Many investors have been waiting for quite some time to see the reins of Wells Fargo (WFC +0.90%) handed over to a leader untainted by its scandals. Now, finally, that's happening: Charles Scharf, currently CEO of Bank of New York Mellon (BK +0.36%), will take over Wells in a few weeks. Something else investors anticipate with much hopefulness: initial public offerings such as Peloton's (PTON +0.39%) on Thursday. But not like that one, in fact, because the exercise equipment maker has been on a clear downward slope.
In this Motley Fool Money podcast, host Chris Hill and senior analysts Jason Moser, Andy Cross, and Ron Gross discuss what to expect from Scharf and reflect on why nearly half of this year's IPOs are broken. They also talk Nike (NKE 0.07%) earnings, McDonald's (MCD +0.38%) Beyond Meat (BYND 2.17%) burger test, why market timing with funds that track the VIX is a bad idea, and, of course, reveal the stocks on their radar.
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. 20, 2019.
Chris Hill: It's the Motley Fool Money radio show. I'm Chris Hill and joining me in studio this week, senior analysts Jason Moser, Andy Cross, and Ron Gross. Good to see you as always, gentlemen! 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 this week in CEOs on the move. After more than six months of searching, Wells Fargo has finally found someone willing to take the corner office. Charles Scharf is currently the CEO of Bank of New York Mellon. He takes over at Wells Fargo in a few weeks. Ron, this really started to seem like a job that nobody wanted, but given the reaction on Wall Street, Scharf and his reputation, it seems like a good hire for Wells Fargo.
Ron Gross: Yeah. As you say, it took six months, but a solid choice. CEO of Bank of New York, CEO of Visa, senior executive at JPMorgan Chase and Citigroup, he is on the board of Microsoft. Very well respected. Has his work cut out for him, for sure. This is not an easy job here. First thing he has to do is really make nice with the regulators, and hope to convince them to lift the sanctions put on the bank back in early 2018, which really restricted their ability to grow. Interestingly, his background, specifically his most recent background at Bank of New York, they're not as retail focused as Wells Fargo is, so he may have a learning curve here. Not stepping into a similar role. There's some differences here. But still, solid resume.
Andy Cross: Interesting going to the outside, which is no surprise. I think they had to do this, considering where they are coming from, all the scandals they had. They've got to bring some fresh blood in here. But I think he is the first outsider to lead Wells Fargo, maybe ever.
That's really encouraging for Wells Fargo shareholders and hopefully customers who've obviously gotten the raw end of the stick from Wells Fargo for so many years. Hopefully comes in and really shake things up. Warren Buffett and Berkshire Hathaway is a large investor still in Wells Fargo, the largest. I think back to Warren Buffett and the Solomon scandal back in the early 90s, and what he was talking about with reputation and losing money, and the fact that if you lose money, he'll be understanding; if you lose reputation, he'll be ruthless. He hasn't been so ruthless recently, but hopefully this is a really good turn of the page for Wells Fargo.
Jason Moser: There was some really interesting data in regard to CEOs and how they come in and out of this line of work. You would think a CEO, you're going to probably hold that job for some time, but there's some level of attrition there. If you look at reasons why CEOs are getting ousted, sometimes they sit down or retire, but go back in 2018, for example, for the first time, there were more CEOs, 39% total of the CEOs that left their positions in 2018 were forced out for ethical lapses, versus something like financial performance, or just board problems, or whatever else that may be. So I think that's understandable. We've seen a lot of leaders being put under microscopes recently for present and past behavior. Certainly seems like it's played a bigger role recently than in the past.
Hill: Just this week alone, you look at eBay, Volkswagen, Juul, WeWork, a lot of CEOs leaving their jobs this week. It feels like a higher than average week in terms of turnover.
Moser: To that point, this year so far, 850 CEOs have left to their posts. That's 17% more than the 725 at the same time last year. Your perception is reality.
Gross: Public company stats, those are?
Moser: I believe that incorporates not just public, but private too.
Cross: Overall, look at the last few years for the S&P 500 companies, the average tenure of a CEO now is about five years. That's actually down a little bit down, by about a year, over the last few years. So you are seeing a little bit more aggressive nature from either boards or from activist shareholders trying to encourage CEOs to leave the main seat.
Gross: I actually love that. That means that the boards are taking a more active role. For decades, boards sat on their hands and were happy to just collect their stock or their paycheck, weren't as active as they perhaps should have been, especially when there was corporate governance shenanigans going on. So, I applaud.
Hill: On last week's show, we talked specifically about WeWork. I believe we had that, the CEO leaving. I don't think we had the CEO, Adam Neumann, leaving necessarily as quickly as it happened, but I believe we had that.
Gross: Yeah, we had that. And we're not geniuses, it was appropriate. Interesting, entrepreneurs don't always make professional CEOs. This is one of those cases.
Hill: Real quick, before we move on. You look at the average company in your portfolio, and let's just assume a new CEO is coming in, it's an average situation -- and by that, I mean, it's not, "The current CEO has to go." It's just, that person's leaving, a new CEO is coming in. Let's just go around the table real quick. Ron, what are you researching first about the new CEO?
Gross: Very simply, just the background. Does he have experience in the industry --
Hill: Or she.
Gross: Or she, good point. Is their experience appropriate? Were they inside the company or external? What does the tenure look like?
Moser: Yeah, if there are any transcripts to go through from previous positions, it's nice to go through and look at the language that they use. Is that language really customer-centric? Or is it more metric-based, trying to appease Wall Street? That can give you a better idea of whether they're all longer-term focused, or perhaps a little bit shorter-term focused.
Cross: Inside or outside the organization? Where are they coming from? What experiences are they bringing? Ultimately, what's the next three to five-year vision they're going to bring to the company?
Hill: Let's move to this week in IPOs. Peloton, the company that makes exercise bikes and treadmills, went public at $29 a share on Thursday and closed lower, Andy. I think they were hoping for a different result.
Cross: [laughs] The CEO definitely was, he actually said that publicly on TV. I'm glad I'm a long-term investor because clearly I'm not a day trader. I predicted the IPO to pop earlier this week when it came public. It's a really interesting company. The IPO aside, looking at the fitness universe, selling very expensive hardware, they also have a software tie-in. Growing very fast. Revenues more than doubling. Came public at an $8 billion market cap. Now it's about $7 billion, so it's lower, and continues to move a little bit lower. 1.4 million Peloton accounts. 500,000 connected fitness subscribers. That's someone who's bought these very expensive bikes or treadmills, and they're connected into the platform. And then, more than 100,000 digital subscribers. Growing very rapidly. Losing a lot of money just as fast, too. That's really the problem. When you think about what we've seen over the last few months in the IPO space, so many companies focus so much on growth, and investors have been willing over the last year or two to bid these stocks up. Now, we're seeing a little bit of pushback on that in the public markets.
Hill: Before we get to other IPOs, can we talk about connected fitness for a second? Because it really seems like it is not a good business to be in. I'm thinking, Jason, about somewhere in the neighbourhood of $800 million that Under Armour invested in the past in connected fitness of one form or another. And, not to pick on them, but Fitbit. It's a nice little device, but -- again, it seems like a good idea, but the upside for connected fitness as a business so far has not presented itself.
Moser: I agree with you. I don't think it's very good on its own. I think it's better off as just one part of a greater whole. We saw with, Amazon, they released these wireless earbuds this week at this hardware event they had. Those wireless earbuds have fitness tracking capability locked right in there. You can get those things all sorts of different ways. Under Armour, they overpaid a lot of money for something that they haven't really realized a lot of return on the investment for. But you look at a company like Nike, Nike has done a good job of investing in connected fitness, but just not making a headline about it. We'll talk more and more about their quarter here a little bit, and you'll see that they are making investments in connected fitness, but it's not as explicit, it's not as obvious, and I think that's probably where they're one-upping most companies.
Cross: Very interesting, the Fitbit comparison, Chris. Fitbit came public in 2015. The stock doubled that day. Was valued at almost $7 billion, 5X revenue. So, in the area of where Peloton is today. Now, Fitbit's stock is down to below $4 per share. Market cap valuation has just crumbled. Meanwhile, Garmin has done very well over the last few years, beaten the market. The stock's more than doubled since that 2015 IPO of Fitbit, while Fitbit's stock -- and, of course, GoPro -- have moved in the opposite direction.
Hill: WeWork, as we talked about, shelved their IPO. Ron, we have another company get right up to the precipice of an IPO and then pull it -- Endeavor, one of the biggest talent agencies in the country. Is it that bad an environment right now? That's at least one way to interpret a pulled IPO.
Gross: If you're not profitable, it's that bad. Maybe that's appropriate. That euphoria has run its course. Endeavor's lost money in four of the past five years. They were looking to go public at an $8 billion valuation before the price got pulled back. Trying to raise $600 million, but then they lowered the IPO price. Then they pulled it completely. We'll probably see this come back at some point, at a later date. Endeavor is the old William Morris Agency. Folks who are fans of Entourage might remember Ari. Ari Emanuel runs it. It's an interesting company. It's a really nicely diversified entertainment company. But, you'd think you'd want to see some profits before you do a road show.
Hill: We've had a lot of high-profile IPOs this year, but some of the biggest names just year to date -- again, as you said, Andy, we're long-term investors. When you look at Uber, Lyft, more recently Smile Direct, those stocks all down to 30% to 40% since their IPO. It really does feel like we need to take a break.
Cross: I think the bankers have gotten a little bit aggressive. The Smile Direct pricing was just wrong. They totally missed that. Maybe they missed the pricing on the Peloton IPO -- actually, they did. The bankers did, and the company did, too. There's just some recognition that that very excited, hot IPO market does go in cycles, and we hit a top of the cycle in the past couple months.
Moser: Yeah, it looks like, of the 120 companies that have gone public this year, 57 are trading below their offer price, according to Renaissance and CNBC. That tells you something, right?
Gross: It's interesting -- sometimes IPO markets get hot when investors think there's nothing else to buy, so they're buying the new thing. We've interestingly seen a rotation into some more conservative, more value-y stock, stocks that pay dividends. People are more focused on that as a place to put their capital rather than the next hot IPO.
Moser: You're also seeing companies out there that have had a decent track record thus far as publicly traded companies -- I think Square is a good example here. The fundamentals of that business are just as good as ever, but clearly, this appetite for risk is pulling back a little bit. I think the market's not as willing to give so much of that room on that price to sales metric that we keep on having to use for all these businesses that don't make any real money yet.
Hill: Shares of Nike up 6% this week and hitting a new all-time high. Nike's first quarter profits came in higher than expected. Jason, a lot of things going in the right direction for them, including e-commerce.
Moser: My daughters have owned this stock for a while now. They're pretty happy about things. I'm not going to make the leap to call Nike a tech company or a services business. Don't get me wrong. But there is no doubt they're making the necessary investments in tech and services to stay on the cutting edge for what they're calling the digital first consumer. We are in a market now where a lot of people are growing up with digital commerce as the first form of commerce that they know. Mark Parker, CEO of the company, said something on the call that I thought was really telling. I quote, "becoming personal at scale is the ultimate objective." That tells you where they are and what they're trying to do. The numbers seem to be working out. Digital growth of 42% for the quarter. We've been paying a lot of attention to North American revenue for Nike and Under Armour and other companies. That was not all that impressive. 4% growth for the quarter. But they made up for it internationally. China continues to just kill it. We've talked a lot about retail companies that were going to benefit from the back half of the year, back to school season and whatnot. They did note on the call that kids footwear apparel just experienced the biggest back to school season ever. That's good. Gross margin expanded 150 basis points thanks to better pricing -- in other words, they were able to raise prices a little bit.
All in all, it's a proven company. We know how popular the brand and the product [are]. They just continue to get it done. The stock today at 35X trailing earnings actually seem like it's all that unreasonable for such a quality business.
Gross: Yeah, they're doing a great job. That digital growth does not bode well for folks like Foot Locker, where you really don't need that distribution channel anymore because you're going direct to consumer. I would be very careful of those companies and stay away.
Cross: Interesting, speaking about IPOs, Nike came public in 1980. Less than $1. Split adjusted it's now at $93. That's an annualized return of 20%, annualized per year over the last 40 years.
Hill: On Thursday, McDonald's announced it will start testing a new menu item in Canada -- the PLT. The Plant Lettuce and Tomato sandwich will be offered in nearly 30 locations in Southwest Ontario. Andy, after Burger King tested the Impossible Whopper, no one should be surprised by this.
Cross: No, not at all. I was a little hard earlier this week on the name, PLT. I'm starting to warm up to it a little bit. They're going to test it, Chris, as you mentioned, in Canada. 28 stores. Interesting, the price will be a little bit less than $5. By the way, the Beyond Meat patty is made specifically for McDonald's, so they're going to try to keep that McDonald's taste into the patty. But as the rest of the world continues to move more and more toward trying to have alternatives to meat, this continues to be a push. McDonald's has recognized this. Interesting, Beyond Meat's stock really did jump. It gained almost a billion dollars in market cap that day. That's the equivalent of about 7 million PLTs per test store sold. So the valuation per test store per PLT is quite high for Beyond Meat.
Hill: It really was something to see Beyond Meat coming back to rationality in terms of its stock price, and then, as you said, on Thursday, the news breaks and it pops 12%.
Our email address is [email protected]. Question from Dan Rogers in the UK. Dan writes, "I was recently made aware of the VIX index, which aims to track the volatility of the S&P 500. For me, it would make sense to simply buy the VIX during times of low volatility and hold until the market becomes more volatile, which occurs fairly often, and then just repeat the cycle. Is there something I'm missing here? Or is this a sensible strategy?" What do you think, Ron?
Gross: Oh, Dan, if it was only so easy, we'd all be doing it. You are correct it, it's the investor fear gauge. A high VIX reflects increased investor fear. Low VIX suggests complacency. But you can't directly by the VIX. You have to do it through an ETF or an ETN, exchange traded note. It's basically, at the heart, a market timing strategy. Your rate of return is going to be based on your ability to get in at the right time and get out at the right time. As long-term investments, these are not good. For example, one ETF is down 95% over the last five years. It's your ability to get in at the right time and get out at the right time. I would suggest that that's a hard game to play. There's also structural problems with the way these ETFs are structured, which takes away from the profits that you could actually earn. The performance digresses from the actual VIX, which makes it an even tougher strategy. I would stick to being a long-term, diversified investor.
Cross: I think that's right. I've never invested in the VIX. I've never played with it. You certainly don't have to. We're not missing anything as long-term investors. It's not something that you have to rush into. Like Ron was saying, the structural differences are the real worry with trying to trade around into the VIX.
Gross: And while certainly there are some speculators, it's more often used by professional investors as a hedge to reduce risk in a portfolio. So, again, I would stay away. Just be an investor, not a speculator.
Hill: Also: taxes.
Gross: Yeah, short-term taxes, for sure.
Hill: Guys, seems like the school year just got started, but here at The Motley Fool, we are already looking for interns for the summer of 2020.
Gross: We certainly are.
Hill: Investing, writing, marketing, we're looking for software developers. We want you. If you're a college student or you just happen to know a college student who might be interested, tell them to go to careers.fool.com. When you apply, tell them you're one of the dozens of listeners.
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, you're up first. What are you looking at this week?
Gross: It's a radar stock, not a recommendation. I just started looking at it. It's Five Below, FIVE. Operates over 750 discount retail locations in the U.S. Aimed largely at teen and tween bargain shoppers. It's a rerecommendation in April in our Rule Breakers service. They have done quite well in a difficult retail environment. Gained customers from other failed retailers like Toys R Us. Significant growth plans in place. Plans to grow to 2,500 stores from 750 right now. That's a pretty big growth runway. Certainly doesn't appear cheap at 39X earnings. That's where I need to dig in a bit more.
Hill: Steve, question about Five Below?
Steve Broido: How many items do you think the average customer is picking up at once, if they are indeed five below?
Gross: Some are ten below, actually. They've introduced 10 below, too. So, I'm going to say only one or two items per trip.
Hill: Jason Moser, what are you looking at?
Moser: A little company called Facebook, FB. You've probably heard it. They recently announced a project called Live Maps that is going to go along with the augmented reality glasses that they keep telling us they are working on. This is interesting, the Live Maps initiative is basically working on creating 3D maps of the world. It's going to incorporate essentially more real life into navigating around anywhere from cities to neighborhoods and buildings. It's responsible for things like getting notifications projected into thin air, identifying objects with labels. All sorts of neat stuff. I do think it's important because they need to figure out a way to diversify this business model beyond the advertising revenue that supports the stock today. We are certainly seeing with big tech, Amazon included, they're starting to roll stuff out now. I think the race is on to try to develop this wearables market. One side note -- we will see COO Sheryl Sandberg testifying next month, likely regarding Libra, testifying in front of Congress. That should be interesting.
Hill: Steve, question about Facebook?
Broido: Has the media turned more positive on Facebook? It seems like a year ago, every headline was horrible. Now it seems like things have gotten a little bit better for them.
Moser: Yeah, I think the tone is a little bit more positive, but not so positive. It's better, but not where it needs to be.
Hill: Andy Cross?
Cross: Stitch Fix, SFIX, the online apparel provider. You load in information, put a bunch of data in, and you get a more customized piece of apparel back. They report earnings next week. Revenue was up 29%. Client growth up 17%. That's actually the lowest point in the past couple quarters, so I want to see that reverse. That's what I'm looking for.
Hill: Steve?
Broido: Is Andy Cross going to be a Stitch Fix subscriber?
Cross: I will someday. I am not now, though. I predict I will be.
Hill: What do you want to add your watch list, Steve?
Broido: I own Facebook. I think I'm going to go with that one.
Hill: Alright. Ron Gross, Jason Moser, Andy Cross, guys, thanks for being here! That'll 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.
