The first trading day of the year didn't bring much upbeat news to Wall Street. Word is that manufacturing is slowing down in a fair number of key foreign markets, victims of political and trade fears, macroeconomic fatigue, and general uncertainty. But with U.S. markets in bear territory, long-term investors may be looking for direction.

In this MarketFoolery podcast, host Chris Hill and senior analyst Seth Jayson talk about their views on the market: why trouble elsewhere isn't a win at home, and why fear is contagious in the economy; whether a sector-based investing approach makes sense; and why markets seem unimpressed with so many companies' strong performances. Perhaps most importantly to their listeners, they'll also offer their best suggestions for profitable investing tactics this year.

A full transcript follows this video.

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This video was recorded on Jan. 2, 2019.

Chris Hill: It's Wednesday, Jan. 2. Welcome to MarketFoolery! I'm Chris Hill. Joining me in studio today, Seth Jayson. Happy New Year!

Seth Jayson: Is it that already? Happy New Year!

Hill: For a couple of days now. And the market's open, unlike yesterday, when the market was closed, and people were recovering from the night before, and presumably watching a lot of college football here in America.

Jayson: It looks hungover from the headlines I saw this morning, the market here. 

Hill: Yeah, the market does look a little hungover. 

Jayson: I was on vacation for more than a week and I didn't read single bit of news. No financial news. No other news. Hey, guess what? The world's a lot better that way.

Hill: [laughs] Sorry to pull you back to reality and your day job. 

Jayson: Can I just think about where Harry Potter might have been in London and what Roman thing is underneath my feet? That's so much better. It's a better way to live.

Hill: It is. We can get to that. But in the meantime, let's talk about what's going on with the market.

Jayson: Listen to the enthusiasm!

Hill: Exactly. Now I'm just thinking about people who have listened to this podcast for a while, and maybe have said to a couple of their friends, "Hey, it's the start of a new year. Start getting your finances in order. Here's this podcast I listen to! Listen to this!" And this is the first episode.

Jayson: [laughs] This is their first one.

Hill: There are at least a couple of people who, this is their first episode.

Jayson: Do we have video? [groans]

Hill: Let's get to the market. Market down. There's very little news, and what news we have is not encouraging on a macro level, and that's from China and the monthly report, in terms of factory activity in China. Not great. Factory activity in China for the month of December shrank. It's the first time since mid-2017 that that's happened.

Jayson: Yeah. And if it were just China, you could say, "Oh boy, the president sure is sticking it to the Chinese! U.S.A.! U.S.A.!" But it's actually a whole bunch of the manufacturing countries over in Asia. Korea somehow going the other direction, for now, anyway. South Korea. North Korea, I'm pretty sure the manufacturing is still probably lousy. It looks a little bit more broad-based than just a China problem. Of course, the culprit is probably fears about global trade wars, tariffs everywhere. If we're going to do politics and policy by always being angry at stuff coming from somewhere else, people are getting afraid. At the same time, there were some slowdowns in Europe also. Italy moving in the opposite direction. 

These are not good things. If you see these indices down, probably a prediction that some companies are really starting to wonder about demand over the next few months, and they're pulling back a bit. Not good.

Hill: Definitely not good. It reminds me of Fred Smith, CEO of FedEx (FDX -1.52%), a couple of weeks ago --

Jayson: There was that. I was still here for that. People were surprised.

Hill: Fred Smith was pretty pointed in his remarks about politicians around the world. You've touched on this, it really points to the level of uncertainty that large companies, and by ripple effect, medium and small companies have with respect to a lot of different things. Not just "What's the state of trade between the U.S. and China?" but also, in terms of planning that large companies can do around manufacturing, what can they be certain of? When you're doing your budgeting 12 to 24 months out --

Jayson: Or further, in the case of capacity increases that you're investing in. Yeah, this is all scary. It has a ripple effect. And then, of course, you've got the ripple effect of a stock market that suddenly drops into free fall at the end of the year. Maybe deservedly so. There were some nosebleed valuations on a lot of stocks. These are normal, but they freak people out. And when people get freaked out, they tend to fold their wallets up and keep them in their pocket. That pulls the demand back, and a freak-out over nothing can turn into an actual something, and then you really need to freak out.

Hill: Before we get to what might be interesting to look at, in terms of investments in 2019, let's go in the other direction for a second. Are there things, whether it's individual companies or industries, that you're looking at and saying to yourself, "You know what? I'm not going to look in that direction for investing ideas." For me, and I think I touched on this on a recent episode of Motley Fool Money, it really seems restaurants are a stay-away. For me personally. It's an industry that I understand, and based on what's been happening over the last 12 to 18 months in restaurants, I think to myself, there's so much upheaval, you have so many that are either aggressively looking at going private or flirting with the idea, that I just think, as an investor, I'm avoiding restaurant stocks in 2019.

Jayson: Well, if they want to go private, maybe you want to buy some, depending on those prices, right? It is tough for me to be an industry or sector investor. There's always outperformers in every area, obviously. Restaurants, for years, we were saying, "We're over-restauranted here in the U.S." But people said that for a long, long time, and a lot of restaurants did a lot of business and expanded while that was going on. It did just fine. 

The good operators will always stand out. I haven't checked in with my friends at Chefs' Warehouse (CHEF 2.18%) for a while, but as of a year or so ago, and I suspect this is still going on now, higher-end restaurants -- Chefs' Warehouse sells fancier stuff to higher-end restaurants. Think country clubs or small chef-driven restaurants and things. Higher-end restaurants were doing pretty well. But the mass restaurants were engaging in price wars. The ones who could stay on top of things with apps and delivery were doing better than others. But there's upheaval in that business, the same as there is in bricks-and-mortar retailing. Those who aren't doing a good job of selling stuff the way consumers want to get it are falling behind. 

There was an interesting article I read a while ago. Uber Eats was wandering around in Brooklyn. They know there's no burgers close enough in Brooklyn to deliver to people. So they asked somebody, I don't remember what it was, a pizza shop or something, "Do you want to be a burger restaurant? There's no burger restaurant there." And the back of this place, they make burgers and fries. They gave it a burger restaurant name. And this business started selling burgers like crazy, delivery only. So, there are places in the restaurant business where money is going to be made. I suspect that the better operators are the ones who will do better with digital and online and delivery and things like that. 

To get back to the sectors or the industries in general, I took a look at the losers. Performance is what I was looking for, over the past 12 months. Right now, as of the end of last year, that looked a lot like losers. Energy, for instance, down 20% over the year. Materials, almost as much. Industrials, probably 15%. Consumer discretionary, you think of companies like Under Armour (UA) (UAA -0.59%) and others getting whaled on, actually one of the best. Not positive performers, but only down a couple of percent. There are very few sectors that took a win for the whole year, healthcare being one of them, and utilities eking out a small gain. 

I usually start my sector hunting where things have been the worst in the past year, because that's where I expect the lingering crummy sentiment to be, and that I'll be able to find bargains. That's usually where I start. This year, if you're comfortable with energy, you might want to start looking at energy. Look at materials. Materials are always interesting. If you can find good operators in cement or aggregates, smaller companies. One I follow is Eagle Materials (EXP 2.67%). It's really tough to send that stuff too far. It's expensive to ship rocks and cement and stuff. So if you find a better operator that has a good geography, and it's down and it's a good operator, that can be a good investment, especially in a down cycle like this.

Hill: What does Eagle Materials do? Is that beaks and feathers?

Jayson: [laughs] That's what you'd think. It's primarily around Texas with cement and aggregates and things. They also have a wallboard business. The wallboard business was actually doing pretty well, even though the housing thing started to fall apart at the end of last year. That's one that I happen to like. Probably not going great guns right now with sales of the real estate market down and maybe a pullback in infrastructure investing. But these cycles all eventually turn. In the meantime, you get a good player at a cheaper price than at the height of the upcycle. I like to look in places like that.

Hill: It's a nice reminder that, as you said, even when an industry can be down, or an industry as a group can be challenged, if you take the time and look within, you might find some hidden gems in there.

Jayson: That always holds. Last year was interesting. This market this year, I'm going to say, might be an easier market to make money because sentiment is probably going to be poor for a while. I'm looking at this article by someone named John Butters, it was about how -- and this this happens pretty often -- if you took, at the beginning of 2018, and you took the stocks in the S&P 500, and took the number of buy ratings on them, divided it into quintiles, and you took the stocks with the lowest number of buy ratings, guess which performed the best last year? It was those stocks. In fact, the only one, according to this, that had a positive return by the end of the year. And that's because last year, everybody was so excited about everything, and there was lingering bad sentiment on a certain combination of stocks, and those stocks outperformed. 

Looking for the unpopular stocks is always a good idea, probably a better idea in a super great market. However, we have a different market this year. You can almost pick any stock of any business that you really like. We've talked about Home Depot (HD 2.51%) a few times here recently. What have we been saying about Home Depot quarter after quarter? Do you remember? I've been in here.

Hill: They just crush it. 

Jayson: They have been crushing it. Right?

Hill: Pretty much, yeah, across the board. By the way, when I think back to the end of 2018, it was a warning sign when Home Depot, whenever was their last quarterly report, I remember talking on this podcast and around the office, probably to the point where I was annoying people, that I was dumbfounded -- Home Depot put up the quarter that they did, had the guidance that they had, and the stock was still down. It was a little bit of a canary in a coal mine. And it was followed the next week by Walmart (WMT -0.63%), same sort of thing. Not as glowing a report, but same sort of thing. I was like, "Is it just me, or is something weird happening in the market? When Home Depot, with years of a great track record, puts up these numbers, keeps guidance where it is, and the market is selling it off? What do people know that I don't? Because right now, this is looking a little mystifying."

Jayson: Yeah, exactly. How clever do we need to be? I had a planned tangent from the clever, which I'll go into really quickly. You think of a guy like David Einhorn, another terrible year last year. He's really, really a smart guy, but he's almost too clever. All right, we think Tesla's (TSLA 3.88%) probably massaging the numbers, being a little wacky, doing crazy things, no long-term value. He thinks, well, you can still get creamed having a short, so why bother? Except that he's really smart and he wants to be right. So his fund is doing terribly, but a very smart guy. 

I think 2019 is the kind of year where it's a great year for people like us. You don't have to be very smart and you can make some money in stocks. Home Depot, I think, is a good example. The stock is down some 20% here, according to the chart I'm looking at. In the meantime, you have a free cash flow yield to that stock price of about 5.1%. 2.4% dividend yield, according to what I've got here. Selling at a multiple to revenue that is still a little bit high historically. But if you look at the charts, and you look at the direction of their margins and how well they do -- by the way, they're doing well in the places they need to. They're doing well in digital sales, sales through the phone, order online/pick up in store. They're doing all the right things, and the stock has been crushed, along with a lot of the rest. 

I'm no fan of the Google. Alphabet (GOOGL 0.66%) (GOOG 0.77%) is down quite a bit. They just churn through the cash. I have a feeling that one day, governments should -- probably now -- split them up. They have too much power. But is it going to happen? Probably not. If it happens, will that affect the value? Probably not. They've got a variety of businesses. The Google has been creamed lately. 

I really dislike the Facebook (META 0.27%) more than anything. I'm not on Facebook. I think it's terrible for humanity. But so were cigarettes, and how long did that business make people rich? Facebook's down almost a half, throwing out 4.5% free cash flow yield. People spend all their time on it. 

These are some easy ideas. They're right under your nose. Thanks to a little market panic in the last month or so, there are a lot cheaper than they were.

Hill: It's going to be interesting, though, when Facebook reports their next quarter. You see this almost anecdotal evidence of people saying, "I've deleted it from my phone."

Jayson: I wonder if anyone really does.

Hill: Well, that's the thing. I saw a report the other day, I think the number was 40%. Like, "40% of this age demographic deleted it from their phone." Like, all right, that's based on a survey. If that's actually true, this is going to be the most interesting quarter in Facebook's history as a public company, probably right after the first quarter they ever reported.

Jayson: You've still got Instagram, which everyone's addicted to. I've never used it because ...

Hill: It's not for you and me.

Jayson: It's not. It's not for us. And you've got WhatsApp, which I have used, which I don't use as much anymore because they started sticking ads in the middle of your list of calls. [laughs] I'm like, are you kidding me? There's an ad there? Or, was that Facebook Messenger? That was Facebook Messenger. I guess they're threatening to put ads in WhatsApp, which is why the WhatsApp guy left, right?

Hill: Yeah.

Jayson: They're going to put ads everywhere. The business is selling ads.

Hill: I was going to say, they're in the business of selling ads, why wouldn't they stick ads everywhere they can?

Jayson: Exactly. It may be unpalatable to geezers like us, but they have a lot of eyeballs. They're selling a lot of ads and they're making a lot of money. 

I think, 2019, if you can avoid being a panicky Peter, you don't have to be too clever this year. Just keep at it. If you don't even want to pick individual stocks, this is the year to just make sure that you're getting your money taken out every month, put in your 401(k), in your S&P 500 index fund or something. This is the kind of year to make sure that that's happening, for sure.

Hill: Yeah. Our friends at the Motley Fool Answers podcast do a great job of talking every week about Money 101 issues. To the extent that we'll talk about them on this podcast, it'll just be to echo that comment. If you've got a 401(k) planned, any sort of retirement plan, particularly if there's a matching component from your employer --

Jayson: Free money.

Hill: -- max that thing out. 

Jayson: Especially because, if you're in a higher-ish tax bracket, such as the sorts of folks who listen to this podcast, that have some money available for investing, you're losing some of your ways to get the tax man off your back with the home and real estate tax changes, write-off changes. One of the still-dependable ways, at this point, is to get rid of taxable income. Maxing out those 401(k)s and any other retirement plan that you can is the best way to do that.

Hill: Before we wrap up, you were over in London. Where else besides London? Were you in Rome?

Jayson: No, we were just in London. We stayed down by St. Paul's, near the Blackfriars station there. The Blackfriars art deco pub is down that way. It's near the bridge that the Death Eaters destroy in the beginning of that Harry Potter movie, the Millennium Bridge, which we found out the locals called the wobbly bridge. It was originally installed, it wobbled a lot. It was perfectly safe, but people got scared and sick. Apparently, in England, in the theaters, when the Death Eaters destroyed that thing, the audiences applauded.

Hill: [laughs] Can I just suggest that if a bridge is nicknamed by the populace "the wobbly bridge," the civic leaders might want to do something about that.

Jayson: They did, they fixed it. Because people didn't want to go over it.

Hill: [laughs] That's terrifying.

Jayson: Yeah, but isn't that so English? "Oh, the wobbly bridge."

Hill: It is, that's delightful. 

Jayson: We were in London. We had a wonderful time. If we have any London listeners over there, thank you for a great time! Sybil now has a favorite Irish pub. 

Hill: One more reason I'm a fan of your daughter. 

Jayson: It serves Thai food. An Irish pub that serves Thai food. She taught the manager and one of the waitresses how to play an ancient Roman board game similar to Go. I have a strange kid. She's great!

Hill: I think she's creative. Not strange. Let's steer clear of the word strange. She's creative and delightful.

Jayson: Strange in the best way.

Hill: In the best possible way. Seth Jayson, thanks for being here!

Jayson: 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 MarketFoolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow!

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