All News Is Bad News: The Noodles & Co. Story

Another day brings us another tidal wave of red in the market. In this episode of MarketFoolery, host Chris Hill and Motley Fool Director of Small-Cap Investing Bill Mann talk about the biggest financial stories of the day.

You may have noticed the market is down again. You may have seen some of the biggest companies getting crushed in the last few weeks, and alarming headlines proliferating like weeds. Bill explains what's causing the latest downturn, how to keep your head cool when the market dips, and the critical ways our investing landscape has changed in the last 10 years. Then, the guys take a look at earnings from Noodles & Co. (NDLS 1.62%), which sent the stock tumbling despite being pretty OK. Is a buyout on the horizon for the restaurant chain? Tune in and find out more.

A full transcript follows the video.

This video was recorded on Oct. 24, 2018.

Chris Hill: It's Wednesday, October 24th. Welcome to another non-studio, Denver edition of Market Foolery! I'm Chris Hill. With me in the lounge of the Four Seasons Denver is the one and only Bill Mann!

Bill Mann: In the "loun-ge." It's nice in here!

Hill: We're ensconced in a nice, little, cozy corner of the lounge. 

Mann: I could stay here all day and talk to you. 

Hill: Well, no, you can't, because nobody wants to listen to that long of an episode, and we also have stuff to do later today.

Mann: We do have stuff to do.

Hill: I should point out, by the way, because we've got our member event on Thursday, this is the rare proverbial short week from Market Foolery. This is our last episode of the week. Great opportunity to check out Industry Focus and some of the other Motley Fool podcasts. We'll be back on Monday!

Mann: Don't mess it up!

Hill: I'll try really hard not to. No promises. Let's start with, once again, the market. You and I were getting coffee earlier today. You were looking at your phone and you just said, "Huh, it's all red again." It's just another way where the market's taking a pounding.

Mann: [laughs] I don't want to laugh. It's funny. We think of ourselves as being long-term investors. 10 years ago now was the midst of the horrible part of the global financial crisis. I think, if you were to ask the average person at that point, when the Dow was at 7,000, "10 years from now, it's at 25,000. Are you feeling good or bad?" 100% of the people would have said, "I'm feeling good." And yet, because of the path, right now we're at 25,000, and people feel pretty bad. People are scared.

Hill: Yeah. There are a lot of reasons for that. One thing that has nothing to do with the type of investing that we do with The Motley Fool, where we focus on the business, we have the midterm elections coming up in a couple of weeks. That always royals the markets. That's a macro factor that we're dealing with anyway. More talk of tariffs. More companies. It's not just people talking about tariffs, more companies coming out. We had Caterpillar yesterday talking about that.

What do you do in situations like these, when you look at your phone, you're checking stocks, and you're seeing a lot of red? Does your mind automatically go toward opportunity? Or do you say, alright, I'm going to take a couple of extra moments and see what's what?

Mann: Look, Chris, it is so easy for market commentators to say, "I'm excited!" It's really unnerving. It really is unnerving when you see your net worth drop by a little bit, even though you know, deep down, that the market drops 10% every 11 months or so. We are reminded every six months or so that this is what happens. Markets are notoriously and will always be volatile. It's just part of the thing. I don't want people to think, "Yeah, I'm a robot." In my case, these are times in which having a long-term view is very, very important. It's important to remember that the path itself is something that can end up throwing you off of being long-term focused on what good businesses are. If you've got money that you want to put to work, now is a much better time. One of the things that we've been thinking about is, even though the Dow and the S&P have dropped by a little bit, farther down in the market, a lot of really good companies have been absolutely hammered, 40-50% below their all-time highs.

Hill: We've talked before about how great times for businesses are obviously when a given business is going well, leadership is focused on that business, there are good market conditions, that sort of thing. On the flip side, every now and then, companies are dealing with different distractions. Sometimes they're industrywide. Sometimes they are specific to a company. I have to believe that for a lot of companies, when they're looking at employee morale -- if you're at a public company and you own shares of a stock... You and I have been at The Motley Fool long enough where I remember talking back in the late 90s about, "Boy, it's got to be a little distracting to be at a public company, one of these .coms in both directions." When the stock is going up, it's like, "I'm going to take five minutes out of my actual job and just stare at my stock and my net worth going up." Then, 18 months later, being nervous and watching it go down in the opposite direction. So, I have to believe that's one more thing that companies are wrestling with.

Mann: I think that's exactly right. There are a lot of things to be said for companies having their employees own lots of stock. But it has to be distracting during times of great volatility, one direction or the other. People forget volatility isn't necessarily just down. It can be both. 

But I think in terms of the market itself, one of the things that we've been talking about is that it really feels like the narrative that has driven the market has changed a little bit. Over the last decade, one of the reasons that the market has been able to go up so much is that inflation, and therefore interest rates, have been at nearly absolute zero. Over the last three or four years, any one of us could point to things. Obviously, prices are going up. It's not just real estate. It's rutabaga, it's cards, it's flights, it's whatever you want to look at. But they haven't necessarily been captured in either the real inflation rate, the reported inflation rate, or, they haven't come into what you would call common knowledge. Everybody knows that everybody knows that inflation is going up. When that happens -- and I happen to think that it's happened -- the narrative in the market will change.

If people are looking at something to do, I would look at something to do that's a little bit different than what's worked over the last decade, which has been U.S. large cap stocks over anything else.

Hill: This dovetails nicely into something that Aaron Bush and Matt Argersinger and I talked about yesterday. Tomorrow at our member event, the two of them and you and I are going to be on the main stage talking about global investing. Let me ask you the question that I asked them, which is, when you start to look outside the United States, do you think in terms of business first? Or do you think in terms of geography first? When you decide, "I'm going to spend a little time looking for stocks outside the U.S.," where do you go? Do you think industry or geography?

Mann: I think they go hand in hand. One of the reasons for investing outside of the United States is that it doesn't make any sense to buy a Swiss insurance company because it's Swiss. Insurance is insurance is insurance, in every country in the world. When you invest outside of the United States, you really want some dynamics and some factors that are different than what you get here in the United States. 

For example, looking at countries like China and India that are growing at 7-8% and have done so for 20 years, that's an obvious place that is entirely different than what's happening here in the United States. Then again, you don't necessarily just want to buy any company because it happens to have exposure to tailwinds, and you definitely don't want to do it at any price.

Hill: Without being hyper-specific, where do you find yourself looking these days?

Mann: A lot in Japan, actually. A lot of Japanese companies. Japan's market is still below what it was in 1991, which, kind of a long time ago. [laughs] 

Hill: What a kick in the teeth that's got to be.

Mann: Horrific, absolutely. I mean, I giggle a little, but it's really not funny. It's a sign of how disjointed markets can get from underlying fundamentals. But that's a place that has seen huge gains in corporate governance. They are very much an export market. So, that's a place that I've been looking very intently at.

Hill: Before we get to our final story, I just want to say a quick thank you to everyone who came out last night to our listener meetup. We had an awesome crowd. I would say 35-40 listeners came.

Mann: I would have loved to have been there. I was on the train coming in from the airport, and got in just as you guys were breaking down. But it sounds like it was a really great event. It's really always wonderful to be able to spend time with people. You really do forget that we're not just speaking into a microphone. It's great to make those connections.

Hill: It really is, and to hear what people are doing, not just in their investing lives but in their work lives, where they're working, what they're doing. It was really great. I'll just say that one of the things that I was particularly pleased by was the range of people who showed up last night, in terms of age. There was a young man who was 14 years old. I talked to him about investing. There was a woman who told me she just got her first Social Security check. That kind of range is just fantastic.

Let's go to a specific company. Speaking of stocks that are in the red. Noodles & Company down 20% today on third quarter results that make me think that, as we have seen this parade of restaurants go private over the past 18 months or so, it really looks like Noodles & Company is positioning itself to go private.

Mann: I think it might help them. You look at their quarter. I spent some time on it this morning. They were talking about all of these things that they were doing in terms of the brand refresh. They spoke a lot about their zucchini noodles being a big thing. I personally don't get that. I'll be honest, I'm not their people in that regard. But, whatever. And their earnings were not bad.

Hill: I was going to ask you about that. I didn't look at it as deeply as you did, but my quick look at it was, "Wait a minute, is this down 20% bad? Because it really doesn't look like it."

Mann: No! And that's not a stock itself that you would say has gotten ahead of itself. I'm going to see how many times I can say "itself" in a single sentence. It's not a stock that had run up a lot. I just think that we are now in a cycle -- I was talking about the narratives changing -- all news is bad. When all news is good, you say, "The Fed raised rates. That's good because it means the market's strong." Now, all news is bad. "The Fed raised rates. Oh, my god, they hate stocks!" Right? "They hate stocks. They want us to suffer!" I wonder if it's the same thing with companies at this point. If you have to report anything, you're probably terrified.

Hill: If you're one of these private equity firms that's been gobbling up Buffalo Wild Wings and some of these other ones, I have to believe someone is running the numbers on Noodles & Company right now. They might be amenable to an offer. Certainly, if their fourth quarter looks anything like their third quarter and they get punished for it.

Mann: They have to hate this kind of short-termism. They really do. I don't like to say, "This company ought to be private," because I prefer as much opportunity as possible to be in the public markets. But it's good candidate for a private market takeover. Things don't change that much from quarter to quarter, which probably makes it irresistible for them to financially engineer. There are certain companies I'm not quite sure why they stay public. I think you're exactly right that Noodles & Company fits that bill quite well.

Hill: Bill Mann, thanks for being here!

Mann: Good to see you, Chris!

Hill: As always, people on the program may have interest 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! Remember, we're off tomorrow. We're back on Monday. See you then!