In this episode of MarketFoolery, Chris Hill talks with Fool senior analyst Jason Moser about some of today's market news.
2019 is a bad year to be a failing consumer-goods seller. The guys discuss the post-bankruptcy future of Forever 21, a few factors that led it to this point in the first place, and what this means for investors in mall-based REITs like Simon Property Group (SPG +0.94%).
Then, a look at the $6 billion real estate trade that just went off between Colony (NYSE: CLNY) and Blackstone (BX +0.00%). Plus, the guys answer a listener question about dollar-cost averaging versus lump-sum investing into a 401(k) amid all this oncoming recession talk. Tune in to hear more.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
This video was recorded on Sept. 30, 2019.
Chris Hill: It's Monday, Sept. 30. Welcome to MarketFoolery. I'm Chris Hill. Joining me in studio today, the one and only Jason Moser. Happy Monday!
Jason Moser: Happy Monday, indeed!
Hill: Happy last day of the quarter!
Moser: That is right. The last day of the quarter. Or, it's just the eve of the beginning of a new quarter.
Hill: The eve of Q4. Kick into October and earnings season and Halloween and all the goodness that comes at the end of the year.
Moser: Did I see correctly -- I lose track of this stuff over time --
Hill: It's International Podcast Day.
Moser: 1,690?
Hill: That's the number episode we're doing right now. No. 1,690.
Moser: I ... I've got a little lump forming here in my throat, Chris. I've been around here for a lot of them.
Hill: Didn't think we were going to hit that when we started in January of 2011.
Moser: Very grateful.
Hill: We're going to hit some real estate. We're going to dip into the Fool mailbag.
We're going to start, unfortunately, with another retailer declaring bankruptcy, and that's Forever 21. A privately held company, but obviously, ripple effects for publicly traded retailers, particularly in the apparel space, which is what Forever 21 does. They are closing nearly half of their locations around the world. They've got somewhere just under 800. They're going to close about 350. They've got some financing to get through this. It seems like there is a path forward for them, but I don't know. As we get closer to the end of the year, and we start thinking backwards on, what will we remember about 2019? I think one thing will be the high-flying IPOs that turned out to be not profitable companies. I think that'll be one thing. And I think, once again, big chain retail struggling is going to be another.
Moser: Yeah. I'm not terribly surprised at this. I have two daughters, so I've been inside Forever 21 more than I care to discuss. You could see that they are just these big footprint stores with a tremendous amount of stuff. If you get in there at the wrong time of the day, half that stuff is on the floor. There's no competitive advantage in this line of work. It's not to say that people don't need clothes. Obviously, we do. It's just, when you're looking at it from the perspective of where things are going, where commerce is going, it just doesn't make a lot of sense to maintain these massive footprint stores. Forever 21, I think, for the longest time, had built that brand around a core audience. To see them trying to move into other demographics -- they were testing out men's clothes and whatnot -- I don't think that's something that's feasible with a brand like that. So, fast-forward to today, this core market that we call fast fashion, which is just, you go in there and get whatever you want for cheap; it's not unique, but you can go in there and find a lot of cool stuff to buy if you're looking for clothes. Fast fashion is really having a tough time. It's running into some headwinds as consumer shopping behavior is changing. Sustainable fashion is something that's becoming more important. Even used fashion. It's really interesting to see in this space companies like TheRealReal, which is essentially -- I don't want to say "used," but I guess it is. It's just consignment retail. But, it's online. You've got companies like Farfetch that are bringing the luxury goods market online. It is about figuring out ways to be as efficient as you possibly can. Having this massive footprint of stores is turning out to be not an advantage, but maybe a disadvantage in many cases. It's gotten Forever 21 to this point. Chapter 11. They'll reorganize. Hopefully streamline the operations, shrink their footprint a little bit. Perhaps they'll still be able to exist, just in smaller form.
Hill: I think there are a couple things going on here. One is, you think of how they got to where they are today. You touched on this. They grew not just their store count, but also the size of their stores so that there was this impetus within the company to expand outside of their core audience. So, going outside of young people, and saying, "We're going to really push into men's clothing. We're going to push into lingerie," as opposed to just sticking to what was succeeding for them to that point. As opposed to, by the way, a company like Lululemon, which really has taken a methodical approach. I think we're in year three now of their stated plan to expand international and expand into menswear. They've been very methodical about it. They're being very smart about taking more of an omnichannel approach, as opposed to, "We'll have these huge blowout stores." Forever 21 just got too big, too fast. Now they're going to have to get a lot smaller.
Moser: I think that's right. You look at the implications this could have for investors, how this could affect investors -- Forever 21 is not a publicly traded company, but Simon Property Group is. That's a real estate investment trust that has a big presence in the mall and outlet store area. Forever 21 is their seventh-largest tenant by rent. This is going to be something that certainly affects Simon to a degree. You look at Simon and their core market, malls aren't exactly booming these days. It's understandable. Consumers are getting their things different ways. Consequently, you've seen Simon have not really that stellar of a go over the last five years. Typically with real estate investment trusts, they're not going to be the biggest capital appreciators, but you're going to pull a nice dividend yield along the way. And certainly, you've been able to do that with Simon. But the stock itself has underperformed woefully. And this is not the kind of news that they want to hear. It's going to be interesting to see how this shakeout continues. It feels like this commercial real estate space we're finding a lot of stuff that they're not sure what to do with right now. The nice thing is, for someone like Simon, they had the resources to be able to pivot and do other things with this real estate. But I think that's going to take a little while to figure out.
Hill: One more thing to watch in the public markets is, in 2020 when Old Navy gets spun out of Gap. Old Navy is something of a comp to Forever 21 in terms of its core audience. If you look at the way Old Navy is marketing itself these days, they're looking to expand outside of their -- Old Navy really made its bones as inexpensive, decent-quality clothing for kids. They're marketing more toward adults now. It'll be interesting to see if that pays off for them. If they go down the road of Forever 21 -- hopefully the executives are watching this play out and saying, "OK, this is not the route we need to go. We need to get more into e-commerce."
Speaking of real estate, Blackstone Group is buying a portfolio of warehouses from Colony Capital for just under $6 billion. Interesting in a couple of ways here. First and foremost, for Blackstone Group, do you like this purchase? The stock down 1% or 2%. I'm assuming that nobody's too concerned about the check they just wrote.
Moser: No, I don't think so. I think it's really interesting to see the juxtaposition of the strategy between Blackstone and Colony. They're doing two different things here. Blackstone is looking to gain as much presence in the e-commerce space, particularly the last mile, as they can get. That's what this deal is all about, is adding to this real estate portfolio that's going to play into this move toward more and more e-commerce and us getting our stuff as quickly as possible. I think that's a trend that's here to stay. I think we're all pretty much bullish on e-commerce and getting our stuff faster and faster. So, from that perspective, I think it makes a lot of sense for Blackstone's strategy here, to try to gain as much presence in that space as they can. This is the second such deal this year for them.
When you look at Colony, very much the other side of the coin. They're like, "We want to get out of this traditional real estate space." They're looking at the way technology has changed commercial real estate. It goes so far beyond retail. You think hotel owners, the pressure they're feeling from companies like Airbnb; or companies like WeWork and how that's changing the commercial real estate space for places of employment. It's just a much different space now. So, Colony looking to get a little bit more into the digital space, looking at the infrastructure, mobile phone towers, data centers, stuff like that.
Two very distinct strategies. I think it actually works out well for both of them. The thing about real estate, it's pretty darn prohibitive for a lot of people. It's difficult to invest in real estate because it requires a lot of capital. Blackstone has a ton of it. I think this really lines up with the general strategy they laid out at the beginning of the year. And it's one that I think makes a lot of sense. If you believe in the tailwinds for e-commerce, if you think that it's going to become more and more important over time for this last mile to really come through for customers so we can get our stuff more quickly, I think you have to look at what Blackstone's doing here and like it.
Hill: I'm not so surprised by what's happening with Blackstone's stock. As you said, this is the second deal of its kind. They're clearly pushing into the warehouse space. I'm a little surprised, Colony Capital's stock isn't moving higher. It's basically flat today. I'm assuming it has to do with the debt. Blackstone is somewhere in the neighborhood of a $60 billion company. Colony Capital is about $2.5 [billion to] $3 billion. So, considering the money they just got, I'm a little surprised. But, like I said, maybe it's just the debt.
Moser: We talk about this all the time -- you can never really predict what the market is going to do on any given day, how it's going receive any piece of news. I think, generally speaking, though, you look at this deal, it lines up for both companies well, given the strategies they're pursuing. Time will tell whether they're making the right call or not.
Hill: Last week on our YouTube channel, Matt Argersinger, Austin Smith, and I did live Q&A about real estate. You can check that out. You can check out millionacres.com, which is the business that Matty and Austin are heading up. One of the things Matt in particular talked about was those REITs that are playing into the warehouse space because of the rise of e-commerce. A lot of good stuff there.
Our email address is [email protected]. You can also tweet at us on the Twitters. We got a question from @smilegirllawyer, who writes, "I need to roll over a 401(k) into a traditional IRA. With everyone jittery about a potential downturn, should I buy bits over time? Or, should I invest all at once? I'm a long-term investor, but a potential downturn could mean a sale on good stocks and companies."
Thinking about this the right way, in terms of a potential downturn and what it could mean.
Moser: Yeah. This is a very good question. Most people's knee jerk reaction would immediately say, "Don't just invest it all at once. Be methodical, go slowly, dollar-cost average in." The reason why we say that is, traditionally, there is data that shows that that's a good strategy. Now, there's a really interesting blog post I found on Twitter. The guy's name is Nick Majuli, I think his Twitter handle is @dollarsanddata. He posted on this very topic in. As you can judge by his name, he's using a lot of data to make informed decisions. He actually presented data that showed that in most cases, investing a lump sum is going to statistically give you better returns than dollar-cost averaging.
Now, there are some things to take into consideration here. Ultimately, this really all depends on who you are, what your goals are, your risk tolerance, and all of that good stuff. It's not just as cut and dry as saying the math bears this out, therefore you should just go all lump sum. You have to ask yourself first and foremost, when we talk about investing, you're looking to invest in individual stocks, because you're talking about this potential downturn with some opportunity to buy stocks. This data that was presented by Nick was based on investing in the S&P 500. It's using the S&P 500, and saying that you're just going with that index. Obviously, we invest in individual stocks because we believe if we find good businesses and we invest in them and hold those shares for long periods of time, that is one of the primary sources of outperformance. That's something we believe in. It's something I believe in. It's something I continue to do.
Now, if you just invest all of your money in one lump sum into the S&P 500 index, you're not going to have any money to buy individual stocks, because your money will be in an index. So you have to ask yourself, first and foremost, how are you trying to invest? If you're just going with an index, there's some data out there that says maybe a lump sum is the way to go. But if you're looking to invest in individual stocks, you don't want to do that because you're not going to have any money to then invest in individual stocks when that opportunity arises.
Now, you have to ask yourself the question, are you going to have the intestinal fortitude to pull the trigger when those dips come, when those buying opportunities arise? As much as we believe that we will be able to pull that trigger when the time comes, when that time comes, our emotions play tricks on us. It becomes a little bit more difficult sometimes to do.
I think that the short answer is, it really does all depend. I do think, based on the question, @smilegirllawyer -- gotta love that name -- based on what she's saying, looking to buy individual stocks, you want to have that money to be able to do that when the opportunity arises.
One final thought here is, if you have a job and you're contributing to a retirement plan, that's a form of dollar-cost averaging right there. I dollar-cost average every paycheck, and so do you and most people here. There are a lot of different ways to do it. There's some interesting data out there that supports the lump sum. It just depends on your investing philosophy and what your ultimate goals are.
Hill: All things being equal -- to your point, the only thing we know is what was listed in the question -- it sounds like from a temperament standpoint, the question asker is thinking about this the right way, in terms of taking opportunities. I could see, all things being equal, you get that lump sum. Maybe you take 40%, 50% of it. You've got a list of stocks where you're ready to go, right there. You deploy that. Then, maybe, over time, start to do some more research on others.
I'm curious, though, what you think about this idea -- whether it's investing at once or doing it over time, are you in favor of not investing the whole thing? Of just saying, "Here's this money I'm rolling over from my 401(k)." For the sake of argument, let's say it's $50,000. Are you in favor of saying, "Eventually I'm going to get to the point where $45,000 is invested, but I'm keeping 10% on the sidelines for down the road."
Moser: I always enjoy having a little dry powder, as they call it, a little extra cash in there, just to be able to do what I want, when I want. We get that question a lot -- "What do I do with this cash in my portfolio?" As you can imagine, if you dollar-cost average, a real source of that underperformance is the fact that you've got cash sitting there, doing nothing. That's a problem. Depending on your timeline and how far along you want to go with this, I tend to be a little bit more deliberate and methodical. I'm also investing everything into individual stocks. My 401(k) plan here at work, every month, that goes into an S&P 500 index fund, so that's my index fund exposure. Anything else that I have, I'm investing in individual stocks. And in order to do that, you need to keep some capital on the ready, or you need to be prepared to sell something in order to buy something.
I'm a little bit more of the mindset of deliberate and slow and steady wins the race. With that said, Nick's argument here was really sound. There is data that shows, if you just have a lump sum, and you just want to get this thing working for you in the market, really, the better bet probably is to go ahead and lump-sum it. You just want to get that thing working for you as quickly as possible, and avoid having those excessive cash balances dragging in your account. The longer you go on, ultimately, those markets really just do go in one direction, and you can feel pretty good about that.
Hill: Jason Moser, thanks for being here!
Moser: Thank you!
Hill: As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of MarketFoolery. The show's mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow.
