In this episode of MarketFoolery, host Chris Hill and Motley Fool analyst Bill Barker look at a few of today's market stories and answer some listener questions. Bank of America's (BAC 2.06%) new $20 minimum wage comes right up against an appearance at Capitol Hill. Meanwhile, shares of Cerner (CERN) popped big on activist interest from Starboard Value. The stock's lagged for the past five years, and shareholders seem pretty happy to get some fresh air.

Plus, Bill weighs in on how investors can sort out value plays from value traps when it comes to big, low-growth heavyweights like grocers or airlines.

There's also a stretch of a few minutes where we verbally mix up GE (GE 1.44%) and GM (GM 1.98%). Oh, the difference one little letter can make -- thank you for your understanding!

To catch full episodes of all the Motley Fool’s free podcasts, check out our podcast center. A full transcript follows the video.

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This video was recorded on April 9, 2019.

Chris Hill: It's Tuesday, April 9. Welcome to Market Foolery! I'm Chris Hill. Joining me in studio today, from MFAM Funds, a proud graduate of the University of Virginia Law School, Bill Barker. Congratulations to your Cavaliers!

Bill Barker: Thank you! [laughs] Thank you very much! It was a good run!

Hill: Heck of a run! We've got condolences to our colleague, Mike Robinson, who's a Texas Tech grad, who was at the basketball game last night. But congrats to Matt Trogdon, our colleague, and the many UVA graduates who work here at Fool headquarters. A lot of orange and blue around the office today. A lot of people flying the colors. And why not? They should. 

Barker: Yeah. I mean, this a Virginia company. 

Hill: That's true. 

Barker: People don't know that. 

Hill: And let's face it -- when it comes to majors college sports, you're probably going to have a better shot at winning a national title with your law school than your undergraduate alma mater. 

Barker: Time will tell! [laughs] 

Hill: [laughs] I guess we'll see. We're going to dip into the Fool mailbag. We've got news from the healthcare industry, the packaged foods industry. 

Let's start with this. Get the popcorn ready because on Wednesday, the CEOs of the biggest banks in America are heading to Capitol Hill to testify before the House Financial Services Committee. The rundown is: Jamie Dimon from JPMorgan, Michael Corbat from Citi, David Solomon from Goldman Sachs, Jim Gorman from Morgan Stanley, Brian Moynihan from Bank of America; we'll get to Wells Fargo (WFC 1.24%) in a second. Coincidentally -- or maybe not coincidentally -- Bank of America announcing today that the company is raising the minimum wage at the company to $20 an hour. If nothing else, the timing of that announcement makes Wednesday probably a little less painful for Brian Moynihan testifying on Capitol Hill.

Barker: Yeah, I think so. I don't think there's much coincidence about it. We'll see. It seems like a smart political play at the moment, getting the headlines that they want and positioning. They'll expound on that a bit in front of the camera. I think that it takes some of the wind out of the sails of those that are going to attack at least Bank of America. And I think every everybody is going to be under pressure to respond. 

Hill: In terms of Wells Fargo, at the moment, if someone from Wells Fargo is on the list to testify, I haven't seen it yet. Doesn't mean it's not going to happen. We've still got time before the hearing. But I'm reminded of a conversation I had a couple of years back with Paul Lienert, who's covered the automotive industry for 30-plus years. We have him on Motley Fool Money pretty much every year around the North American International Auto Show in January. Talking to Paul about the ripple effect of Automaker X having some sort of large failure, and failure to disclose the failure of whatever the technology is -- whether it's Volkswagen and the emission standards -- and just the ripple effect. If you're any of the other automakers, you're like, [groans]. Because they all pay for it in some small way. 

By the same token, Wells Fargo just continuing to screw up in terms of their own culture; the fake accounts scandal; Tim Sloan, who was there when the scandal happened, not being the right person to try and clean up the mess, and then he is shown the door. If you're any of these other CEOs, I have to believe in the back of their mind, at some point tomorrow, they want to say, "Hey, at least we're not Wells Fargo." It's one of those things where, yes, it's a Wells Fargo problem, but it really does spread to the other banks. 

Barker: Yeah. I think, to the extent they can, they'll probably redirect the questioning toward, "Oh, well, Wells Fargo. You probably would have enjoyed having them here to kick around." 

I was looking up some of the data on what's been paid so far, post-2008, 2009. About $250 billion in fines against the banks. Not all that's cash. Some of that has been settled by loan forgiveness and some other credits. But in terms of, there was a bailout of the banks, true enough. They paid back the money that they were in some cases forced to borrow from the federal government. That was paid back. They have paid fines. And I don't know that that it is a strong thing to say, "Hey, look, we've already paid a quarter of a trillion combined in fines. Don't act like we haven't already been punished." That's not going to get them anywhere. But they can talk obliquely, I guess, about having made amends at times. 

Hill: One difference between now and five years ago, eight years ago, that sort of thing, is you can make a pretty strong case that big banks are no longer No. 1 on Capitol Hill's enemy list in terms of the business world. I think big tech has probably supplanted them. So, for any CEO who wants to trot out their, "Hey, at least we're not Wells Fargo," they could just as easily say, "By the way, we're also not Facebook." 

Barker: I don't know that's going to go anywhere, either. They've got to accentuate the positive part of the story. This $20 minimum pay, which Moynihan has said, "Look, anybody who works here is going to be making at least $41,000 a year," that sounds pretty good if you're thinking in terms of a minimum wage job, of which there are essentially none in a bank, right? You've got bank tellers. To the degree that that's a major part of the employment of banks, I don't know how much that's the case. But you don't have a lot of employees at any of these banks who are thinking of, "What are the other minimum wage jobs that I would be comparing this against?"

But I think it is a positive. They're pointing to it in part as something that they are doing. They're connecting the dots between the tax cut and passing on some of the profits that they're sitting on from the massive tax cut. That will get them some of the way. Maybe one half of the aisle, one side of the aisle, will allow them to talk about that. The other half, probably less so.

Hill: Like I said, get the popcorn ready. 

Let's move on to Cerner Corp., which is a healthcare technology firm. Cerner has reached an agreement with Starboard Value, well known activist investors, to add four members to the board of directors. Cerner is also buying back $1.2 billion worth of stock. Which of these two things is pushing shares of Cerner up 10% today? Based on the fact that shares of Cerner have treaded water over the last five years or so, I'm assuming it's the board seats. 

Barker: I think, yeah. Swimming along in the line that Starboard is recommending, it's remarkable, Starboard really doesn't have that much of Cerner. I read about 1% of Cerner's stock. But there's a whole laundry list of changes that are going to be made, including the strategic business unit being eliminated. I think the dividend was just recently started by Cerner, and it looks like they are going to be forced to change some of their capital allocation, including at least an authorization to buy back up to $1.2 billion. Whether that gets follow-through or not, we'll see. But, I think the board seats. It's all part of the equation. I don't know how you can separate a 12% move when it opened, and now it's maybe 8% or 9%, what part of that is ascribed to what part of this whole package.

Hill: I'm not looking to knock Starboard Value. But I am curious about something that you just said, which is that Starboard Value only has a 1% of Cerner's stock? How are they getting four seats on the board if they only have 1% of the stock? This seems like something you'd get when you have at least 5% of the stock, and really closer to 10% of the stock. 

Barker: I agree. I was surprised when I read that. I want to admit that I need to make sure that that's the case before going too far. But if it is the case, you can guess that they have some other shares that they are in communication with that are on their side. Because, yeah, 1%, if that's all that it means? Sell your 1% [laughs] if you're that unhappy. You don't have as much power as you think. But if they have plenty of people on their Rolodex and know where to push the buttons and organize the votes at proxy time, then that's a different story. 

Hill: Yeah, I was going to say -- if, in fact, it's only 1%, that opens up a whole world of opportunity for activist investors, potentially.

Our email address is [email protected]. Question from Deng, who's writing from China. Deng writes, "I've been listening to MarketFoolery since I started investing in stocks in 2014. Lately I've been looking at some large-cap stocks which may not grow that fast." He cites his examples: Kroger, General Motors and some airline stocks. He goes on to write, "I'm considering their P/E values, which are below 10, making them cheaper than the market average. Are they a bargain? Or are they potential traps?"

Oh, the age-old question, Deng: value play or value trap? That is always the thing that sucks in... I was going to say value investors, but really, a lot of investors. There are growth investors who see a stock get knocked down 20% in one day and immediately start thinking, "It's on sale 20%. Maybe I should be jumping in here."

How do you help people think about solving this question? We're talking about more than one stock here. We're not going to go through all of these. But, what do you look for, once you've made that initial calculation of, "OK, here's a large-cap. It's not going away." Sometimes we're looking at large companies that are paying a dividend, so there's some reason to buy them. Maybe the businesses isn't setting the world on fire, but you've done the math, and you say, "Look, from a P/E standpoint, this is significantly cheaper than the overall market. Why shouldn't I buy a few shares?"

Barker: Yeah, it's a good question. I'm looking at data that right now, in comparison to its forward earnings. GE, for instance, is at 5.8 times forward earnings. And boy, that sounds cheap.

Hill: That is cheap. 

Barker: Over the last five years, the average is 6.2. 

Hill: For the market?

Barker: For GE. So, it's maybe 5% cheaper than its five-year average, in comparison to the forward earnings expectations. Why is it so cheap? One, the forward earnings tend to be overly optimistic, not only for GE, but for everybody at this time of the year. You've only got one quarter, not even yet reported. So there is the typical enthusiasm about the year ahead. As the year goes down, and companies report, they say, "Well, we're not going to earn quite as much as we thought we would, or you thought we would."

Additionally, just it's a highly cyclical industry, autos. Auto sales have begun to level in decline. That is the way cycles work. You're looking at pretty good rear view earnings for GE. It's just that highly cyclical stocks don't carry big multiples. When they have good earnings, it seems really cheap. I can go back to 2016 and find that the company was trading at 4X earnings. Then, after last year, had a little bit of a decline.

Hill: Is this GE, or General Motors?

Barker: General Motors.

Hill: OK. Wow!

Barker: Have I been saying GE this whole time?

Hill: Yes, you've been saying GE this whole time.

Barker: Well, that's pretty cyclical too... [laughs] No, no! General Motors, GM.

Hill: I was like, "How is GE... "

Barker: Dan, can we just filter all that out? Is there some sort of AI programming that can solve all of my misstatements? [laughs] 

Hill: If there was an AI program, believe me, the AI program would be sitting in that chair right now. We'll put a little note in the in the description of the podcast, and hopefully people will read that. That makes a lot more sense to me, that you've been talking about General Motors this whole time.

Barker: It makes sense that I would be misstating things for minutes. 

Yeah. Kroger is fairly similar. The major grocers, they're not growing very much. In fact, they're under some increased pressure from Amazon/ Whole Foods. So they're not really expected to compound earnings, particularly. People aren't going to be eating more next year than they are this year. You're really looking at sort of population growth as the driver of what they can do, other than acquiring other grocery chains, and that doesn't look like the greatest use of capital at the moment, either. 

Kroger is trading at 0.16 times sales. Of course, there's very, very, very low margins for grocers. And that's quite a bit less than the five-year average of 0.26. On a valuation basis, I'm a little bit more attracted by that. But I'm not really so attracted at what the next five years look like for Kroger. 

Hill: Well, I think it's a great point that -- again, the question is, "I'm looking at these stocks and their PE relative to the market." I think the point you made at the beginning, before you started confusing GE and GM, was, "Don't just look at that! It's a good point of comparison, but you also want to look at, what is the PE of this stock or relative to what it has been?" Compare the valuation to itself. As you said, in the case of General Motors, yes, it's cheap relative to the market, but relative to what it has been over the last couple of years, it's not like it's trading at some amazing discount to what it has been. 

Barker: Yeah, you want to compare it to its own history and to its sector, to its closest competitors. In that case, you normally learn fairly quickly whether there's something company-specific or whether it's a broader application to the industry. Ford right now is trading at 7 times earnings. A little bit more expensive, but not meaningfully so.

Hill: Speaking of large caps, there's a story from last week that we did not get to about Kellogg. Kellogg is getting out of the cookie business so it can focus on breakfast cereal and snacks. Kellogg is selling its Keebler cookie brands and Famous Amos to Ferrero for $1.3 billion. Ferrero, the parent company of Nutella and Tic-Tacs, two tasty things that don't necessarily taste great together. 

This seems like a good move for Kellogg. You look at the cookie brands that they had, they were doing less than $1 billion in sales and driving not a lot of money in terms of operating profit. It seems like, even though the breakfast cereal industry has its challenges, I think if I'm a Kellogg shareholder, I'm generally happy about this move.

Barker: I mean, I don't know how much it was distracting them from focusing on cereals. If it was, then it's a good move to get rid of it. I mean, Keebler cookies, it kind of runs on its own. You get some synergies from just taking up more shelf space in the grocery store. That allows you some economies of scale. But maybe it wasn't in this case. Maybe the logistics of getting the cookies into the same place that the breakfast cereals were going was not achieving any economies of scale. I don't know. I think consumers won't notice any difference, ultimately.

Hill: No, they definitely won't. Look, Kellogg's been trying to sell these for at least since the end of last year. This was something that they were able to execute. Maybe they didn't get the price that they wanted, but they were clearly looking to streamline. Good for them. Like you said, consumers aren't going to be able to tell the difference. I'm sure, for all of the jokes I make at the expense of Mondelez, they're really crushing it in the cookie business. I'm sure part of the thesis for Kellogg was, "Look, we don't need to keep doing this."

Barker: "We can't compete with 70 flavors of Oreos."

Hill: "We can't, and we're not going to anymore. We're going to let that be someone else's problem. Now, we'd like to introduce you to 70 flavors of Pop Tarts. Let's talk about that!" And that's working for Kellogg. 

Barker: Yeah. There are quite a few flavors of Pop-Tarts popping up, but it's not quite as trendy as the Oreos. They don't have the flavor of the day kind of thing that Oreo seems to.

Hill: They don't. The thing about Oreos that has not broken through for Pop Tarts is the brand marketing alliances that you see. The most recent one for Oreos is the Game of Thrones inspired Oreo cookies, with the final season of Game of Thrones getting ready to start. I guarantee you, the HBO marketing people were not going to Kellogg saying, "Look, we have an idea. It's a Game of Thrones breakfast cereal and Game of Thrones Pop Tarts." No. That's an easy one. That's a layup. 

Barker: Who would not want dragon-flavored Oreos? 

Hill: What does that taste like? I think they're just going with straight-up chocolate. 

Barker: What's that got to do with Game of Thrones

​Hill:​ I don't know!

Barker: It's like they haven't been watching the show at all. 

Hill: I don't think these are dragon-flavored. 

Barker: Well, that's just a missed opportunity. You would have thought Oreos would have been on top of that one. 

Hill: Well, there's a Game of Thrones fan at my house, so I think I'm going to have to pick up a box of one of these things. For all of my railing against Mondelez...

Barker: You're going to fall for it, huh?

Hill: I mean, if I can momentarily buy one of my kids' love for a few bucks? Yeah, sure! I'll do that! I have no problem doing that! Don't tell me you haven't done that before! Most parents have done that. 

Barker: Oh, yeah!

Hill: "Here's a little thing. I'll spend a couple of bucks. My kid will be happy. That'll be that."

Barker: It's just Oreos. 

Hill: Right.

Barker: It's not wasted money.

Hill: Right. They're going to get eaten, might as well benefit from it. 

You can read more from Bill Barker and his colleagues -- maybe in the next issue of Declarations, their free monthly newsletter at MFAM Funds, maybe they're going to write about GE. Maybe they're going to write about GM. Maybe both. There's only one way to find out, people! Go to and sign up for Declarations. It's free, for crying out loud, and it's good, too! It's actually really good content from Bill Barker and the MFAM Funds team. Check it out! Thanks for being here!

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