The Market Breaks Its IPO Fever

In this episode of Motley Fool Money, host Chris Hill talks with analysts Jason Moser, Ron Gross, and Andy Cross about some recent market news. lululemon athletica (LULU -1.26%) hit new highs on earnings. WeWork's road show tanked, and its future looks grim. Stiff competition from Microsoft (MSFT -2.45%) put dark clouds on Slack's (WORK) horizon. Plus, updates from DocuSign\ (DOCU 0.10%), PagerDuty (PD -2.70%), Zoom Video Communications (ZM -0.99%), and Constellation Brands (STZ 0.06%) (STZ.B), as well as some answers to listener questions. And, as always, the analysts share some stocks on their radar.

Stay tuned for an excerpt from an interview with Emily Hoffman, the communications expert behind "Crucial Conversations," about how to more effectively communicate at work.

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

This video was recorded on Sept. 6, 2019.

Chris Hill: First up is DocuSign. Second-quarter revenue for the provider of electronic signature technology came in higher than unexpected. Shares of DocuSign up 18% on Friday. Jason, still not profitable, but the top-line number sure is going in the right direction.

Jason Moser: Chris, this is 2019.

Ron Gross: Yeah, come on, man!

Moser: A company doesn't need to be profitable. All kidding aside, if you remember, last quarter, the stock got hammered on some billings guidance that management offered. This quarter is the opposite. I think this is a good example of how billings can not only be a challenging metric with which to assess a business, but they can also present potential opportunities for investors paying attention. Billings essentially is reflective of new customers and subscription renewals and additional sales to existing customers. It's telling you how the business is doing. It can be a little bit squishy due to timing, new products, and whatnot. But this quarter, billings were up 47%, outpacing revenue growth, which is a good sign. They raised guidance, which is always nice to see as well. Ultimately, it is all about this company building out on its core competency in e-signatures and document management. If we've talked about the agreement cloud before, Chris, which I don't think we have, we're going to talk about it today. That's essentially the life cycle of document management from inception to signature to storage to execution. They are building out this agreement cloud, which is becoming the trusted source. It's the end-to-end solution. They have 537,000 paying customers now. Dabbling into the mortgage business here with Rooms for Mortgage. That is a big market opportunity. We saw before Ellie Mae went private, they had partnered with Ellie Mae. Ellie Mae was using DocuSign for their products. The mortgage market is a big opportunity. It's nice to see them entering that vertical.

Gross: Have they heard the phrase "path to profitability"? Do we have a sense of how long we have to wait here? 

Moser: Are we talking GAAP or non-GAAP here, Ron?

Gross: [laughs] How about adjusted GAAP? That's my favorite.

Moser: It's still a very young company, only about a year in the public markets. We have not seen them harp on that much right now. It is all about growing that top line and building out the cloud infrastructure and product suite. I suspect, though, this is a very high gross margin business, profitability will happen. I'm not terribly worried about that.

Andy Cross: From a business side, investment side, we like the stock. It is very volatile. You just look over the last year and a half, the stock touched base at $65 and been all over the place. Investors do have to realize, like many SaaS-based companies, it can be a volatile stock and you have to invest in for the next five years.

Hill: Shares of Lululemon Athletica hitting a new all-time high on Friday after same-store sales in the second quarter rose 15%. Ron, I know Lululemon reported other numbers --

Gross: [laughs] Yeah.

Hill: -- but when your comps are up 15%, it almost doesn't matter.

Gross: It's so impressive because it's consistently solid results. I must admit, better results than I thought they would be able to put up consecutively. This time around, really solid results in both online and menswear. Online up 30%. Menswear comps up 27%, so at a faster pace than the 15% overall comp. Really impressive to see. I was a skeptic of menswear. Again, I'll admit that. Clearly, I didn't call this one right. Really impressive. Revenue up 22%. Operating margins widened. Translated to earnings-per-share growth of 35%. They were able to raise guidance as a result. Stock's trading at a premium, no doubt about it. Forty-three times for a specialty retailer, wow. But, they're putting up the numbers to support it.

Hill: You point out one thing that is really important -- you talked about the men's segment growing. That's something management has called out for a couple of years now. It's nice to see any business executing against their stated plans. To provide you a little bit of cover, I was thinking this morning about, you go back six, seven years ago on this show, and we were all a little skeptical of Lululemon in part because the price point they were selling the yoga pants at, competition coming in from Nike and Under Armour...you're forgiven for being a little bit skeptical.

Gross: [laughs] Thank you, Chris, but it doesn't take the sting away. 

Hill: Shares of PagerDuty down more than 10% this week. Second-quarter profits for the cloud computing company came in higher than expected. PagerDuty's management raised guidance for the full fiscal year. Andy, still sold off.

Cross: If you look at the revenue growth at 45% for the quarter, very healthy. A little bit of deceleration. The company's recently public. But the focus that I was looking at, and I think investors are paying attention to, are the investments they're continuing to make in the business. Not profitable. Generated a little bit of free cash flow this quarter, which is nice to see. But operating expenses up 48%. Again, vs. revenue of 45%. Sales and marketing expenses up 49% as they build out both their people, which is the big investment, but also their solutions long-term. Looking at the stock, their sales may be up 38% for this year. I hope they can do a little better than that. It sells at 13 times sales. A really great culture they're building there for the solutions. Very tech-friendly. Insiders own north and 15%. I like the business long-term. It will be volatile. The stock's at a discount now.

Moser: I'm still confused as to exactly what this company does. I think it's the "pager" part of PagerDuty that really stifles me here. What does PagerDuty do?

Cross: They're the nerve center inside these big tech companies, they help developers and operations and salespeople monitor those solutions. If things are failing, not working, they're basically sending out alerts. It's like an on-call management for tech people. PagerDuty is a name they created when it was first envisioned inside Amazon when they had pagers, many years ago.

Hill: We've had a little bit of fun over the years at the expense of companies like Coach when they changed their name to Tapestry, which we didn't completely get.

Moser: Tronc.

Hill: Tronc, absolutely. This seems like one where we want to go ahead and openly encourage the executives at PagerDuty to put together a team, maybe think about some rebranding in 2020.

Zoom Video's second-quarter report was pretty much everything you would want to see if you're a shareholder. Profits and revenue came in higher than expected. The guidance was good. Shares of Zoom falling nonetheless, Jason. This is one of those recent IPOs that's taken off. Is it just about the valuation? Is that why it's sold off?

Moser: Yeah. I think the biggest risk to the stock clearly is the valuation in the near term. By every metric, the business is -- Ron, I'm sorry -- firing on all cylinders. 

Gross: [laughs] Don't be sorry!

Moser: Speaking of companies that may want to rebrand, I wonder if Zoom might not want to take the "Video" out of its name. They've introduced this new Zoom phone product, which is an audio-based Zoom phone offering. Hey, man, just make it Zoom Communications. It probably paints a little bit more of a clear picture. But I think, ultimately, you can never underestimate the power of a constant focus on making your customers happy. That's what founder and CEO Eric Yuan does, it seems day in and day out. Strong quarter. Revenue is up almost 100% to $146 million. Customers contributing more than $100,000 in trailing-12-month revenue were up over 100%. They stand at now 466. To put that in context, Slack just reported 720 of those customers. You can see there is some room there for Zoom to grow that customer base. Total of 66,300 customers with over 10 employees. Also, some interesting data that they had on the call and regard to remaining performance obligations or another billings metric, but ultimately, what it's telling us is that their customers are signing into longer-term contracts, and they're doing that because they like the product and they are getting more value out of it.

Hill: Let me step back for a second. A couple of the companies we've talked about not having to deal with the burden of being profitable -- you mentioned something, Andy, that got me thinking. It's basically how unprofitable companies invest. And when they're in that growth mode, that's something that we like to see. But I'm curious, as analysts, is that a little bit trickier to evaluate management on? It seems like for the blue chip, well-known companies that have a history of paying a dividend or buying back shares, they've got that track record, it almost seems like it would be a little easier to evaluate how they do on that. And I'm wondering if it's a little bit trickier for investors to look at younger companies that aren't profitable and judge how management is doing in terms of capital allocation.

Cross: I think in the big expenses, people, and evaluating the expenses you're going to have in people. We certainly saw it with PagerDuty this quarter and this year. It's far harder and more difficult to evaluate what the ultimate return on that will be. That goes into your compensation, stock-based compensation, and costs of being able to manage a growing business. For those young companies, a lot of it is in people.

Gross: Yeah. The younger companies, the growth companies, you'll often see missteps. They'll go in one area, spend a bunch of money, they'll have to pivot. That's part of the growing pains about being a younger company, eventually, hopefully, growing into a midsize or larger. But that's not to give the larger companies a pass. Some of them are horrible capital allocators, whether it's buying back stock or making an acquisition that they never should have in the first place. 

Moser: Also, with these younger companies, seeing a clear strategy, that they're focusing on their core competency. DocuSign is one good example. Zoom is another one. If you look at the customer base that they're signing up here, they added a little-known customer here called HSBC Bank, Chris. I say "little-known" facetiously here. That's going to introduce them to 3,900 global offices in 67 countries, and potentially 290,000 additional hosts. Clearly, they're doing something that is getting on these big companies' radars, particularly in the finance sector.

Hill: This week, Slack issued its first report as a public company. Shares fell 15% Thursday morning, but recovered some of that loss later in the week. What do you think, Ron?

Gross: There's actually a lot to like in this report. But I think investors are mostly concerned about slowing top-line growth here. Revenue was up 58%. That's compared to 82% growth last year. But there are some really positive things going on. Net dollar retention rate up 136% in the quarter. Means they're able to get existing customers to spend even more money. 

Hill: We were talking earlier today about, we all have Microsoft Office on our laptops, and there was an upgrade recently, and part of the upgrade is Microsoft Teams is automatically served up when I boot up my laptop. That's Microsoft's answer to Slack. And even though we use Slack here at this company, what I've seen with Microsoft Teams so far I think would have me nervous if I was either a Slack executive or a shareholder.

Gross: I think that's precisely the reason we saw weak guidance for the third quarter. Increasing competition, specifically Microsoft Teams. That led to revenue guidance of growth from 46% to 48%. Again, that's in contrast to the current quarter of 58%. Continuing this trend of saying, "Our revenue growth is going to slow," to support a $14 billion valuation. That's not what investors want to see here. Very formidable competition in the likes of Microsoft.

Moser: I do agree with Slack's leadership that channel-based communication is better in most cases than email, for most things. Where Slack falls down for me is on the organizational structure. There's just no organization to it. The nice thing is, it's a fixable problem. They just really need to get to it and figure out a way to organize it so that it's easier to find stuff without having to dig too much, and then still ultimately coming up empty-handed. 

Hill: The last high-profile IPO of 2019 is WeWork, which had originally scheduled its public debut for later this month, but something interesting appears to be happening during WeWork's road show with institutional investors -- namely, a lack of interest. This includes reports that WeWork's private valuation of $47 billion is roughly twice what Wall Street thinks it should be, Andy.

Cross: Whoa, Nelly! I don't think we've ever seen this kind of potential private market valuation downgrade as it goes ready to file. It's filed its report, it's ready to go public. This is pretty big news, especially if you're SoftBank, by the way. SoftBank is the largest investor. There are reports that Adam Neumann, who is the co-founder of The We Company, the owner of WeWork, flew to Japan to meet with SoftBank and Masayoshi Son, the founder of SoftBank. SoftBank's a big investor into WeWork, and now SoftBank's trying to raise money for their next Vision Fund, next hundred-billion-plus fund. When you're coming on the heels of the Uber IPO, that wasn't a huge success. Now, there are concerns at the SoftBank level whether we should even maybe think about pulling the IPO. Frankly, they need so much capital. WeWork is burning money. Revenues are growing, doubling, but their costs are doubling more so. The economics of the business, not showing the profits that investors want to see. Maybe they should think about pulling the IPO.

Hill: You mentioned the Uber IPO. Ron, there were bulls. There were people who thought that was absolutely going to work. And it may still end up working. The IPO wasn't necessarily a big success. I'm looking around, I'm not seeing a single person who's coming out in the financial media and saying, "I love this company at this price!"

Gross: If you're the investment bankers, it's a disaster. The demand is just not there for the stock. They won't be able to support the stock. I think there's nowhere for it to go but down unless you take a baseball bat to the valuation. Even then, there's just no appetite for this stock. If they pull it, I don't know where the capital comes from to support any type of growth going forward, whether private money steps in and tries to support this company.

Moser: You've got Wall Street saying maybe it's worth about half of what they're saying it's worth now. Think about, after it goes public, that thing could then sell off to the tune of another half. You're really looking at a company here that, the valuation does seem to be extremely in outer space. That doesn't mean that if it goes public, that's going to ultimately take care of business. I suspect if this thing does go public, it's going to get cut in half and it's possibly get cut in half again.

Hill: It feels like we're done with the IPOs for this year. At the end of this year, when we do our wrap-up show, this is probably going to be one of the stories of the year, the IPOs of 2019. There's a lot to like there, but I feel like we can pack it in now. 

Moser: Maybe. But it's also a very good example of remembering that when a lot of these companies want to go public, and they have a lot of private money behind them, there's an exit strategy that goes into investing in a lot of these privately held companies. These big investors have an exit strategy. Eventually they want their money back. That's what makes it so difficult not only for them, but for investors who then want to consider investing in it when it goes public. You're depending on valuations, and as we've seen many times, valuation is more art than science in most cases.

Hill: Constellation Brands has a portfolio of beer, wine, and liquor brands. Lately, Constellation has seen an uptick in the millennial generation's consumption of alcohol. Why? This week at the Barclays Global Consumer Staples Conference, Constellation CFO David Klein said he knows exactly the answer to that question: millennials are starting to have kids. Ron, I have to say --

Gross: Yes? [laughs] 

Cross: You have kids! [laughs]

Hill: I like the fact that he was very open and honest. As the parent of three kids that I really love, I think I understand why they're starting to see that uptick.

Gross: I see some truth in there. It's also just the age one is at when they're having kids. Work, stress increases, life in general gets more stressful. Looking to take a little bit of the edge off. It's interesting now that we're seeing a lot of these new beverages, whether it's the hard ciders or the sparkling wine with seltzer. You can imbibe, but maybe in a little bit of a healthier way?

Hill: I will say, all kidding aside, I do think that beer, wine, spirits, I think this is going to be one of the more interesting industries to watch over the next couple of years in part because, as you said, Ron, the entry of hard seltzer, hard cider, that sort of thing.

Cross: Not just that, but now we're seeing the cannabis market, CBD oil. There's other alternatives for Generation Z in their young 20s and the alcohol consuming years coming up. They have alternatives that are legal which weren't quite legal when we were growing up.

Moser: Boston Beer CEO just said they'll be jumping into that THC beverage market. They're just not going to be first. They're going to see how the space is dictated. They'll be getting in there, don't worry about it.

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Hill: A few weeks ago on the show, our guest was Motley Fool co-founder David Gardner. Recently on his podcast, David was joined by Jeff Haslow, our finance director and treasurer here at The Motley Fool. David and Jeff then got on the phone with Emily Hoffman, who teaches corporate clients how to have "Crucial Conversations." With more and more ways to interact at the workplace, companies are finding good communication is more important than ever before. David and Jeff started their conversation by asking Emily what she considers to be a Crucial Conversation.

[...]

Emily Hoffman: We define a Crucial Conversation as a very specific type of interaction. It's characterized by three defining features. The stakes have to be high. It has to matter; the consequences of the dialogue have to matter. You have to have opposing or differing opinions. If we all agree with everyone, and we're just nodding our heads, it's not crucial. You've got high stakes, you've got opposing opinions, and then the third element that is really the kicker is that strong emotions come into play. When you take those three things -- high stakes, opposing or differing opinions, and strong emotions -- and you mix them up together, that's when a conversation really turns crucial. The skills that we give people are around how to handle those really high stakes, difficult conversations. 

David Gardner: These conversations are the fabric of our life, in office, outside of office. The more we can get better at them without ever probably expecting to be perfect, the better off we are. Emily, let me ask you some. For some of our listeners not yet familiar with the book, I hope they're inspired by our conversation to read into it and learn more, but they're probably hearing phrases like "tools," or there's a self-consciousness about this that a lot of us probably don't think about when we have conversations.

Hoffman: Crucial Conversations is not a cognitive science. It's not something I need to understand. It's something I need to be able to do. It's a performance art. It is really about saying, can I learn something and then use a skill or a tool in a very behavioral way? So, we really try and offer up specific behavioral skills in the book that people can use. If you want a conversation to go differently than it has before, to go better than it has before, you have one option, which is to change the way you enter that conversation, to change the you that you bring to that conversation. I can't change the other person. I can change me. So, we really talk about, how do I work on myself first?

There's a couple of great skills. I'll talk briefly about two of them that I love. The first one is to say, I need to focus on what I want here. What is my intent when I come into that conversation? Ultimately, it's our intent, our motive, or what we call our heart, that drives our behavior. If I can get my intent right, I'm going to be successful. In fact, I'd love all of our listeners to do that right now. Think about the last time you had a conversation that didn't go very well. When you think about that conversation in your mind, maybe you got really upset, or maybe you cried, or maybe you just shut down completely, and thought, "This is not worth it. I'm not going to say anything because I'll just get in trouble," whatever it was you did, it didn't go very well. I want you to think about, in that moment, what was your intent? What was it you wanted? For most of us, if we're honest about it, our intent was to save face, to avoid conflict, to blame someone else, to be right in the conversation. That's pretty much always my intent with my husband. Like, I'm going to be right, he's going to be wrong, he's going to apologize me. Right? [laughs] It's so easy to get those kinds of motives. Instead, what we teach people is to challenge yourself and say, "That's maybe what my intent was when it didn't go very well. But what is it that I really want here?" And not just, "What do I really want for me," because that's very self-focused, but, "What do I want for that other person as well? What should they be getting out of our conversation? And what do I want for our relationship? And what do I want for our team or our organization?" Having to go through that process of asking those four questions and really thinking about, "What is it I want?" that's how we challenge and get back to a better intent, an intent that will help us learn, produce results, strengthen relationships, and ultimately want to hear the other person.

Gardner: That's a great example. About a third of the whole effort of the conversation needs to occur before the conversation ever happens. It's this self-examination, Emily, that you're talking about. You mentioned that there are two tools you're going to hand out. That's the first one. What's No. 2?

Hoffman: The second one is what we call mastermind stories. As I told you earlier, a Crucial Conversation is defined by high emotions. Typically, those emotions take us astray in a conversation. We get a fight or flight response. We call it silence or violence. I shut down or I get really aggressive in the conversation, and I'm driven that way by my emotions. So, what we teach in Crucial Conversations is a way to master our emotions. In order to do that, you have to understand that our emotions are driven by our stories. They're driven by the interpretations that we give to events. Often we think that our emotions are caused by other people or what other people have done. You can hear that when you hear yourself say, "Oh, he just really frustrates me!" or, "Oh, she just annoys me!" We think that what other people do creates an emotional response in us. But it's not true. The science doesn't show that. The science, in fact, shows that it's our interpretations and our judgments, our inner processing of what we've seen and heard, that creates an emotion. It's the story we've told ourselves about why he did that, or why she did that, that creates an emotion. What that does is, it unlocks tremendous power. It says, if you can learn to engage your stories, to process them, to cognitively challenge the story you've told yourself, you can actually create a different emotion in yourself, a healthier emotion, and emotion that will make you want to return to dialogue.

Gardner: One of my assumptions about human nature, and I've said this before on Rule Breaker Investing, and I stand by it, I hope the science bears it out -- Emily and Jeff, it's that we tend to judge ourselves by our intentions, and others by their actions. Somebody's late for the meeting. If it's us, it's like, "Well, I was trying to be on time." If it's them, it's like, "Dave's late again." So, instead, if we reverse those two things, and try to judge others by what we perceive to be their intent, hopefully a positive one, and ourselves by our results, I think that leads to a better meet.

Hoffman: I absolutely agree with that, David. I think you're right on in that. The thing that I often teach people in the class that I want to be careful about is, that shift of focus, where I judge them instead by giving them openness, and saying, "OK, there could be lots of reasons they were late to that meeting," what that does is, that allows me to challenge my story and change my emotions. But what I don't want to do is give a free pass to bad behavior. I still want to be able to go address it. I still need to have the Crucial Conversations, say, about your perpetual tardiness, or your poor results, or whatever it is.

Gardner: [laughs] Sadly guilty as charged.

Hoffman: [laughs] Whatever it is that's frustrating me -- I'm not going to say, let me be kind, let me judge not; I'm not going to say that just so I can let you off the hook. I'm saying it, and I'm reengaging with it, so I can change my emotions, so when I go talk to you about it, we have a really good conversation that's like, "Hey, Dave, why were you late?" I don't bring all my irritation and frustration there, but I don't avoid the conversation, either.

Jeff Haslow: One of my favorite questions while you're doing that process is, "Why would a rational person behave that way?" as you're looking at the other person. There are stories. There's a story, I think, in the book, or in the course materials, about somebody tailgating you all the way and flashing their lights at you, and you're getting very angry at them, and then they pull into the emergency room of a hospital.

Hoffman: [laughs] Right.

Haslow: And suddenly your anger goes away, and you understand, "Oh, I was judging this person for completely the wrong reason."

Hoffman: That's such a great example! The fact that your anger can go away quickly is evidence that the anger was caused not by the tailgating, but why you thought the tailgating was happening, the story you told yourself. And the moment your story changes, your emotion changes, as well.

Gardner: So, when we stop, we take a breath, we ask ourselves, what do we really want? And how does that affect us and our emotions in the moment? It makes me think, Jeff and Emily, that it's a higher order of thinking. A lot of us, it's hard to observe ourselves briefly within a conversational context and then plunge back into that conversation and behave better. Emily, is that a skill that we all need to develop? Or is it already there inside us and we just need to let it grow some? Help me understand how I can be more self-consciously observant and reflective in the context of Crucial Conversations.

Hoffman: I think it is a skill that we can develop. I say that because I've seen people who haven't had the skill develop it. Now, that being said, some of your listeners are probably saying right now, "But wait, I know some people who are naturally good at it." Here's my anecdotal evidence about people who are naturally good at communication -- it's that they actually have parents, or teachers, or school friends, who are naturally good at communication. I actually think they've learned it, but they just learned it a long time ago. I do think, when we get to the workplace, some people do seem naturally gifted at it, but it's not that it's not a skill; it's that it's a skill they've already learned.

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Hill: Before we get to the Fool mailbag, if you've got an Amazon Echo or a Google Home Assistant, then you can get The Motley Fool's daily news briefing. Just look for The Motley Fool on your Echo or Google Home app. Click subscribe, and you are good to go. That's The Motley Fool's Daily Flash Briefing, seven days a week on your home assistant.

Our email address is [email protected]. Question from longtime listener, Bruce Woodford, who writes, "Oaktree Capital Group has had a nice run since being acquired by Brookfield Asset Management. It's up 21% since the announcement after years of remarkably flat returns. However, that fat, juicy dividend I'd been enjoying appears to have gone away. I was expecting it to show up about a month ago. I don't see any reporting about a change on the part of management. Can you explain what's going on? What am I missing?"

Gross: Yeah, Bruce, so, Oak is being acquired. They paid their last distribution dividend on May 10th, $1.05 per unit, and that will be the last one for Oaktree. The acquisition will close sometime later this year, then Brookfield will have their own dividend policy, make their own decisions of where that dividend goes. But as far as the Oaktree dividend that you've loved so much, that's done.

Cross: We own Oaktree in one of our real-money portfolios. I just reached out to Interactive Brokers, which is our broker, they have not yet provided the information on how to vote for the merger because it's part cash, part stock. They're in the works of getting that ready for their shareholders. People may not have received all of the information yet from their broker on the Oaktree-BAM merger.

Hill: Is this a common occurrence? I'm not really familiar with Brookfield, but on the surface, this seems like an unforced error. Bruce can't be the only person who bought a stock thinking, "Oh, I'm buying it for the dividend," and then, to just discontinue it...

Gross: They were very clear that there would probably be only one more distribution when they announced the acquisition. At some point, you do have to suspend it, because they're into closing mode here. The companies are going to be one company here, so at some point, you just have to cut that off.

Hill: Question from Sam Muffley in Queens, New York. He writes, "When you're buying new stocks or adding to your current holdings, how do you think about money amounts? I have around 60 stocks and I do bite-size purchases that end up being about 1% of my account each time. I'd value any thoughts that you have." We'll go around the table. Jason, I'll start with you.

Moser: I think primarily, the goal is to make sure that whatever you're doing when you invest that money, don't pay any more than 2% of the overall purchase in transaction costs. Whether you're paying nothing or $5.95, let that be your guide there. Then it boils down to investing philosophy. Are you looking to own 60 or 120 different stocks? Are you looking to own a more concentrated portfolio? Do you feel like there are some companies in there where you'd like to make higher-conviction bets? I shouldn't say bets. Higher-conviction investments, rather. But, for me, it does all boil down to making sure you're not overpaying in transaction costs. From there, it's investing philosophy.

Cross: Yeah, I have no problem with nibbling into positions. We've talked about buying in thirds a lot, for many, many years in Stock Advisor. Start a position, 1% is a good amount. What is important to know is how -- Jason was saying this -- how you're going to allocate future purchases. Do you want to keep this at 1%? How's it going to grow? But, starting positions, as opposed to jumping in and putting a chunk of money, whether that is $1,000, or $10,000, or $100,000, into a stock, depending on your portfolio, don't feel like you have to go in and match up a complete allocation. Buying in, as long as you maintain your costs effectively, I think that's OK.

Moser: You know what I think is really helpful? Once you get used to that old David Gardner axiom of buying your winners, adding on the way up, it really makes it a lot easier. I think a lot of people feel like you have to go all in, get in at the cheapest price. One you feel good about adding to a stock on the way up, it makes this whole question a heck of a lot easier.

Gross: I'll take the other side for the sake of argument here. If your intent is to be an active participant in your investments, it gets difficult to do when you get up to 100 stocks. It's very difficult to follow that many companies, to determine if they're on track, they're doing well, you continue to believe in them. If you want to be more passive, and you're going to let them ride and hopefully they'll do well over the long term, then you might be OK. One other caveat is, the more stocks you own, once you start to own 100 or more, you're so diversified that it's likely that you're going to be getting a return that is equivalent to whatever the return of the market is, whether that's the S&P 500 or the Wilshire 5000. Diversification to that extent will lead to returns that are equal to the market itself.

Moser: What's that Buffett quote? Something like diversification is for people who don't know what they're doing? I don't know that I necessarily agree with that, but I found it interesting to hear that coming from him at one point.

Hill: You know what? That's a little snarky for Warren Buffett.

Gross: [laughs] Yeah, I don't think he said that.

Hill: But, credit to Sam Muffley. He's a young guy, so the fact that he's got around 60 stocks, he's got that kind of diversification, that's a good path to be on. 

All right, let's get to the stocks on our radar. Our man behind the glass, Steve Broido, is going to hit you with a question. Ron Gross, you're up first. What are you looking at this week?

Gross: I started looking at Jack Henry & Associates, JKHY. An August Stock Advisor recommendation. They're a tech services and data processor for smaller U.S. banks and credit unions. All those regional or midsize and small-sized banks out there, they need technology as well. Jack Henry is there to provide it. They've got a really incredible track record of stable growth, market outperformance, growing dividend. Revenue has grown for 30 consecutive years. They've increased their dividend for 23 consecutive years. The continued trends toward outsourcing will only continue to spur that growth.

Hill: Steve, question about Jack Henry?

Steve Broido: Can you give me a more specific example of what they actually do? I'm a little confused here what Jack Henry is doing.

Gross: Sure. They'll provide the technology for a small bank. So, whether it's electronic funds transfer, or a mobile banking platform, automated teller machine platforms, digital check management systems, all of those technology solutions that smaller banks need.

Hill: And, much like PagerDuty, they have a name that doesn't necessarily --

Moser: [laughs] I was going to say, it lines up for me with a midrange whiskey or something. "Give me some Jack Henry."

Hill: Jason Moser, what are you looking at this week?

Moser: I wonder how many people are listening to us on this company's products. I'm looking at Sonos, ticker SONO. Sonos makes their money by selling audio equipment in the form of wireless speakers and home theater speakers and components for those speakers. They are expanding their partner ecosystem. They've incorporated things like Alexa and Siri and Google Assistant voice control. Big partnership with IKEA they recently announced, which actually incorporates Sonos speakers into IKEA furniture. I really have to check this out.

Gross: That sounds like a bit of a stumble.

Moser: [laughs] Maybe. Maybe not. I don't know. We'll see. Balance sheet is in good shape. This is an interesting business. High reputation there in the speaker space. Learning a little bit more about the business as we speak. 

Hill: If I buy one of those things at IKEA, I don't have to put the speaker together, do I?

Moser: No, no.

Gross: Does it come with a meatball?

Moser: You might have to put the legs on the furniture, but the speaker should already be in there.

Hill: Steve Broido, question about Sonos?

Broido: We have Sonos at home. I love it! What is your favorite thing about Sonos, JMo?

Moser: Honestly, it's the audio quality. That's what's captivated my attention. As cool as I think Amazon's Alexa technology is, I don't think the audio technology is quite up to par with something like a Sonos. We'll have to give it a shot, Steve. That's interesting, to know that you own it.

Hill: Andy Cross, what are you looking at this week?

Cross: Another fast-growing cloud SaaS company, ZScaler, ticker ZS. It releases earnings next Tuesday then it has an investor day. It went public in March 2018. More than 3,000 companies it helps provide security for their applications. All based in the cloud, so there's no on-site applications. Market cap about $9 billion. Growing 50% a year. Not profitable. But really looking at how they're continuing to grow the business and customers they're serving and what their revenue retention rates look like. Owner and founder owns almost 20% of the company. Looking to see how the growth prospects are shaping up for ZScaler.

Hill: Steven, question about ZScaler?

Broido: That's definitely the coolest company name I've heard in a while. Where did that name come from? Do you have any idea?

Cross: That's a good question, Steve! I don't know where they got that name.

Gross: XScaler was taken.

Hill: Sonos, ZScaler, Jack Henry. Three very different businesses. Steve, you got one you want to add your watch list? 

Broido: I'm enjoying Sonos at home. Maybe I will add it to my portfolio. You never know!

Moser: Hey, now!

Hill: All right! Jason Moser, Andy Cross, Ron Gross, guys, thanks so much for being here! That's going to do it for this week's edition of Motley Fool Money! Our engineer is Steve Broido. Our producer is Mac Greer. I'm Chris Hill. Thanks for listening! We'll see you next week!