Check out all our earnings call transcripts.
Square (NYSE:SQ) recently hired a new CFO, eliminating the uncertainty that had been swirling since Sarah Friar stepped down in late 2018, so Industry Focus: Financials host Jason Moser and Fool.com contributor Matt Frankel, CFP give their takes on the news. Plus, we'll share our favorite investing books for the new year and discuss a classic portfolio allocation debate. All this and more on this week's episode.
A full transcript follows the video.
This video was recorded on Jan. 7, 2019.
Jason Moser: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market each day. It's Monday, Jan. 7. I'm your host, Jason Moser. Joining me in the studio via Skype, first show of the new year, my guy, Certified Financial Planner Matt Frankel. Matt, how's everything going?
Matt Frankel: Great, a good weekend of football behind us!
Moser: Your Eagles shirt doesn't leave much to the imagination as to who you were pulling for yesterday.
Frankel: Hey, South Jersey, born and raised. We're pretty much Philly.
Moser: That was a nail-biter, man, for sure. They're moving on. That's good to see. On today's show, we're going to dive into Twitter to answer a couple of listener questions regarding portfolio allocation, some book recommendations. As always, we'll have One to Watch.
First, Matt, there was some news that came out late last week that seemed relatively relevant to our universe here. It looks like Square has a new CFO in town, Ms. Amrita Ahuja, who is currently the CFO of video game developer Blizzard Entertainment. Yes, that's Blizzard of Activision Blizzard. She's going to be coming in and taking over the reins there at Square. After reading a little bit about her work history and a nice little Twitter thread she had out there regarding her family and how they came to the country, I feel really good about this hire. What do you think?
Frankel: It seems like they got the right person for the job. Like I've said before, Sarah Friar left some pretty big shoes to fill over there. Having said that, I like what Jack Dorsey had to say about how entrepreneurial she is and how she's going to focus just on the CFO role. Sarah Friar was a dual focus. She did a lot of the CFO role and a lot of the PR work for the company. Pretty much everything we know about the company's future plans to get into banking, and to be the one-stop-personal finance-shop, we know from Sarah Friar's speeches and discussions and things like that. He says she's going to be a little more focused on the job, which I think is a very good thing from an investor's perspective. It definitely seems, a lot of parallels between her old job and new job. I think it's a good hire. I think the stock does not deserve to be down 30% from when Sarah Friar announced that she was leaving. Even though Square has popped in the last few days, I don't think the pop was a direct result of the announcement, I think it was more because the market was going crazy higher on Friday. But I think they have the right person for the job. Only time will tell, but this is definitely a step in the right direction. Investors hate uncertainty, and this removed a big chunk of that uncertainty. I'll leave it with that.
Moser: That's a good point. We weren't sure how long this was going to go on. But given that Jack Dorsey at both Twitter and Square, he said his primary role as CEO of both companies is to make sure that he's getting the appropriate talent in the appropriate positions. That's encouraging. You look at Ms. Ahuja's work history, she had stints at Fox Network Group, at Disney and Morgan Stanley after receiving degrees from Duke and Harvard Business School. So, yeah, I'd say she seems pretty qualified.
Frankel: Yeah. This definitely seems like a good person to have at the top of their list. I can easily see why Jack Dorsey went ahead and pulled the trigger and brought her on the team.
Moser: It's probably a little bit of a different stage for Square at this point in its life. For a while, Sarah Friar needed to be out there front and center, creating that public image and helping to nurture that public image of Square, so that consumers and merchants and restaurateurs all understood more about what Square does and the value proposition that they're offering to all of their different customers. Perhaps today, there's more public awareness, more understanding as to what the company does, to where Ms. Ahuja can go in there and focus more on the numbers and making sure that the company is allocating its investments appropriately.
It reminds me, perhaps, of when Ruth Porat took over at Alphabet. She was able to go in there and focus a little bit more on the numbers and make sure that they were running a smartly led operation there. Maybe that'll be something that Ms. Ahuja has the chance to do here, as well.
I don't know how public a face she will be, but I would recommend anyone who wants to learn a little bit more about her, you can go to Twitter and actually see the thread that she tweeted out shortly after this news was announced. She gives a little bit of her story, her parents' story, and, as you mentioned, the entrepreneurial spirit of her and her parents. I think that gives a little bit more understanding as to why we like that hire. Certainly, it seems like she would be somewhat empathetic to not only the company, but its customers, as well, and that can only be a good thing.
Frankel: Definitely. I like your point about how they don't really need that public face as much anymore. When I first started writing about Square and first invested in it a few years ago, I used to have to use the first hundred or so words of every article about them explaining who the company was.
"You know, the ones that make the little card readers you see sticking out of people's iPhones?" Now that's no longer necessary. You don't really need someone to tell you where the company's going constantly, who they are, what they do. I like that they're consolidating this role down to a more traditional CFO role. That's a big positive in my mind.
Moser: Good news for your One to Watch for 2019. We'll keep following it and wish them the best of luck. I'm sure we'll learn a little bit more when earnings season comes around.
Let's tap into Twitter. We had some really good questions over the break on Twitter and a couple that really caught our eye. We can have discussions about each one of these tweets for the entire podcast. We won't, but we'll try to tighten it up as well as we can.
No. 1, we had a tweet from @LeontheFixer. @LeontheFixer asks, "Were there any book recommendations that podcast guests gave in their 2018 wraps? I seem to remember them in past years but didn't seem to be any this year." He's wondering, do we have any book recommendations that we read through the year, or even earlier, something that we can throw out there for listeners. Folks, you're in luck. Matt and I both read a lot and we've got some pretty good recommendations coming at you. Matt, I'm going to let you kick it off. What kind of recommendations do you have for readers out there?
Frankel: One personal finance book I just read was called Your Money or Your Life. I don't know if you're familiar with this one.
Frankel: My wife and I both just finished reading this. In my opinion, it's the best book on personal finance I've ever read.
Moser: Oh, really? Wow!
Frankel: In terms of putting it into perspective, saving money, and how to get yourself in the mindset of a saver as opposed to a spender. So, if your New Year's resolution was to be smarter about how you're spending money and stuff like that, I definitely recommend giving that one a read.
Beyond that, I'd love to recommend some of the classics, I know this was on my last book list I did on this podcast a few years ago, but I have to reiterate Peter Lynch's books, especially One Up on Wall Street. We were just talking about Square. This is the one that got me to invest in Square and to find opportunities like that. The whole book is about using your advantages as a small investor over the big players like hedge funds, institutional investors, etc., by just using what you already know. The whole reason I invested with Square is because I was walking through farmers markets in my area, a plumber came to my house with a Square card reader out of his pocket, and I just observed how this was becoming more and more of a trend, before I even knew what the company did or who it was. That's how I got them on my radar as an investment, and it's wound up being the best performing stock I've ever invested in. I bought it a few years ago at $11 and still own it today. Even after the recent correction, it's been a big winner. So, that's called One Up On Wall Street. I actually have a copy of it right here.
Another of Peter Lynch's books that I like, it's lesser known, it's called Learn to Earn.
Moser: Oh, I remember that!
Frankel: It's a really good overview of the basics of investing. If you've ever tried to read a college finance textbook and find it's way over the head, this breaks everything down into real, simple English, in a really easy-to-understand way.
Beyond that, the two Benjamin Graham books are always great ones to read if you haven't read them already. The Intelligent Investor and Security Analysis. The way I would phrase it is, The Intelligent Investor is like going to college for investing, and Security Analysis is grad school. It's the step beyond, it teaches you how to dive into the numbers and things like that. The Intelligent Investor, they updated it a few years ago. Probably the best book on value investing ever written. It's Warren Buffett's favorite book, if that tells you anything.
Moser: I enjoyed reading that one. A lot of the principles that Ben Graham wrote about back then still hold today. Obviously, it's a little bit of a different world today, the way technology has changed the landscape out there. I never read Security Analysis. I felt like it was a bit more into the weeds than I was looking for at the time. But I have heard from a number of people that they benefited a lot from reading it, so maybe I should get in there and give it a read, as well.
I'm going to go in a little bit of a different direction. You gave a lot of big picture investing books. We've read most of them. I love Peter Lynch's take on things and can't recommend those enough. If you read One Up On Wall Street, read Beating the Street as well, and you've got Learn to Earn. Those are three great Peter Lynch books. Those lessons are timeless.
The best book that I read in 2018, and I'm going to thank one of our members and listeners, Greg Gajus, because he's the one who left me this book last time he was in town for one of our events. It's called The Healing of America: A Global Quest for Better, Cheaper and Fairer Health Care, written by T.R. Reid. It's an easy read, but it's so informative. It gives you a look at the healthcare systems around the world. He essentially goes into all of these different places to try to find the strengths and the weaknesses of everybody's system. They all have their strengths and weaknesses. There is no one answer for our problems here domestically. It goes to show that it's not a simple solution. It's going to be difficult when you've got a lot of political sway going one way vs. the other.
For me, it all boils back down to, what is the goal of your healthcare system? Are you trying to make sure everybody gets healthcare? Or are you trying to achieve some other goal? And with most countries, the goal was very clearly, "Let's make sure everybody has healthcare." After reading the book, I don't feel as comfortable saying that our goal here is to give everybody healthcare. I think it's to give everybody healthcare with some conditions. And that makes it a bit more difficult.
I think that's a great book to give you a better idea of how healthcare is viewed around the world. You recognize that it's not a one-size-fits-all. It's certainly a tough problem to solve. I found myself highlighting passage after passage in that book. I keep on going back and looking at it again. Just a great read.
Another one, I read this a few years back. Citizen Coke by Bartow Elmore. This is a neat one because it talks about the history of Coca-Cola from the very beginning and how the business was built, how it changed, the parts of the value chain that made up the business. This goes into some neat areas of the business that a lot of people wouldn't maybe think of. Essentially every chapter is devoted to one facet of the business, whether it's the water or the bottling or the actual soda mix and talking about the economies that benefit from one vs. the other. That was a fun read.
American Icon: Alan Mulally and the Fight to Save Ford Motor Company. This one was written by Bryce Hoffman. This was published a number of years back. As the financial crisis hit, we saw all these automakers really struggling hard. Ford was the one that was able to stand above the rest. One of the reasons is, they brought in Alan Mulally. He had a strategy in mind. He had a vision in place. He led that company from a very difficult position into a position of success, and Ford has done very well since then. Obviously, the auto industry is a difficult one to begin with, but I think it it's a really neat story about Alan Mulally the guy, about what he did with Ford, about the other players in the space and the areas where they fell short.
I had the great fortune of actually interviewing Alan Mulally one year at the North American International Auto Show in Detroit. Nice as it could be. It was a big thrill for me. One of the highlights of my life as an analyst. Getting to meet and talk with him was really cool. Reading this book, it resonated even more.
Those are three that, if you're looking for some good investing stories, those are great ones there. Hopefully, that will give @LeontheFixer and the rest of our listeners a fun list from which to choose here in 2019.
OK, Matt, let's go back to Twitter for one more question this week. This was one we got over the break from @ChrisM_Jones. Chris asks, "Would love to have your take on portfolio allocation. I received my annual portfolio review for my broker and went through it. I had never really thought a lot about sector allocation but wanted to get your take on the importance or lack thereof on sector allocation. My portfolio is 52% "tech." I'm a computer programmer scientist, so I try to invest in what I know best. I'm also overweight in consumer cyclical and basic materials and underweight all other sectors based on comparing to the S&P 500. Thanks in advance for your insight."
Matt, this is a big, wide ranging topic, portfolio diversification and allocation. I thought it'd be a neat opportunity for us to talk a little bit about it and give Chris some ideas. What do you think there of what Chris tells us about his situation?
Frankel: I don't think he's doing anything wrong, really. I just mentioned Peter Lynch's book, One Up on Wall Street. The whole underlying theme of it is to invest in what you know. Right before we recorded, I tallied up some of the numbers from my own portfolio. This actually surprised me -- my portfolio is 56% split between real estate investment trusts, REITs, insurance companies, and banks. The three things I know the best make up well over half of my portfolio. Tech is right up there, too. I'm overweight tech. I'm very underweight things like healthcare, which I know nothing about. Underweight in a lot of industrials, which I don't understand that well. I wouldn't know enough to make good investments in those areas. If anything, I would probably buy an index fund that invested in healthcare stocks because I don't really know.
Having said that, there's a limit to the "invest in what you know" thing. There's a reason I don't have 100% of my portfolio in REITs, although I feel that's probably the best one of the best long-term opportunities right now. You still want to find the best of the best in the other sectors. If you don't know a sector that well, it's a really good strategy to either, A, buy an index fund like I just mentioned, or, B, find the best of the best players in that industry with big competitive advantages that aren't going anywhere. To give you an example, I'm not a tech wizard or anything like that, but I know enough that Apple's a great company, which is why Apple is very overweight my portfolio right now.
That's my advice. If you do feel you need a little bit of diversification into sectors you're not too familiar with, if you need to get into banking, for example, either the XLF, that index fund I mentioned a few weeks ago, or one of the big banks like JPMorgan Chase, you really can't go wrong with one of those. Again, invest in what you know. I wouldn't dive into like any small-cap or mid-cap stocks in an area that you don't know very well. But as far as the best players in the sector or index funds, that's the way to go, in my opinion, if you're not too familiar with the sector and need a little more diversification in your portfolio.
Moser: Yeah. I was reading this question, and the first thing that came to mind was Warren Buffett's quote regarding diversification. He says, "Diversification is protection against ignorance. It makes little sense if you know what you're doing." I think there's something to this. The first thing that I think is, don't diversify just for the sake of saying that you're diversified. If you're investing in something that you have no idea about, that's not diversification, that's just bad investing. If you don't know anything about materials, or cyclicals, or energy, healthcare, whatever it may be, don't just assume that you have to have that exposure because it makes for good diversification. To your point, having a fund probably makes more sense in those areas where you're not so familiar with the actual space.
I also want to go back to one thing. In 2018, remember that the S&P Communications Services sector was launched. Essentially, the S&P made this new sector. Everybody at this point probably feels like they're over-exposed to tech. That's because most of the things in our lives all revolve around tech in one way or another. But the S&P put together this S&P Communications Services sector. This sector ultimately included companies from three different industry groups -- telecommunications, technology, and also consumer discretionary. The basic idea was that we are in such a tech-driven world today that a lot of these companies are viewed a little bit differently today than they were perhaps 10 or 20 years ago. The main point here is, if you feel like you're overweight tech, well, that makes a little sense because we're in such a tech-driven world today. I don't think that's ultimately a bad thing.
To take a little bit of a bigger picture view, less about markets or sectors, and focusing more on small-cap, large-cap, mid-cap, things like that, I went to our Premium Pass offering here at the Fool to look through some of the portfolio tools that they have. They have some recommended allocations there for folks who are either in that grow-your-wealth phase or defend-your-wealth phase. Just to give some numbers there, in the grow-your-wealth phase, the recommendations in Premium Pass -- these are, of course, workable. Nothing is set in stone. They're saying, if you're looking to grow your wealth, have 25% of your portfolio in large-caps, 15% in mid-caps, 15% in small-caps, 30% in international, which I found interesting, 10% in alternatives, which could be real estate or REITs like you were talking about earlier, Matt, and 5% in bonds. But generally speaking, the idea with that grow-your-wealth portfolio is, you can take on a little bit more risk at that point. That's why you have such heavy exposure to stocks.
If you go to the defend-your-wealth portfolio, they have large-cap at 25%, mid-cap at 10%, small-cap at 10%, international at 10%, alternative at 5% and bonds at 40%. Those are things to keep in mind. Every investor is a little bit different in their goals and their stage of life. If you're older and you need to focus on protecting your wealth, you need to allocate a little bit differently and make sure that you're taking some of that risk off the table.
We could probably go on for hours just talking about diversification and allocation. Chris, we hope that helps out with your questions there.
Folks, remember, you can always reach out to us via email at email@example.com. Make sure to follow us on Twitter @MFIndustryFocus. If you have questions, fire away. We'd love to bring them onto the show and answer them for you.
Matt, let's clear this week out here and wrap it all up with One to Watch. I'm going to let you go ahead and start here. What's your One to Watch for the coming week?
Frankel: I'm going to name one of my REITs. I don't personally own this one yet, but it's jumped to the top of my watchlist. Over the past couple of months, hotel stocks have really gotten beaten down. Unlike a lot of commercial properties, hotels are very recession-prone industry. Since the whole reason that the market's done what it has is because of fears of a global slowdown or recession, hotel stocks have been completely annihilated.
I want to recommend one called Apple Hospitality REIT (NYSE:APLE), ticker APLE. They invest in mid-market hotels. Think Homewood Suites, Courtyard by Marriott are some of their big brands in their portfolio. These tend to hold up better than most during recessions. They get a lot of the business crowd, which is less sensitive to economic slowdowns. They also tend to get a trickledown effect -- when people who would normally go to a higher-end hotel need to cut back, they go to these ones.
Right now, because of how badly these have been beaten down. this one is yielding 8.2%. It's well covered by the company's earnings. Even if it takes a hit, that dividend's well covered. That's one that I'm watching right now. Even if it takes a little while for these to recover until the next recession comes and goes, or whatever happens, you're getting paid really, really well to wait. That's one that's on the top of my list. Now that I realize I have 56% of my portfolio in REITs and financials, I may have to rethink it. [laughs] But that's definitely one that I'm really tempted to buy right now.
Moser: [laughs] That's good. I'm with you. I'm going to go a little bit real-estate-oriented as well. A little bit different, though. This is partly a tech play. It's Ellie Mae (NYSE:ELLI), ticker ELLI. Ellie Mae is the mortgage software provider we've spoken about before.
This is a really good business that's caught in a really tricky time right now. The sentiment for buying homes is low. Some complaints about inventory being somewhat tight, prices being a little bit tough, and interest rates starting to move upward. Really, Ellie Mae counts on that volume, either in the form of purchases or refinances. They're pinned very much to the housing market. The stock has taken a big hit over the past year because of management ratcheting guidance back a little bit based on the housing market and some questionable economic conditions for home buying in the coming quarters.
I think this is the point in time where you need to be looking at a business like this. It's a good business. It's profitable. It has strong cash flow, competent management. It's trading at around 22 times free cash flow today. Historically, that's a pretty good deal for what we consider a darn good business.
I will say, I do own shares of Ellie Mae myself and remain a happy shareholder. I think this is a good opportunity to be looking at this stock if you don't own it. The housing market will come back. It ebbs and flows. Hey, if we have a recession that hits in the next year or two, you never know, if we do see something like that, this business could certainly get cheaper. But, a good business, and one I think listeners should keep on their radar.
Matt, that's about all we have for today. It's always great talking with you. Congratulations on your Eagles yesterday! I know you're looking forward to the game this weekend.
Frankel: I am. I'll actually be up by HQ for that one.
Moser: All right, man, I look forward to seeing you! 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. This show is produced by Austin Morgan. For Matt Frankel, I'm Jason Moser. Thanks for listening! We'll see you next week!