The market sure gave Market Foolery a warm post-Christmas welcome back this week. In today's episode, analysts Chris Hill and Jason Moser go through some of the lovely happenings that just keep on happening, like a tweet, apropos of seemingly nothing, from the Treasury Secretary that there's no liquidity crisis. Among other things. Long-term investors don't need to sweat the day-to-day stuff too hard, but the guys share some advice on investing in a market as volatile as this without getting swept away.
A full transcript follows the video.
This video was recorded on Dec. 27, 2018.
Chris Hill: It's Thursday, Dec. 27. Welcome to Market Foolery. I'm Chris Hill. Joining me in studio, we both survived Christmas, Jason Moser. I should say all three of us survived Christmas, because Dan Boyd, our man behind the glass, also survived. Good to see you.
Jason Moser: Good to see you alive and kicking.
Hill: It's been bananas, hasn't it?
Moser: [laughs] Yeah.
Hill: There is actually some business news out there. There's an acquisition we're going to talk about. Actually, two acquisitions we're going to talk about.
But we should start with what's been happening with the market Christmas Eve and then on the 26th. It's just been crazy. Even for us, I think. I don't know about you, but I got this sense when we were chatting before we started taping that, we're in the studio, we've been watching the market. This is our job. But even for you and me, we were looking at what was happening on Christmas Eve and going, "Holy cow!"
Moser: Yeah. It's really weird. I've said this before. I walked out of the financial crisis stretch of time there, 2008, 2009, the Hank Paulson years, where really, all it took was one 30-minute-long speech from him live on the news to send the markets one way or the other five, six, seven hundred points. And we became very used to those types of moves. These are definitely a lot easier to stomach, but you still step back and you're wondering, what in the world is going on? I think the headlines would have you believe that a lot of this is based on interest rate policy. It was something to the extent that Fed Chair Jerome Powell said that they're probably going to raise rates twice in 2019. But maybe his attitude, the way he said it didn't instill confidence in people. You have to start looking at some of the stuff and saying, you're reading a bit too much into this.
Now, with that said, the reality is that these are the types of things that are going to move these markets on a day-to-day basis. We can sit there and say it's absurd, but it's not going to change the fact that these markets are going haywire. You have a few things to keep in mind. No. 1: We're at a point here toward the end of the year where there's going to be some cleaning house and setting up shops for the beginning of 2019 and making those holdings look better from an institutional perspective.
I would also say, all of this headline stuff aside, it doesn't change the fundamentals of a lot of these really good businesses out there. They're the same good businesses they were at the beginning of the year as they are at the end of this year. They have long track records of success. My point is, I think these are the times, the volatility is really when opportunities present themselves. Make sure that you have your ducks in a row and you're ready to pull that trigger.
The other thing I would encourage people to do is to take it slow. You don't need to put all your cash to work at once. The one thing the financial crisis taught me back then was, take it slow. If you think it can't go lower, trust me, it can definitely go lower. The fact of the matter is, we're going to have this administration for at least the next two years. A lot of this is tied to the unpredictable nature of what they're going to say next. Love it or hate it, that's going to be the reality of the situation.
Hill: A couple things. First of all, for those who are new to investing in the stock market or new to paying attention to the Federal Reserve, what Jerome Powell did, that guidance, that's not unusual. Past Fed chairs have done that, future Fed chairs will do that. That, in and of itself, is not unusual.
As you said, when you have one of the dominant storylines of the past week, in terms of Wall Street and the Fed, being people figuring out if the president is allowed to fire the chairman of the Federal Reserve. Like, people looking into that, and, "Our next guest is a lawyer who's going to interpret," that's new. I don't think we've seen that before.
But to your point, and you were touching on emotion and not getting caught up, it's worth reminding ourselves that part of keeping your emotions in check is recognizing that other people are not going to keep their emotions in check. And when there was this question, when the president was tweeting about Jerome Powell, and sending signals of "Powell needs to go," and, by the way, having the Treasury Secretary call the CEOs of the banks out of the blue, and then tweet about that ... that's not helping.
Moser: Not at all. The picture that runs through my mind, immediately when I saw that tweet -- we always about the difference between Main Street and Wall Street, and what's going on at Wall Street isn't necessarily what Main Street is feeling. I see that tweet go out, and I'm thinking, man, the normal, everyday Main Street guy or gal, they see that tweet, and they're thinking, "Liquidity? What the hell is he talking about?" Like, what does that mean? How does that matter to me?
Hill: For those that missed it, Treasury Secretary Mnuchin was tweeting about and then issuing a statement about how he was in Mexico on vacation right before Christmas, and, probably at the urging of the president, called the CEOs of the six largest banks in America, and then decided to share with the world, "Hey, everybody, I talked to the banks and I assured them that we're good we're in terms of liquidity." And then, on Twitter, you immediately had all these other people tweeting analogies to that. It's like you're on a plane and the pilot comes on, "Just want to let everybody know, we have a full tank of jet fuel and all of the engines are working great. We're fine. If you thought everything was problematic, no, everything's fine. Feel free to walk about the cabin."
Moser: [laughs] I mean, did you have liquidity concerns, Chris?
Hill: Not until that!
Moser: Not until that, I didn't either! I really do believe that even after that call, I look at that and I think, I still don't have concerns in regard to liquidity. Just, that's a tremendous disconnect. You're not speaking to the general public when you say stuff like that. You're speaking to people us, who are going to sit here and talk about it on this show and try to explain to the general public that frankly, you shouldn't be worried about that. There was obviously a liquidity crisis during the Great Recession. The ways that they addressed that dealt with it, we're paying a little bit of the price today and trying to unwind all that mess. But to get out there and just say it based on some of the market tumult, I think, was amateurish, to be quite honest with you. I don't think it was very professional. I don't think he quite thought it through.
Again, I go back to, we've got at least two more years of this administration, whether you love him or hate him. It's not getting political here. I'm just saying, this is the type of stuff you have to expect. It's going to be a little bit unpredictable. But you know what? That's OK. Actually, I'm going to embrace that unpredictability. I'm going to make sure that I keep some cash on the sidelines ready to invest, because I think we're going to continue to see these types of opportunities going into 2019, going into 2020. These times, that volatility, as we've said before, is what helps you separate yourself and really outperform over longer periods of time. It just takes some courage. It's a lot easier said than done.
Hill: Let's get to the acquisitions. You had pointed out this first one. Clearly, I was caught up in the headlines whether or not it's OK to fire the chairman of the Federal Reserve and tweets about liquidity.
Ameris Bancorp made an acquisition. What's the deal here?
Moser: Longtime listeners will know Ameris. I've talked about it before. It is one that flies under the radar for a lot of folks because it's a small-cap Southeast regional bank. It's one I started digging into back during the financial crisis, when everything was going to hell in a handbasket. Ameris has always been a very well-run bank. It was much smaller back then, but the FDIC saw fit to use Ameris as a partner in rolling up a lot of those failed institutions. Ameris has been able to grow over the years and deliver for shareholders. It became, ultimately, about a $2 billion market-capitalization bank. Recently, the stock has pulled back a little bit.
This is your quintessential deal where the market is placing the burden of proof on the acquirer. That's the right perspective, I think. They announced this deal -- they're going to buy Fidelity Bank, an Atlanta bank. They're going to roll this bank into their family. It's about a $750 million acquisition, so it's a big one for Ameris in the context of their company.
But I think that there are a lot of reasons to be optimistic about it. I like banks a lot. I compare them to insurers in that they're basically in the business of investing. Well-run insurers are able to take that float that they get from the premiums and they're able to invest that money and help grow the business and diversify and get bigger. Banks are very much the same way; they're just investing that deposit base.
This deal is going to give Ameris a much bigger deposit base. Actually, the deposit base they're bringing in from Fidelity, it's a lower-cost deposit base, about 25% lower cost of deposits, which is good. That gives them the opportunity to make more money on that deposit base. It also gives them terrific exposure to the Atlanta market, which is booming. Having been down there since 2000, I've seen the development, and I continue to go back -- it's amazing how big that place is getting, and the sprawl.
This is going to give Ameris total assets of $16 billion-plus, total deposits of $13 billion-plus. They have a consistent history of being able to bring 1% or better return on assets. While acquisitions are always very risky -- and that's a big risk here too. I'm not discounting it. But, No. 1, they have a good track record based on what they've done over the past several years with the FDIC and bringing all of these institutions in. They made a few other acquisitions last year. But also, these are two cultures that are very similar. They've known each other for a long time. Executive teams have worked together before. I think there are a lot of similarities, and it seems that both teams are very excited to become part of each other's family.
Hill: You look at the stock, which has almost been cut in half in the last six months. I'm wondering if you look at the stock and say, for someone who doesn't own shares, this is a buying opportunity? Or, because of this acquisition, because of the size of this acquisition, do you wait and see how it plays out maybe three months from now?
Moser: If this happened four years ago, five years ago, with a little bit less experience at the helm, and a little bit less of a track record to go on, you probably are a little bit more hesitant. I think today, the risk-reward is such that this is absolutely a buying opportunity. This is a proven management team in a business that isn't going away. They've done a very good job of managing this business in a conservative fashion, and all of the metrics continue to confirm that. They remain well capitalized and they don't do anything stupid. They have a very nice, diverse lending book. Frankly, I own shares personally. I have a lot of optimism as to where this bank is going to go over the coming decade. And I think that's how investors need to look at this. Today, it looks a little bit sketchy, a little bit risky, maybe. But if you look at this as a two-year, five-year, 10-year holding, they're going to digest this acquisition and become a much bigger and healthier bank that's going to be able to deliver more for shareholders over time.
Hill: As you said, Ameris Bancorp, concentrated in the southeast part of the United States. Would you say it's the Bojangles of banking?
Moser: [laughs] I'm sure they don't make biscuits that come quite close to what the Jangler is able to deliver. Where Bojangles has had a little bit of trouble extending their book beyond the southeastern quarter of the United States, I think that Ameris is a bit stronger in that regard. I suspect we'll continue to see them slowly but surely spread beyond just the Southeast. I would not go so far as to call them the Jangler of the banking industry.
Hill: The stock of the day is Earthport, a British payments company. Shares of Earthport are up 280% today. That is because this small payments company has just been acquired by Visa. Good for Earthport. [laughs] Good for any shareholders who are listening. They're having a heck of a day.
This seems yet another smart deployment of capital on the part of Visa and the war on cash.
Moser: If you've never heard of Earthport, join the club, because I can't say I knew a whole heck of a lot about it either until this deal was announced today. Although, I will say, it's interesting. This initial offer was made back in November. While the deal was announced today, there was another competitor in this space that made an offer as well, a counter-offer, so Visa had to up their ante a little bit in order to get it.
You look at the numbers -- $250 million, whatever. This is a drop-in-the-bucket deal for Visa. There's far more upside than downside for them when you think about it from a global perspective. That's what this is -- it's a play on cross-border transactions, spreading that footprint and getting a bigger global presence. When you look at this space, this is exemplary of what the biggest advantages in the space are. The scale that Visa possesses, and the network effects that come from being a part of that big network.
It's interesting to me, from the European perspective, companies like Earthport are going to have a very difficult time succeeding. The EU is a fairly highly regulated environment when it comes to interchange. It sounds when it comes to cross-border transactions, the European Commission is actually testing additional regulations or caps on that interchange for cross-border transactions. It's not really much that would affect Visa any which way. They're passing along the cost in regard to the business that Earthport's focusing on. But it makes for a much more difficult environment for companies like Earthport to succeed. There's not much they can do. They can't raise prices, they can't really do anything to exercise any kind of pricing power. So growing and competing in this space is really difficult.
Then, the light at the end of the tunnel is, you get acquired by a much bigger network like Visa that immediately increases your network by many factors. It's probably the best-case scenario for Earthport. For Visa, like I said, it's not really a big deal either way. It's another incremental step in building out that network, becoming a bigger global network, and flexing the scale that they've achieved to date. It's not going to be one on its own that makes a big difference to their performance, but it's another piece of the puzzle.
Hill: I have to believe there are investors who are looking at this move and immediately searching around for, "What are other small...? Who are Earthport's direct competitors? Because hopefully, I can pick up a few shares, they get bought up, because that that really does seem to be the move."
Moser: That's probably a fair assumption. Look at the European space. I spoke with Rory Carron the other week with Rubicoin out there in Ireland. We were talking a little bit about some of these smaller payments companies over there in their part of the world. I get people on Twitter all the time who ping me about some of these smaller companies, too. I think there's a good chance we're going to see a lot more consolidation in the future with these European companies. Again, it's going to be a little bit more of a difficult environment for them to grow and succeed. The light at the end of the tunnel is, "Maybe we can become a part of something bigger." Visa and Mastercard are the most obvious suspects, but don't discount companies like PayPal. They recently bought iZettle. That was a European play. You're seeing Square certainly try to grow their presence there and beyond. American Express, Discover, there are so many companies out there that do such a good job, and I think they're looking at this global opportunity and really thinking long and hard about the opportunities that exist.
Hill: In the same way that we talk about start-up beverage companies, and for them, the business plan is, "At some point, hopefully we get acquired by Coke or Pepsi." In the spirits case, maybe Diageo buys us, or Constellation Brands, that sort of thing. The difference there is, if you're a small craft brew based in Richmond, Virginia, or Raleigh, North Carolina, whatever, you can just go about your business. You're not worried about being quashed by Budweiser. Whereas with Earthport, to your point, at some point, someone in the room had to say, "Look, if we don't take this offer and we don't get another one, this may be a binary outcome situation for us. Take this offer, or, in two years, we're out of business."
Moser: That's a very good comparison there. There's a lot more loyalty to a good craft brew than there is to that little European payment processor that you can't remember the name of. [laughs]
Hill: [laughs] Right. This weekend on Motley Fool Money, we've got our 2018 year in review, then we're back at it Monday with Market Foolery and Industry Focus, which Jason hosts. Obviously, the market is closed on Tuesday. Then, back to business on Wednesday.
Moser: Back to business. Looking forward to it.
Hill: Thanks for being here!
Moser: Thank you!
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. We'll see you on Monday!
Chris Hill owns shares of PayPal Holdings. Jason Moser owns shares of Mastercard, PayPal Holdings, Square, and Visa. The Motley Fool owns shares of and recommends Mastercard, PayPal Holdings, and Square. The Motley Fool owns shares of Visa and has the following options: short January 2019 $82 calls on PayPal Holdings and short January 2019 $80 calls on Square. The Motley Fool recommends Anheuser-Busch InBev NV, Constellation Brands, and Diageo. The Motley Fool has a disclosure policy.