In this episode of the Market Foolery podcast, host Chris Hill and Motley Fool contributor Jim Mueller analyze those stories and answer the timeless question, "How many stocks should someone have in their portfolio?" Plus, they discuss a survey about Americans' attitudes toward Netflix (NFLX 1.74%), including how many would choose Netflix over sex.
A full transcript follows the video.
Check out the latest Netflix earnings call transcript.
This video was recorded on Feb. 14, 2019.
Chris Hill: Happy Valentine's Day! It's Thursday, February 14. Welcome to MarketFoolery! I'm Chris Hill. Joining me in studio, Jim Mueller. Thanks for being here!
Jim Mueller: Hey, Chris! Thanks for having me!
Hill: Thanks for being my podcast Valentine!
Mueller: [laughs] Anytime!
Hill: We're going to dip into the Fool mailbag. Apple (AAPL +3.26%) is getting serious about video streaming, we're going to dig into that. Also a survey. We'll get to the survey.
We've got to start with Big Red. Shares of Coca-Cola (KO 0.18%) are having their worst day in over a decade. Fourth-quarter results for Coke were about what Wall Street was expecting. The guidance for 2019 was not, and shares are down 8%. Look, we've talked about plenty of other companies that have had worse drops in a single day. This is Coca-Cola. This is sort of the steady blue chip. 8% -- I was about to say huge, it's not huge. It's a big drop.
Mueller: For a company of that size, definitely. I'm going to let the guidance alone. It is what it is. It's just basically whether what management says agrees with what Wall Street is expecting. Wall Street is basically guessing what's going to come, even though many companies do try to massage what those expectations are.
Just some of the numbers here. On an organic basis -- that is, taking out the effects of foreign currency translations and a bunch of the refranchising they've been doing with their bottlers -- revenue grew about 5%. A little bit on volume, 1%. Quite a bit, 4% on price increases. As far as pricing power goes, Coke still has it.
Hill: They do still have it. We talk from time to time about companies that, when they are going over their earnings, sometimes they're trying to massage the numbers in such a way where you're like, "Oh, come on!" In the case of the foreign currency, lest anyone thinks otherwise -- because Coca-Cola is as quintessential an American brand as there is -- most of their money is coming from outside the U.S., so that's a material thing for them.
Mueller: Right. I like that their operating income was up 7% ex currency. Cash flow from operations came in at $7.3 billion for the full year. Six billion in free cash flow. Both of those up substantially over the previous year. Just from the numbers, it looks like it's doing pretty good.
They're gaining market share. Their soft drinks gained 2%, driven a lot by their zero-sugar product, Coke Zero. The only category that was down was the juice, dairy, and plant stuff, down 1%. But water, enhanced water, sports drinks up 3%. Tea and coffee up 1%. All those are good numbers for Coke. They've been buying things. They just invested $15 million into Dirty Lemon.
Hill: Never heard of it, but I like the name.
Mueller: [laughs] They have interesting products. More about fitness and beauty drinks. For instance, they have a product called Collagen, and it's a drink that has collagen in it. It's meant to be a skin moisturizer, skin revitalizer kind of drink. Coca-Cola said, "OK, we'll take a leap on you." [laughs] Just last month, they bought a Nigerian juice company that had been founded in 1980 for an undisclosed amount called Chi Limited.
They're still expanding. This is a part of a big trend in big drink. PepsiCo bought SodaStream last year to get more of their sparkling water stuff. I saw an interesting stat this morning from S&P Global Market Intelligence. They showed the number of mergers and purchases of assets over the years. Back in 2009, there were about 65 for the entire year. Last year, there were over 130 of these things. So, you get a brand going, you get some sales, and Coke or Pepsi or Dr Pepper -- whatever it's called nowadays...
Hill: Dr Pepper Snapple, is still called that? I don't know.
Mueller: It used to be. Didn't they add another?
Hill: They added another one.
Mueller: Anyway, all the big guys are still, just like big beer, going after the small ones, trying to do a lot of their growth.
Hill: You think back to last summer. Coke had a bigger acquisition with Costa Coffee, about $5 billion. I don't want to just put this on Wall Street analysts. I don't own shares of Coca-Cola any longer, but I did for a good stretch of time. It's almost as though shareholders are saying, "OK, this is good, but we need to start seeing results." If they're going to get material returns out of coffee sales in the U.K. and Europe, that's great. But it's almost like, "We need that sooner rather than later."
Mueller: It'll come when it comes. Consumer tastes are changing. Many people, at least here in the States, are going more for the energy drinks and the healthy drinks, so Coke has gotten away from the sugar. They're getting double-digit growth in their Coke Zero. That's good for them.
Hill: Do you think, at any point, they need to consider going the route of Pepsi? Pepsi owns Frito-Lay...
Mueller: You mean snacks?
Hill: Yeah. Or has that ship sailed? Have they decided, on an institutional level: "We had that chance a long time ago. We decided not to do it." For a long time, it was working for Coca-Cola. But over the last five years, you'd rather be owning shares of Pepsi than Coke.
Mueller: As far as Coke goes, I'd rather that they stick to their knitting rather than getting into something like any sort of packaged foods. Pepsi has a lock on salty snacks. Where is Coke going to go with that? Sweet snacks? Everyone's going away from sweet. Packaged goods? That's having problems of its own.
Hill: Let's move on to Apple, which is getting ready to launch a new video streaming service. This is expected in late April, early May. It's going to have free original content for people who own Apple devices. Apparently, they're going to have a subscription platform for existing digital services that are not named Netflix or HBO.
Mueller: [laughs] Right. Hulu's still out of it, too. This is Apple's way of trying to become a bundled cable provider without being a cable provider. They want to be a one-stop app for subscribing to your news, to your entertainment...
Hill: Music.
Mueller: Music, whether they add that on or not. And they're sweetening the deal with some original content you get just for having an iOS device. The writing's on the wall, as far as cable bundles go. Those are slowly disappearing. So Apple and Amazon, too, through their Prime Video channels, are offering these different apps. The incentive for the over-the-top streamer like Hulu -- or Netflix or whoever, CBS, Viacom,and Lionsgate's Starz have reportedly signed on with Apple -- is that Apple gets a cut of the revenue. They seem to be holding out for 30%, which is pretty hefty.
Hill: That's what they have in the App Store, right?
Mueller: For the apps, I think that's right. But, for instance, I subscribe to HBO NOW through my Apple TV. HBO NOW only has to pay Apple 15%. Apple is trying to get even more out of this deal. Their news service that they're supposed to launch, the report is that they're having a 50/50 revenue share. Plus, they get the data of the viewing habits of these people. So, rather than having to exit your Netflix app to open up a Hulu app or a CBS News app or a CBS app or whatever it is, they just want to have you be able to click through channels like you did on your old cable box.
This is part of Apple's move toward getting more Services revenue. It was about 13% Services revenue in the first quarter, which was just reported recently. That's up from 10% the year before. Their product sales, the number of iPhones they're selling, is slowly going down. It's good enough, right? This is where they seem to be heading. We'll just have to see how it works out.
Hill: Part of me wants to just skip ahead to the fall. Because typically, Apple has an event in the fall where they unveil the latest version of their devices, that sort of thing. If this launch goes well, presumably at that point, that becomes part of the selling proposition, doesn't it? They're looking to get more people in the devices, they're looking to get people to upgrade more. They've done an admirable job of getting people into Apple Music, there's somewhere between 55 million and 60 million subscribers. So, if they can pull this off, then presumably, it moves the needle to some degree on the devices.
Mueller: Maybe.
Hill: But, boy, I think if they could go back in time, they would rethink the battery replacement program. I continue to wait for -- maybe this will never come, but I really want to know the behind-the-scenes story of how that all played out. The estimates that, "We'll only need to replace one million batteries," and it ends up being 11 million batteries, and the massive ripple effect in sales.
Mueller: Yeah. That had a big issue. It certainly affected sales of the iPhone X. But if you go back in history, Apple's modern growth started off with the iPod, the little thing, the music player. They'd launched their Music Store to get people to buy the iPod. You could very well be right, this could be another way to get people to buy the devices.
Hill: If you're Netflix, you're not worried about this right now, are you? You're keeping an eye on it, but you're not worried about this.
Mueller: Apple has some original content. Keep an eye on that. Reports say they spent about a billion dollars last year on that, and they've signed up Oprah Winfrey, among others, to help produce that content. It might be interesting to watch and just add it as another subscription. But if I'm Netflix, yeah, I'm probably not too worried about it.
Hill: I mentioned at the top that HBO is not involved in this. I should have added the word "yet." It will be interesting to see, come late April, early May, when they announce this, if, in fact, they have struck a deal with HBO.
Mueller: HBO has the deal already through the ITV of 15%. They might be dragging their feet about doubling that and losing another 15% of the revenue.
Hill: If you're HBO, you're like: "No. We'll stick with the deal we have. We'll go with 15%."
Mueller: Showtime is supposed to be on this new thing, too. That might push them forward.
Hill: Our email address is [email protected]. I actually got a question from Greg yesterday. We've done a couple of these recently, Live Q&As on YouTube. This was a question we got yesterday that we didn't have time to get to. Question from Greg, who asks a great question and really a timeless question. He asks: "How many stocks should I own? I hear and read about only having about 25 stocks to watch or hold at a time. I have more than 45. What are your thoughts?"
Mueller: Greg, you're a piker. [laughs]
Hill: Whoa, whoa! Why do you have to take a shot at Greg like that?
Mueller: No insult meant or anything like that. It really depends on the person. I have three different accounts that I control. I have 12 stocks in one, 20 in another, and 60 or 70 in the third one.
Hill: Let me just add, you do this for a living, so I would expect you to have more. [laughs]
Mueller: Yeah. But my point is, I don't follow all 60 or 70 of those stocks. If you want a lot of stocks -- and people have done very, very well in investing in a lot of stocks. Peter Lynch, for instance. The saying was he never met a stock he didn't like. And he had a big team following them for him. But on a personal level, if you enjoy the game of investing, if you enjoy reading about companies and following them and listening to conference calls and thinking about them and where they can go, sure, put in as many stocks as you can comfortably follow, and even a bunch of stocks that you invest in based on somebody you trust. I mean, the one account that has 60 or 70, those are David Gardner picks on Stock Advisor that I just buy monthly for that account. I trust David's picking ability. Whether they go up or down, that's what happens.
The more concentrated portfolios I have, my taxable is the one that has just a dozen. Those are the ones I keep a pretty close eye on. Netflix and a couple of others.
The whole idea about having a bunch of stocks is to get diversification. But, you need diversification not just in the number of stocks. If you have 25 and 15 of them are in the tech sector, you're not diversified. You need to diversify across industries, and most people don't have a lot of expertise in multiple industries. So, to get the diversification effect, I think one of the best ways is to have half or two-thirds of your portfolio in a broad market index like the Vanguard Index Fund. Really low fees. You don't want to pay too much for this. But you get all the diversification from that. And then, start investing in some individual stocks that really pique your interest and you know you'll follow. You should do OK that way.
Hill: Also, you talk about the different ways to diversify. One way to do that is, and you touched on this, how much leash you give a stock, how often you check in on it. The more stocks you own, the more you find that you're going to have some group of those stocks that you're not really checking because you feel secure in how they're doing. Maybe once a quarter, that sort of thing. You've got others that are on a shorter leash, that you think: "Maybe this is one I need to cut back on. Maybe this is one that I need to get out of." But invariably, you're going to have a diversity of attention that you pay to them.
Mueller: There's that diversification as well. Certainly don't check it every day.
Hill: Yeah, don't do that.
Mueller: Not even every week. Maybe once a month. Just see, what's the latest news? Did the CEO run off with a mistress of some sort and abscond with all the money? Did he die and not pass on the cryptocurrency password?
Hill: How crazy is that story? [laughs]
Mueller: Wow! [laughs] So, keep a general eye on it, but once a month is fine, unless you really enjoy the game.
Hill: Programming note, the market is closed on Monday 18th for Presidents Day. We'll be back on Tuesday 19th.
Just in time for Valentine's Day, Reuters has a story about a survey of 500 Americans and their affinity for Netflix. A number of questions in the survey. One of the more noteworthy ones was that, when asked if they had to choose between giving up sex or giving up Netflix, 30% of respondents said they would give up sex. Boy, I knew the draw for Netflix was strong, I didn't realize it was that strong.
Mueller: Well, there's also the combo, Netflix and chill, right?
Hill: Exactly.
Mueller: The survey was done by HSI. I misled you when I mentioned this this morning. The reporting we're both looking at was done by Forbes.
Hill: Oh, OK. Not Reuters.
Mueller: No.
Hill: My bad.
Mueller: 500 Americans -- and this is Americans, not worldwide. 500 Americans ranging in age from 18 to 54 -- we're both in the top end of that. Really, some of the other stuff they said, like, if you're dating, does their Netflix tastes matter? And a bunch of people said yeah. A third of the respondents said they've gotten into an argument over what to watch on Netflix. Some people use it as a criteria for figuring out whether to go out with a person or not. 10% of the respondents said they dated someone to get access to their Netflix account.
Hill: Yeah, 10% admitted to dating someone just to have access to their Netflix subscription. When you break down the survey by age, millennials say that they do that more than any other group. That's the one where I just sort of looked at it and thought, look, it's one thing to want to date someone where you're compatible and you're interested in the same types of shows. That makes perfect sense to me. What's going on in your personal finances that you're like, "God, I have to start dating this person because they have Netflix."
Mueller: "And I can't afford the $8 a month."
Hill: Right. Come on, do better in your personal finances! Start listening to Motley Fool Answers, get your personal finances in order, and don't be part of that group.
Mueller: And then there's the Netflix cheating. People have actually broken up over that. That's where you're both watching a TV series or movies series or something, and one of them watches ahead in the absence of the other, and the other one feels betrayed. [laughs]
Hill: Betrayal comes in many forms.
Mueller: It does.
Hill: Thanks for being here!
Mueller: 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 MarketFoolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you on Tuesday!
