicated, but this is dangerous. We don't know how to build computers that can't be hacked. That characterization of a car as a computer with four wheels and an engine, really, it's a hundred plus computer distributed system with four wheels and an engine, is accurate. Just like your refrigerator is a computer that keeps things cold, and your microwave is a computer that makes things hot, and an ATM is a computer with money inside. These are computers. They fail like computers. They can be hacked like computers. Yet the consequence is, someone disables the breaks, someone disables the steering.
There's a great video on YouTube now, a reporter from Wired a few years ago is in a car, and researchers take over the car remotely from 10 miles away. First, it's fun and games. They turn on the radio, they turn on the windshield wipers. Then they disable the steering. And they can disable the breaks. This is worrisome. Well before you get to a driverless car, a Tesla, a car that makes stay-in-the-lane decisions, normal cars can be hacked and have key functionality disabled.
Hill: Is this something that you see the marketplace solving? Is this a situation where companies just have to get better about building in security, whether it's for a smart home device or a vehicle? Or, at some point, does regulation need to step in?
Schneier: This is 100% market failure. What we have today is what the market delivers. Let's talk about Equifax last year. They lost the personal information of every single American. And there were very angry Congresspeople. I testified in front of the House. There were angry people on both sides of the aisle. Something must be done, this cannot stand. It's now a year and a month later, nothing was done. The lesson of Equifax, what the market teaches is, underspend on security, do a lousy job, get to market quicker, have more features, take your chances. If you get unlucky, weather the press storm, and you'll be fine. That's the lesson Facebook is learning today. A lot of very angry Congress people. Nothing will happen.
I see no way to solve this other than regulation. The markets cannot solve it. And that's not a surprise. There isn't an industry in the past century and a half that has improved safety and security without being forced to by the government. Planes, automobiles, pharmaceuticals, food production, medical devices, restaurants, consumer goods, workplace, most recently financial products. Again and again, the smart business thing is to have lousy products that the public will buy, and do your best after the fact to duck any real cost for that insecurity or unsafety.
In my book, I talk primarily about policy solutions. There's a lot of tech to do, but policy is the key here.
Hill: You mentioned your attempt to buy a car. I'm curious, given everything that you know, given everything that you've written about, how has this affected other parts of your life? Do you, for example, not have a smartphone because of the potential for hacking? Do you avoid smart home devices? That sort of thing.
Schneier: No. In a sense, that's really lousy advice. You'll hear people say this, "If you don't like iPhone security, don't buy an iPhone." "Don't be on Facebook." But a lot of these things are essential to living in the 21st century. Of course I have a smartphone! And of course I have devices in my home that are on the internet! You can't not. Of course I have an email address and a credit card. I'm not on Facebook, but that's because I'm a social freak, not because I'm worried about security. We're not going to be able to solve the problem by denying ourselves the benefits of these computerized and connected things. There's real value in all of these.
What I tell people is, you make your best decision, do the best you can. It's not going to be something that you'll be able to fix in a buying decision.
Hill: You mentioned the data breach that Target had. I think that for a lot of people, and certainly it's the case with me, when I see a headline like that, Major Retailer had a Data Hack, Tens of Millions of Credit Cards Have Been Potentially Compromised, etc., that sort of thing, honestly, Bruce, my eyes just kind of glaze over because it's sort of commonplace now.
Schneier: Of course! And Target knows that. All corporations know that. That's why they don't care. That's why they're not making security better. As an aside, can we all agree that calling your company Target is a bad idea? Aside from that, what you're seeing is the reality. If you have a bad security breach, your stock price is not affected. Your customers don't leave you. It's commonplace. Why would a company spend money on security when there's no cost to insecurity? All the costs are borne by their customers, or sometimes users, or sometimes random people. Equifax? I can't even fire Equifax. I didn't hire them in the first place, they just have my data without my knowledge or consent, because it's legal for them to do that. Very serious market failure here. This is not something the market will solve.
Hill: You say that there's really no incentive for greater security. Let's move away from this type of security and think in terms of what we consider to be traditional defense security for America. If you go back in time 20 years, and you look at the companies that are in the business of defense for America -- Lockheed Martin, General Dynamics, Northrop Grumman, those types of companies -- those are publicly traded companies that, if 20 years ago, you had bought all three of those stocks, not only would you have done well as an investor, you would have soundly trounced the market's return. Is there no similar opportunity in this type of security? This is a show for investors, and this seems like a massive problem that whoever figures out how to solve it will benefit tremendously from it.
Schneier: There are security companies that do great. The corollary of all of the computers and services you buy are lousy is, there's a huge aftermarket in security products and services, and they do well. A lot of things don't sell, but a lot of things do sell. It's a complex market. There are opportunities when you find customers in pain and companies who can alleviate that pain. That is a good market.
There's a lot of things that aren't selling well. In a lot of ways, it's like selling insurance. Step back -- there are two ways to sell things, fear and greed. Greed is, "I want something." Fear is more complicated. "I don't actually want the thing, but I want to avoid what I would get if I didn't have the thing." A fear sell is lot harder than a greed sell. You can sell fear. Burglar alarm companies make money, insurance companies make money, and internet security companies make money. But it is a harder sell, so you have to be clever about it. Lots of security companies don't do well, some do great.
Hill: To what level, on a scale of one to 10, do you have optimism that there will be regulation, that all the interested parties from the government side and from Silicon Valley will come to the table and work to solve this.
Schneier: 100% there will be regulation, because the government regulates things that kill people, no exception. As soon as the internet starts killing people, there will be regulation. Where the tech companies will be at the table, who knows? It could be just something that's born out of fear and happens quickly. Whether the tech companies will wise up and realize that regulations are in their best interest? That's less likely. Silicon Valley is very libertarian, regulation-phobic. They don't really understand the value of governments. But once truly bad things happen, I think they'll have no choice.
We are past the debate of government regulation vs. no government regulation. We are now in the debate of smart government regulation of vs. stupid government regulation.
Hill: When you look at the big tech giants -- Alphabet, Amazon, Apple, Facebook, Microsoft -- of that group, is there any one that you think is either poised to be a leader on this issue or is particularly vulnerable on this issue?
Schneier: They all can be leaders and they're all vulnerable. They are the big companies. They're the ones who are going to be affected, and they're the ones that can affect the process. My guess is that sooner or later, those big companies will realize that regulations favors incumbents. Regulation actually is a barrier to entry to new competition. Then they will embrace it.
You're seeing some talk among tech companies now in privacy regulation, not because they want it. Because they're seeing things like the new California privacy law, saying "Yikes," and want a federal process that will be worse that they can influence to pre-empt that.
Hill: Last question, then I'll let you go. We've seen the credit card being compromised. We've seen that story before countless times. We've seen Facebook a few times this year alone. For my money, the most unusual hack that I've come across is the Las Vegas casino that was hacked through an internet-enabled fish tank. Is that No. 1 on your list of unusual hacks? Or do you have something that tops that?
Schneier: It's funny, that's what I was thinking of when you were leading into the question. It's a good example of things being connected and vulnerabilities affecting each other. Target Corporation was hacked, they had their financial network hacked, through someone who broke into the HVAC contractor of several mid-Pennsylvania stores. That Vegas casino had their high-roller database stolen by hackers who broke into the fish tank. Seemingly innocuous things that we connect to the internet in our networks can have wide-reaching effects. I think that's one of the important lessons that we need to teach. That is not just a fish tank, who cares? It's your financial network. It just looks like a fish tank.
Hill: The book is Click Here to Kill Everybody: Security and Survival in a Hyper-Connected World. It is available everywhere you find books. Bruce Schneier, thanks so much for being here!
Schneier: Thank you!
Hill: We've got a little bit of time, let's dip back into the Fool mailbag. [email protected] is our email address. From John Sheffield, "I listen to your Market Foolery podcast every morning while getting ready for work." Thanks, John!
Kretzmann: Appreciate it!
Gross: Love it!
Hill: He didn't have a question, I just -- no. He goes on to write, "My family bought me shares of Coca-Cola when I was about six months old, set it to reinvest, and left it there. I moved it to my own trading account a few years ago. Now, at 23 years old, it has grown to quite a large position. I've been investing for a few years now with my own money, but I've never known what to do with this massive position that has a very low cost basis. Do I sell some of it down and put it to work somewhere else? Do I let it sit and continue to reinvest? There's not a ton of growth opportunity, but Coca-Cola pays a nice dividend every quarter. Thanks, and keep up the great work."
First of all, John should be taking his family out to dinner. But, we get a version of this question from time to time. We love to see this. It's a nice problem to have, Ron, but it's still a problem.
Gross: It's still a problem. It's a problem for a financial planner, but I'll take a shot at it. If it's too big a portion of your portfolio, and it probably is at 23 years old, it probably is wise to sell some of it down as you get older and put it to work in other things. It doesn't have to be done immediately. There's no rush. Coca-Cola is not going anywhere. As you mentioned, it pays a nice dividend. Cap gains tax rate 15%, not too bad, not too punitive. You can take it and put it somewhere else that will earn you more money, hopefully, than you're going to pay in taxes.
Eventually, one day, you could let your heirs take that stock, and the cost basis will step up, and there'll be no taxes associated with it. But at 23 years old, you're probably not thinking about your heirs that much.
Kretzmann: Coca-Cola's probably going to continue to be one of the more stable companies you can invest in. It's not going to be a high flyer, but like John said, you get the reliable dividend. I think part of it is, how confident are you in Coca-Cola shares five-plus years from now? In the meantime, I agree with Ron, it can't hurt to sell bits and pieces, sell in stages as you have other ideas that you want to diversify into.
Gross: Quickly, I would say, don't reinvest the dividends. Take the dividends in cash and put them to work in something else rather than accumulate more Coke.
Hill: Alright, let's get to the stocks on our radar. Our man behind the glass, Steve Broido, is going to hit you with a question. Ron Gross, you're up first. What are you looking at this week?
Gross: I've got a radar stock, not a recommendation yet. Boston Omaha (BOC -0.93%), BOMN. It's a small-cap stock, only about $600 million market cap. Under the radar, early stage conglomerate -- which is fun, an early stage conglomerate. They invest in businesses with attractive economics, mostly right now in outdoor advertising à la billboards, and surety bonds insurance. They also hold some home building real estate services and some other things, too.
Really strong leadership. Two investment guys. Right now, they're only taking minimum wage as a salary until they can grow this thing. I really like how they're aligning themselves with shareholders.
Hill: Steve, question about Boston Omaha?
Steve Broido: What's the most memorable billboard you can remember, Ron?
Gross: [laughs] Well, on the way to Vegas, there are some very interesting billboards that you see as you get closer to the strip.
Hill: Jason Moser, what are you looking at this week?
Moser: Taking a look at a recent IPO here called Eventbrite (EB -0.62%), ticker EB. As I said, they just went public, so there isn't a whole heck of a lot of information out there beyond the S-1. This is a tech platform in the form of an app and also desktop. Ultimately, they have the components for individuals and groups to plan, promote, produce live events. This helps them do that without having to go to a number of different providers. It helps drive ticket sales. That's ultimately how they make their money, by getting the fees from these tickets sales.
The interesting thing about this company is management. It's led by a husband and wife team of Kevin and Julia Hartz. If Kevin Hartz sounds familiar, Chris, well, Kevin Hartz was also behind the founding of Xoom, which is a company that was recently acquired by PayPal, and I liked it a lot.
Hill: You were very bitter about that acquisition.
Moser: I was a little bitter.
Hill: You wanted Xoom to be a stand-alone public company.
Moser: Still harboring a little bit of it, too.
Hill: Steve, question about Eventbrite?
Broido: Sure. With all the video streaming that's going on in this world today, do you worry about that taking a hit at Eventbrite?
Moser: I think that's an opportunity, potentially, to leverage what they're doing with partners, whether it's Live Nation. We've seen Live Nation with Twitter, for example, start offering some video streaming there. I think there are a lot of different ways they can leverage that content with social partners to be able to get that out to bigger audiences.
Hill: David, what are you looking at?
Kretzmann: I'm looking at Vail Resorts (MTN -0.51%), ticker MTN. I believe this was Matty's radar stock last week, so I'm double dipping here. This is the company behind ski resorts. They're increasingly diversified across different seasons, summer and winter, and geographies around the world. Dividend yield at an all-time high. 24X free cash flow. I'm taking a look.
Broido: How do I know when I'm ready for the black diamond?
Kretzmann: Oh, gosh, don't ask me, Steve! That's the answer.
Hill: What do you want to add to your watchlist, Steve?
Broido: Eventbrite sounds pretty cool.
Hill: Jason Moser, David Kretzmann, Ron Gross, guys, thanks for being here!
Moser: Thanks, Chris!
Gross: Thank you!
Hill: That's going to do it for this week's edition of Motley Fool Money. Our engineer is Steve Broido. Our producer is Mac Greer. I'm Chris Hill. Thanks for listening! We'll see you next week!