In this episode of Motley Fool Money, host Chris Hill and analysts Emily Flippen, Jim Mueller, and Jason Moser hit on some of the biggest recent news in the market. Disney (NYSE:DIS) finishes up its merger with Fox, and it's ready to take on a crowded streaming space. CVS Health (NYSE:CVS) diversifies into CBD lotion. Levi Strauss (NYSE:LEVI) enters the public markets with a bafflingly high market cap, while Nike (NYSE:NKE) sells off on higher-than-expected revenue and profits. Biogen's (NASDAQ:BIIB) biggest trial bombs, and the stock tanks along with it. Papa John's (NASDAQ:PZZA) welcomes Shaq into its board of directors. And, as always, the analysts share some stocks on their radar. Plus, stay tuned for an interview with Lake House Capital's Joe Magyer about investing in Australia -- the biggest trends, biggest worries, and some Aussie picks to add to your watch list.
A full transcript follows the video.
This video was recorded on March 22, 2019.
Chris Hill: It's the Motley Fool Money radio show! I'm Chris Hill. Joining me in studio this week, senior analysts Jason Moser, Emily Flippen, and Jim Mueller. Good to see you, folks, as always! We've got the latest headlines from Wall Street. We will dip into the Fool mailbag. And, as always, we'll give you an inside look at the stocks on our radar.
But we begin with a big deal finally closing. This week, Disney finalized the $71 billion deal buying the television and film assets held by Twenty-First Century Fox. In addition to owning The Simpsons, the X-Men franchise, and a whole lot more intellectual property, Disney also now has the controlling stake in Hulu, Jim. I should also point out that the ink was barely dry when the layoffs began.
Jim Mueller: Yeah. Disney CEO Bob Iger sent out a memo trying to set this up in a nice way. Then the layoffs began. Disney had said before the deal closed that they were looking for about $2 billion in savings. An efficient way to do that is to do that by shutting studios and laying off people. They got several studios in the deal. They got 20th Century Fox, which made The Martian and Avatar, really big properties. They got Fox Searchlight, which made The Shape of Water. I think that won an award recently, is that right?
Hill: Oh, yeah! That won some awards.
Mueller: And the Super Troopers. They also got Fox 2000, which made Devil Wears Prada and Hidden Figures, that awesome movie. They decided they're going to keep the first two, 20th Century Fox and Searchlight, and they're closing off Fox 2000. They'll finish the production of the movies currently in production and release them and then say goodbye.
Hill: Jason, it does seem like Iger is very much sticking to the plan that we've talked about before: "Let's get a lot of intellectual property so that eventually when the Disney streaming service is available, we've got even more in the pipeline."
Moser: Yeah. I think you really hit on something there, now that they have the content. We've seen the distribution of all of this content really evolve, particularly over the last decade, as over-the-top has taken over. I think fewer people are really interested in going to the movies if you're going to be able to deliver that stuff to their home. You're seeing Netflix really take advantage of that. I suspect Disney will do so as well. But I mean, they're going to have a lot of different ways to win with ESPN+, Disney+, Hulu. You have this landscape where the standard services -- Netflix, I think, is always going to be a given. I think Amazon is probably there by virtue of Prime. But then you have those hybrids, like Hulu and YouTube Live. It's going to be interesting to see how all of those other legacy properties like CBS and NBC fit their way into that landscape. I can't help but think that maybe they're better off figuring out ways to partner with those hybrids like Hulu and YouTube, as opposed to going it on their own. But we shall see.
Mueller: I think you're right there, Jason. There's a lot of these streaming companies around, and more coming. Disney+, of course. That should do all right. You've also got NBC, CBS, HBO. They're doing their own thing. Apple is doing a bundling thing.
Moser: It's getting very overwhelming. [laughs]
Mueller: Exactly. That's my point. How soon are consumers going to reach saturation? "Oh, I have to sign up for yet another service, I'm going to get that." The producers, the studios, might actually come out and say, "Hey, instead of trying to launch our own streaming service, we're just going to sell the content." I think Fox 2000 is going to survive just fine doing that kind of thing.
Moser: I think you're right. Really, it's the size of the audience that matters the most. We've seen a couple of situations -- Netflix, for example, has won bidding rights to content not by offering up the highest bid, but by the fact that they have the largest audience. There's a lot to be said for that.
Hill: I know we're focused on the streaming here. That seems like the most obvious needle-mover. But doesn't it also stand to reason that, with this additional intellectual property, it should also flow through to other parts of the Disney empire? I'm thinking about consumer products and more things in the parks?
Mueller: Oh, sure. Yeah. Disney is a master at monetizing IP like that, whether it's in the parks or T-shirts and pillowcases or what have you.
Moser: I suspect we'll have another report sooner or later from our very own Mac Greer on Disney Cruise, where they've incorporated some of this latest IP. Mac, I insist that you follow up with that, please.
Hill: The latest hot IPO on Wall Street comes from a company that started in the 1850s. On Thursday, Levi Strauss went public. Shares rose more than 30%. Emily, I expect this kind of enthusiasm when it's a young tech start-up. I'm not knocking them here, this is a jeans company.
Emily Flippen: Wait, Levi isn't a young tech start-up? Well, that's news to investors! This has a huge market valuation. Nine billion dollars is what it's valued at right now. That's virtually entirely from U.S. operations. International sales of Levi's are relatively small, and they haven't even penetrated some important markets. To justify that sort of valuation, it's going to take a lot from them in the future. But this is not their first rodeo. There's a lot of excitement here.
For me, where I have a hard time wrapping my head around this company and this IPO is how anybody feels comfortable investing in and giving a valuation of $9 billion to a company that's run by a man who has not washed his jeans in 10 years. That's crazy!
Hill: Yeah, we were talking about this during the production meeting. I was unfamiliar with this whole idea that jeans are a product that don't have to be washed.
Flippen: It's news to me!
Moser: Beyond that, it strikes me, I'm starting to draw the parallel here -- this makes me think of those mattress companies. You buy a pair of jeans, and the idea is, they're probably going to last for a pretty long time. How many times are you going out there and buying new jeans? I don't know, I mean, I've been wearing the same ones for a while now. That's a little secret --
Flippen: Well, as long as you're washing them!
Moser: Admittedly, I do wash them. But, I feel like you buy jeans as often as you buy mattresses, and I don't know if that necessarily makes for the best business model.
Hill: Shares of Biogen fell more than 30% this week after the company ended the trial for an Alzheimer's drug that it was developing. Biogen has been around since the 1970s. Jim, this is still a $43 billion company, but this was a gut-punch, not just for shareholders but for the patients and families who are dealing with Alzheimer's and were hoping for some type of treatment.
Mueller: It's bad news all around. Investors got hurt when they saw the dollar signs, $10 billion to $12 billion of expected annual revenue if this drug came through. They failed to keep the risks in mind. Science, to put it truthfully, and as a former scientist myself, science is hard, especially when you're dealing with a disease such as Alzheimer's where the cause of it is not quite really known yet. The drug, I know I'm going to mess this up, aducanumab --
Hill: You notice, I didn't even attempt to say the name of the drug.
Mueller: No, you left that for me. That drug is going after one potential cause, the amyloid plaques. It's the latest in several drugs that have been halted that do not show the efficacy needed. Pfizer and Johnson & Johnson stopped trials on their drug a while back. AstraZeneca, Eli Lilly just a couple of years ago, they stopped. This might turn out to be a failure, but a good kind of failure, in the sense that science needs failures in order to learn what doesn't work so that we can figure out what does work. If amyloid plaques are not the way to treat Alzheimer's then drug companies will hopefully rotate to something else.
Biogen does have three drugs working on another potential issue with Alzheimer's, the tau protein. Those might do better. We'll just have to wait and see.
Hill: Normally, when we see a stock drop this much in a single week, it's natural to ask, "is this a buying opportunity?" Do you think that's the case with Biogen? Or do you want to see what their next move is?
Mueller: I would want to see what their next move is or wait for it to drop further, I think.
Hill: Shares of Nike falling a bit this week after third-quarter profits came in higher than expected, with revenue up 7% compared to a year ago. Jason, help me out. This is Nike we're talking about. This is a good quarter. Maybe I missed it, but I didn't hear CEO Mark Parker giving any kind of big warning in the guidance. Why the sell-off?
Moser: I think the headlines about slowing growth here are a bit misleading. If you go through the release in that call, the only thing that's really playing in the form of headwinds are currency effects. To your point, this was a good quarter. I think they've laid out pretty good guidance for the coming 2020 fiscal year as well.
Listen, we were talking about this over the last year, year and a half -- every quarter, North America was just brutal. Sales were falling. Then they got back to flat. Then, all of a sudden, growing 1% was the picture of perfect success. They grew North American sales 7% this past quarter, which was really impressive, particularly when you consider that we were talking about that silly Zion Williamson incident.
Speaking of basketball, Chris, I mean, let's just take a minute here to just doff the cap there to my Wofford Terriers. Now, they're an Adidas crew. Let's be clear here. Adidas' headwinds notwithstanding, that would probably make a better situation for Nike anyway. But congratulations, Wofford, for getting out there and taking it to Seton Hall this past evening. I was thrilled to see that.
Now, back to Nike. I do think this is honestly a bit misleading as an analyst that covers the stock. This is a wonderful business. They continue to do all of the right things. Like I said, laid out good guidance for 2020, gross margin is up again on some pricing power there. They're repurchasing shares, bringing that share count down. Currency effects are just part and parcel of being a global business.
Hill: A reminder for those who have forgotten -- and I have to admit, from time to time, I forget this myself -- Nike owns Converse. One of the things I read was that Converse sales this quarter really weren't all that great. I never thought of Converse as being a significant part of the Nike business. Is it really enough where if Converse has a bad quarter, that's going to really have a ripple effect for the overall company?
Moser: It's not. The Nike brand itself is really the powerhouse. If you see weakness in Converse, they can sit there and play out that headline that Vans is taking share from Converse and Nike's in trouble. I mean, let's see the forest for the trees here and really recognize, this is a company with a lot of power in the brands that it owns.
Again, I did mention, Adidas is running into some North American headwinds, some supply chain issues. Under Armour, we know, is still trying to get their house in order as well. This all puts Nike in a very good position for the upcoming year. As an investor, I'd be very encouraged.
Hill: Reports this week that CVS Health has started selling cannabis-based products in eight states. These are topical products like lotions and sprays. They're being sold in Alabama, California, Colorado, Illinois, Indiana, Kentucky, Maryland and Tennessee. Emily, you're one of the advisors on The Motley Fool's marijuana investing service. Is this a good move by CVS Health?
Flippen: Undoubtedly a good move by CVS Health. This is going to mean great things for those 10 states that have access to these products now through their local CVS stores. It brings much-needed legitimacy, I think, to the CBD market in general. So I think it means great things, not just for CVS, not just for Curaleaf, who is the brand of CBD products they will be stocking, but for any producer of CBD, honestly.
What's really exciting is the fact that CVS is testing this. That means that if there is success in these 10 markets, I think it's likely that we see this continue to expand. Currently, you can only sell CBD in these types of forms. It's a pretty new thing. CBD comes from the marijuana plant. Up until December of last year, the passage of the hemp bill, it was actually illegal, because it was part of that same plant. CBD does not get you high like THC does, but the people who use it, many say that it provides some medicinal benefits. Those statements obviously need to be inquired upon, but for the time being, it's an exciting move in the industry.
But it's really important not to forget just how overweight this sector is in general. There's a lot of companies flying high on really high valuations. Curaleaf, the brand that CVS is stocking, for reference, we talked about Levi, with a $9 billion valuation. Curaleaf, on the other hand, has a $5 billion valuation on sales of $77 million vs. $5.5 billion for Levi's.
So, just to give you a perspective about how high that stock is valued. There's a lot of really strong expectations built into these companies. This is a step in the right direction, but it's a small step.
Hill: Our email address is firstname.lastname@example.org. Question from Nate Smith at Virginia Tech, class of 2020. Nate writes, "Last August, I started investing. I began by reading The Motley Fool Investment Guide book by Tom and David Gardner. I've seen a 17% gain in value from my picks in the first seven months." Well done, sir!
Moser: Hey, now!
Hill: "My investment strategy has been based on industries and companies I understand, solid financials, future markets, and my timeline goals that I have for the stocks that I buy. The one aspect that I'm not familiar with is what to look for in the company's management. Any advice you could give me would be helpful. Thanks for your time and the amazing investment advice I've gained from The Motley Fool."
Let's just go around the table really quick. Jason, you're up first. How do you like to evaluate management?
Moser: That's a little bit squishier, right? A little bit more subjective. There are good ways to do it. He mentioned a key word in reading. I think that you look to the things that management is writing. This time of year is a great one because a lot of the businesses that we really like -- Markel, Amazon, Boston Omaha, Berkshire Hathaway -- they're putting out their letters to shareholders. Go read those letters to shareholders. The neat thing is, they have a library that dates all the way back to when they started, which means there are a lot of letters to shareholders to read out there, but they give you an idea of management's narrative, the things that they're saying they want to do. Then you can hold them to their actions. I think that's one easy way to do it.
Mueller: I would agree with you. Read the annual letters. You do get a sense of how management talks. While you're doing so, and while you're going through the management and discussion part of the 10-K, the annual report, pay attention to how they handle adversity. Do they blame the weather? Do they blame something else? Or do they say, "Yeah, we messed up and we're going to fix this"?
Flippen: Everyone's so focused on reading. The thing that I like to do the most is listen. Look, annual letters, they're great. I agree. They're important for getting an idea about how management views the business. But they spend a lot of time planning those out and thinking about how they say certain things. So whenever I like to look at management, I like to actually physically listen to their earnings calls. Granted, the first statements are pre-prepared. But the way that they handle questions is interesting. You can tell when management is passionate and excited about the business based off the way that they talk. So for me, the first step is feeling like I'm getting to know them as a management team, as people. And that involves physically listening to their earnings calls to me.
Hill: Shares of Papa John's had fallen 40% in the past two years, but the stock moved higher on Friday when the company announced its newest member of the board of directors: Shaquille O'Neal! The 7-foot NBA Hall of Famer is also investing in some Papa John's franchise locations and has signed on to be a brand ambassador. Jason, I think this is brilliant.
Moser: [laughs] Yeah, we were talking about it this morning, I agree.
Hill: It's brilliant!
Moser: I'm calling it, the worst is over for Papa John's. This is officially a comeback story now. They are coming back.
One of the cool things about this deal, and I'll tell you this, the stock component to his compensation -- he's going to make something like $8.5 million off this -- half of that is coming from stock that he'll get in the company over the next three years. Shaq himself is telling you that Papa John's is a strong buy. Are you going to go against what Shaq is telling you? I don't think so!
Hill: I mean, they don't have a pizza problem, Jim. They have a brand problem, and this helps solve it.
Mueller: I can't help but think of what else Shaquille O'Neal has been doing advertising for. Most recently, I'm seeing him on TV a lot for The General insurance. Those are kind of cheesy, and the insurance is for those who really, really need insurance and can't get it elsewhere. So, maybe, maybe not. Does that tie into the Papa John's story, of needing help?
Flippen: All I know is nobody beats Shaq. This is going to mean great things for the international locations. They don't really see The General commercials Jim's talking about, but they do know Shaq. I'm going to be looking at the international sales. I would imagine some people at Domino's are having a bad day today, probably scrambling. Who can compete with Shaq?
Moser: I'm going to leave you with this. Shaquille O'Neal said it himself, the Shaq brand is all about fun. Now, I mean, fun, pizza, they go hand in hand. Look for good things from this partnership.
Hill: Joe Magyer joins me in studio now. He is the chief investment officer at Lake House Capital, an asset management business based in Sydney, Australia. Good to see you, my old friend!
Joe Magyer: You, too!
Hill: A bunch of things I want to talk to you about. Let's start with a company I know you follow closely, and that's Google, aka Alphabet. I'm still clearly getting used to calling it Alphabet. Came out with a new gaming system, Stadia. You and I were talking during the break. You think this has potential not just for Google, but ramifications throughout the industry?
Magyer: Yeah, it's fascinating. They're turning the traditional gaming model on its head. Instead of trying to sell a console the typical way -- you spend a few hundred bucks to buy a console, use that to connect and play with other people, the games are expensive -- this model is using Chrome as the console, essentially. Any device that uses Chrome, you can use this wireless controller to play games through Chrome.
I think it's brilliant. There are a lot of things about it that are really interesting. One is it more than a billion people use Chrome. That's a lot of potential gamers right out of the gate. Another is that Google is running this through GCP, which is their version of Amazon Web Services. What's interesting about that is traditionally, game developers are somewhat limited by the computational power of what's in the console. But with GCP, they can scale that as much as they want, and make the game incredibly computationally heavy if they want to, which is attractive for developers because you're not limited, essentially, in terms of what you want to design, you can just go to town. They also think that running it on GCP will make for less latency, so the game's faster.
Then, a really interesting thing is that they're feeding a lot of this into YouTube. I'm not really into this, but a whole lot of people are watching other people play games. I mean, we watch sports, there are a lot of people who like to watch elite players play video games. Plugging this into YouTube, which is such a huge platform, is interesting. Also, speaking plain to the elite players and a little bit to their vanity, the pitch is, "You can play, people can watch. We have a big audience. We're also trying to make you look great. We can stream in up to 4K with surround sound." And you're like, "OK." And the appeal of this really is for players, "OK, this basically makes my gaming look the best. It's the best platform for it."
Hill: It'll be interesting to see how this plays out for Google. I'm curious, you think of the biggest game makers -- Electronic Arts, Take-Two Interactive, Activision Blizzard -- is this something that they have to adjust to? Or is this not really a concern for them just yet?
Magyer: I think they view it as an opportunity. It's another platform to work off of. The big challenge for Google, they've already got all the distribution, will be getting games that people are excited about and finding designers and developers to produce games that take advantage of those advantages that GCP can offer, that's unique to that. If they can, it's easy to picture it being very, very big.
Hill: Obviously, this is one more industry that Google, given their deep pockets, given their size and scale, one more industry they have the opportunity to not only disrupt but possibly dominate. Which leads to this -- they, along with Apple, Amazon, Facebook, increasingly getting scrutinized. Where are you when you watch the conversation about quote-unquote "big tech" and the possibility of the government looking to either break up monopolies, or the companies themselves, possibly saying, "You know what? We're going to try and head this off and maybe spin off some of our own assets."
Magyer: I think big tech deserves a lot of the blowback that a lot of those companies have gotten. It's gotten very political. I'm not sure that it's all entirely rational. If we're talking about breaking up big tech, you need to drill into it a little bit, though, to see whether or not it makes sense. A good example, typically, antitrust is centered around consumer harm. It's really hard to argue that Amazon is causing consumer harm when it's widely considered the most beloved brand by different surveys in America. Google, almost all their products are free for consumers. How much utility do we get out of things like Chrome, Maps? Think about how much you would pay just to have access to Google Maps. Facebook, there's a study done recently, a bunch of students, the average one would have to take $1,300 to not use Facebook for the next year. That's about 17 times the ad revenue that Facebook gets in North America for each monthly active user. The point being, people get huge utility from these products.
Then you look at the merchant side. You might say, "Well, they're bad for competition." Certainly, there's creative destruction. There are people who Amazon's handed their butt to them. That's true, though, of most industry leaders. I would also say that some of these platforms have enabled small businesses to be built on them. For example, 2017, there were over 300,000 small businesses that started selling on Amazon's platform. So, it's not entirely obvious to me that there's actually a strong case for this. It's easy to score political points talking about it.
Then you're like, "OK, well, let's say that there is a strong case, and this stuff gets broken up. That must be bad for them." Well, not necessarily. There are some examples. I think if you split Facebook and Instagram, that is full-on bad because they use the same back-end for advertisers trying to sell onto the platform. However, there are other platforms where I actually think splitting them off would be value-enhancing, and not just from a financial engineering sense of, "It's worth more because the market would unpack the two and you put a higher multiple on the two separately." You look at Amazon Web Services, and YouTube. Both monsters. You look at YouTube, that's a business that Google bought it, and their ownership made it vastly more valuable. However, there are undoubtedly a lot of partnerships and business that YouTube is missing out on because they are owned by Google. If YouTube was independent, it's hard to imagine them not having, for example, a better relationship with Apple which could be beneficial to both sides of that. Amazon Web Services, that's one where there are people who compete with Amazon who actively don't use AWS because they're owned by Amazon and they view that as competitor. If AWS was independent, that problem goes away.
There are a lot of headlines. I don't think there will be a lot of action. If there is, it may not all be bad. It could be good.
Hill: One of the things we talk about from time to time on this show is the war on cash. From where you sit in Sydney, Australia, what is the state of the global payment industry?
Magyer: Australia is interesting because it's one of the fastest countries to adopt new forms of digital commerce. An example, particularly with payments, Tap & Go has radically expanded in Australia. It's not so much a thing here. That's changing because we'll roll out with chips in the States, and the terminals where people will actually be able to do this. Some of the big trends are, I think it's pretty well known and understood that cash is still around 85% of the world's transactions. So there's still a long, long room to run for digital. What I don't think people appreciate necessarily is the length of that runway, the runway itself, the market. It's 85% of transactions, but the number of transactions are growing overall, and the network effects around some of these business models are really incredible.
Also, an interesting thing that we're seeing is, even though you would think that the network effects around payments would box out competition, I think we're actually seeing more innovation in payments than people had originally assumed, which is pretty interesting. There are more ways to pay than they were before. A lot of those are flops. And I'm not talking about crypto, I'm talking about things like MercadoPago, which is owned by MercadoLibre; talking about Afterpay Touch, based in Australia. Payment forms that didn't exist all that long ago, and now they're growing like crazy and have huge adoption rates.
Hill: I want to get to stocks in Australia in a second. First, in your role at Lake House Capital, I know you can crunch the numbers, but I'm curious what you look for when you are evaluating leadership at a company.
Magyer: Sure. It's difficult. That's something we value highly, the importance of quality leadership. Aligned, quality, honest, transparent leadership, particularly if you're investing in growth companies. The more a company is investing or reinvesting in the business, the more important it is that the CEO and the leadership team aren't screwing up that capital allocation. No offense, but I'm pretty sure Visa could be run by a ham sandwich for a while before anybody would notice because it just it gushes cash. But if you're growing 50%, 60% a year, reinvesting everything, that's a bottle rocket. Make a small change in where you're pointing it, you're going to end up in a very different place.
We look for things like ownership. Sounds very straightforward, but nothing aligns like equity ownership. We like to see founders in place where we can. You're not always going to get that, but founders have an energy and passion for the business that you're usually not going to get from anyone else. We'll also look at historical capital allocation. Have they done big acquisitions? How have they done? Have they done big projects that flopped? Did they learn from that? What were the economics of that? Those are typically what we'll look for. And then, the direct incentive. Anybody can go and look and see how executives are compensated. I'm perfectly fine with executives getting paid a lot, so as long as it's aligned with long-term value creation. Unfortunately, that's not always the case. Good example of what we look for is something like long-term growth in free cash flow per share. Something that turns us off is an incentive around growing revenue or growing EBITDA. I know that may sound funny because those are directionally positive. But when you don't put it in per-share terms, what ends up happening is acquisitions start happening. You can have a situation where, if your goal is to grow EBITDA, well, invariably, people will lever up to buy companies because you're avoiding hitting the interest line, you're growing the top line, you're growing EBITDA, but it doesn't necessarily add value.
Those are things that we look for. I'd say they're all important.
Hill: For anyone who's looking to impress their friends at a happy hour backyard barbecue, what's an Australian stock that you're excited about, that you think most Americans don't know about?
Magyer: Afterpay Touch. It's an interesting one because it's based in Australia. It's growing very quickly there. But they launched into the U.S. less than a year ago. They now have more than a million users in the U.S. If you go to buy something at Urban Outfitters, they accept Afterpay. The premise is buy now, pay later. You pay Afterpay back in three or four fortnightly installments. Fortnightly, not a word used in America very often. [laughs]
Hill: [laughs] I was just going to say.
Magyer: I'm just going to say every two weeks. Everybody's not quite used to that. It has grown like crazy in Australia. People view it as a handy, essentially debit budgeting tool. About 85% of people that use it plug it into debit cards, so it's not typically used as a credit option. I think that you're going to hear a lot more about the business, even if not necessarily the stock, but the business because they're growing so quickly here in the U.S. I bet, if you read conference calls with payment companies over the next year, you're going to see some questions starting to pop up about that.
Hill: For anyone who's thinking about either moving to Australia or just thinking about doing business in or with Australia, besides the use of the word fortnightly, what are some of the biggest differences in terms of the business culture?
Magyer: Overall, it's very similar. Australians are big on underpromising and overdelivering. Culturally, that's something that's important to them. They're very relationship-driven. This is kind of a common thing you'll hear, that Americans can be pretty quick to make a decision in terms of business and large financial purchases. Australians are much more interested in getting to know you, having a personal relationship. Those are things that I'd keep in mind.
Hill: Last thing before we wrap up. What should we be watching? What is something that you're watching? Whether it's a trend, an industry, either in Australia or in emerging markets somewhere?
Magyer: I'm watching home prices in Australia. They've finally started coming off. For a long time, people have commented, including me, about high levels of household debt in Australia. That's disconcerting. Home prices are high by any measure that you could come up with. That has started to pull back. Banks are tightening their standards. We'll see what happens. But I'm not in the business of trying to predict market crashes. I think it's a futile waste of time. I think I'm much better at evaluating businesses, so that's what I try to stick to. That said, I think I'd have to have my head in the sand to not notice or care that home prices in Sydney are down about 10% year on year.
There are wealth effects around that. There's a lot of leverage in the economy. Something that's different about Australia vs. the U.S. that a lot of people talk about in favorable ways, but I actually think it's negative in some, is that in the U.S., it's much easier for someone to be absolved of debts through personal bankruptcy. In Australia, it's much more difficult to shake off debt. So if there is a huge housing crash, the people that are in that situation, strategic default is not really in the cards if you're over there. So instead, you're just buried under a giant mortgage. We'll see.
Hill: Joe Magyer, from Lake House Capital, great to see you!
Magyer: You too!
Hill: Safe travels!
Magyer: Thank you!
Hill: If you're looking for a little Motley Fool swag, you can head to our podcast swag shop. Just go to shop.fool.com. We've got coffee mugs, T-shirts, hoodies. Check it out if you're looking for a little swag.
Let's get to the stocks on our radar this week. Our man behind the glass, Steve Broido, is going to hit you with a question. Emily Flippen, you're up first. What are you looking at?
Flippen: Right now, most of my time is spent looking at a company called StoneCo, STNE. Terrible name! If you hear it, you probably think they're in manufacturing, but it's actually Brazilian payment processing. If you like Square here in the U.S., if you like Buffett, then you'll like this Buffett-backed Brazilian payment processor. They reported earnings earlier this week and this stock shot up, really surpassed anyone's expectations. I'm excited about this company moving forward. They have a unique business model in an expanding area. Definitely something to keep your eye on.
Hill: And the ticker symbol?
Hill: Steve, question about StoneCo?
Steve Broido: What are some challenges when we're evaluating financials in non-U.S. countries?
Flippen: The main challenge is the fact that, oftentimes, these companies are unprofitable. If you look at their financials, you're getting a snapshot as something that looks really bad. They don't necessarily have the same reporting requirements that you have here in the U.S., so it goes back to what we were saying earlier about management. I love listening to these guys on their recent earnings call. Go back, see how they talk about the company, see the view and the optionality there. It's clear that this is a well-run company with great optionality.
Hill: Jason Moser?
Moser: Going with Amalgamated Bank, ticker AMAL. Speaking recently at our Austin member event with Neil Grayson, member and fellow Wofford alumnus, by the way...we just keep winning! What can I say? He got this one on my radar, actually. It's a small-cap bank up in New York. Total deposits of $4.1 billion, assets of $4.7 billion. This is an interesting story because it is a bank, they're trying to build America's socially responsible bank. I am going to have the good fortune to interview CEO Keith Mestrich next week. We're going to talk more about how they're doing. Looking forward to that. So this is on my radar.
Hill: Steve, question about Amalgamated Bank?
Broido: How does a bank define themselves as being more socially responsible?
Moser: I'm going to turn this back on him. I am going to include that in the questions that I ask Keith next week, Steve! How about that? You're going to get the answer straight from the horse's mouth!
Hill: That's a deft way of passing off the question. Jim Mueller, what are you looking at?
Mueller: I'm looking at Select Medical, ticker SEM. They operate critical illness recovery hospitals, rehab hospitals, outpatient clinics, and occupational health centers. The most exciting company you could imagine.
They're a slow grower, about 2% to 3% on top line, but they throw off a decent amount of free cash. They don't pay a dividend. They stopped that a few years ago to reinvest into the growth. They're down about 30% from their highs last August, which is why I'm looking at them now.
Hill: Steve, question about Select Medical?
Broido: What's the biggest challenge facing this company?
Mueller: Growth, really. They're already the biggest provider for many of the services they do. How are they going to grow reasonably well to reward investors?
Hill: Select Medical, StoneCo, Amalgamated Bank. Three very boringly named companies, Steve. You got one you want to add to your watch list?
Broido: I think I'm going to Brazil. Let's go with StoneCo.
Flippen: Ohh, yeah!
Hill: Emily Flippen, Jason Moser, Jim Mueller, thanks for being here! That's going to do it for this week's edition of Motley Fool Money. The show is mixed by Dan Boyd. Our engineer is Steve Broido. Our producer is Mac Greer. I'm Chris Hill. Thanks for listening! We'll see you next week!