In this episode of Motley Fool Money, host Chris Hill chats with Motley Fool analysts Andy Cross, Jason Moser, and Emily Flippen about some of the week's biggest news in the market.
Stitch Fix (NASDAQ:SFIX) had a roller coaster of a week on a divisive new growth strategy. Constellation Brands (NYSE:STZ) (NYSE:STZ-B) sold off on its still-unprofitable Canopy Growth (NYSE:CGC) investment. And Bed Bath & Beyond (NASDAQ:BBBY) shares were basically flat despite the company's terrible quarter.
Plus, updates from Costco (NASDAQ:COST), Charles Schwab (NYSE:SCHW), Robinhood, TD Ameritrade (NASDAQ:AMTD), E*Trade (NASDAQ:ETFC), PepsiCo (NASDAQ:PEP), McCormick (NYSE:MKC) (NYSE:MKC-V), and more. And, as always, the analysts share some stocks on their radar. Stay tuned for some of Fool analyst Dan Kline's reporting on Harley-Davidson (NYSE:HOG), McDonald's (NYSE:MCD), wrestling, and the NFL.
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 Oct. 4, 2019.
Chris Hill: This week, Schwab announced it is cutting trading commissions for U.S. stocks and ETFs to zero. TD Ameritrade and E*Trade followed suit later in the week. Andy, worth pointing out, all three stocks fell double digits.
Andy Cross: Yeah, tough week for shareholders. Great week for clients, though. If you are an investor that uses one of those services, trading costs went dramatically lower. Now, don't overtrade. Don't use that as an excuse to overtrade. True Motley Fool principles. But, clearly, impactful to some of these companies Schwab, only about 3% or 4% of their revenues are tied to commissions, Chris. But when you look at E*Trade and TD Ameritrade, much more significant. Seventeen to 25% of their revenues are tied to commissions. Much more impactful there. That's why the stocks took a hit this year.
I think we've been seeing this. We've been seeing commission costs over the last two decades -- I think my first stock that I bought, the trading costs were somewhere around $50 to $60. It was ridiculous! Emily is looking at me like, "Oh, my God!"
Emily Flippen: That's unbelievable! Impossible!
Jason Moser: I remember the $50 commission. I remember that very well.
Cross: It's true. You had to pay, call your broker, all that. Clearly, we're moving in the right direction. Interactive Brokers were really driving the commission costs so much lower. Last week, announced that they were going even lower through their Interactive Brokers Lite initiative. Now you're seeing Schwab really put the gauntlet down.
When you look at the expense basis compared to their assets, Chris, Schwab is by far the lowest of any of the big banks. Lower than Bank of America, lower than Merrill Lynch, lower than Morgan Stanley. Merrill Lynch is part of Bank of America. Schwab has the ability to do this because they have the most scale, and now they've put that marker out there for the rest of the industry to follow.
Moser: The one thing I was thinking about it, we saw some pretty harsh reactions this week. I would venture to say there are probably some overreactions there. I do think TD Ameritrade is one worth considering, but think about TD before the Scottrade acquisition. I wonder how much this type of thinking went into that acquisition. Certainly, now that Scottrade is a part of that TD Ameritrade family, it's easier for them to do this. I wonder how much thought around this was in that TD Ameritrade- Scottrade tie-up.
Flippen: It does seem like it's also causing a little bit of skepticism in the industry, though. Robinhood, obviously, being the first brokerage, if you can call it that, to allow free trading, attracted a lot of people. There were rumors of a planned Robinhood IPO. As one might assume, this really undercuts a lot of their business now. But the big question is, if they're not making their money by charging for trades, they're probably making their money somewhere else. Robinhood has been notorious for selling, essentially, user data, making their money in that regard. It'll be interesting to see. I think the costs are obviously good on a trading basis. They're still making their money somewhere else.
Cross: Clearly, brokers are making their money elsewhere, Emily. So much on the fees. In Schwab's case, they've moved to more subscription offerings too through their Intelligent Portfolio Plus offerings. Trying to figure out how they can get revenues elsewhere, because trading itself has become a commodity and now it's gone to zero.
Hill: I'm curious -- I'm going to ask you to look into a crystal ball, so it's an unfair question. Clearly, as you pointed out, Andy, Schwab ran the numbers. They looked at this. They said, "Look, this is not a big percentage of our revenue. We can make this move. We think this is good for us from a brand standpoint, from potentially the ability to take market share." They come out and announce this. Do we think that TD Ameritrade and E*Trade were thinking about making this move on their own before Schwab did this? I think they looked at what Schwab did and said, "We have 24 hours to announce we're doing this as well, because we don't have any choice."
Cross: They're far smaller than Schwab. Interesting, Fidelity has not followed up. Fidelity is the next big player in this block now. They are not public. Neither is Vanguard. So maybe they don't feel the public pressure, Chris. But I think after TDA and E*Trade, their stocks fell so precipitously after Schwab's new announcement, I think they felt like they had no choice.
Hill: Costco closed out the fiscal year with a fourth-quarter report that was a little light on overall sales. Competition is tough, Jason. But Costco says they are optimistic for the new fiscal year.
Moser: We've been concerned with Costco for a while now based on market saturation and the fact that it's a razor-thin margin business. We talked about this a couple of weeks ago at a Fool event, the taping of MarketFoolery there, the power of the customer-centric business and how you cannot dismiss them. That's really what Costco is. That's what it was founded on, the customer-centric nature of giving these members the lowest prices possible. We can certainly see, Costco is a great example that that absolutely can transcend leadership. Jim Sinegal set it up. Craig Jelinek continues to keep the ball rolling.
When you look at the numbers, I was really impressed to see the top line up 7% for the quarter. Really impressive for a business like this. Membership renewal rates of close to 91% in the U.S. and Canada. Worldwide, 88.4%. They have 53.9 million member households. All of those numbers increased. So, yeah, growth is slowing, but they are growing. They continue to maintain a strong reputation in the space.
I don't know that I would look at online or e-commerce as a tremendous opportunity for Costco going forward. It's still a tiny part of the business at around 5% of sales. But we're seeing that there is some staying power in physical retail as well. The membership fee encourages you to use the membership, and then the pricing scheme is so good, members feel compelled to keep going back for more. Good balance sheet; $2.5 billion in net cash. Like I said, margins are razor thin, but they're stable. By any metric, this has been a good stock to own.
Flippen: Yeah. I think it was last month, two months ago, that they started to open up Costcos in China. Just think about the international opportunity there as well. There seems to be a ton of people line there at Costcos in China. That might also be an interesting opportunity.
Moser: Executive memberships as well. There are some different levers. It's a slow grower, but hey, they're growing, and management is really strong.
Cross: That's their first China store in Shanghai. They're going to open another one, too. That will be their first step there, but it won't be the last.
Hill: Shares of Costco up 25% over the past year. It's really interesting to see that growth when, as you said, Jason, for a while now, there have been either questions or concerns about their ability to grow.
Moser: We had those questions on this show. I posed them. I was a skeptic. I have to say, it has surprised me how well the stock has performant. Look at it over three and five years, it gets even better. You have to give credit where credit's due.
Hill: A roller-coaster week for Stitch Fix. Shares fell more than 10% on Wednesday after fourth-quarter results came out, Emily. The stock recovered by Friday. Stitch Fix, up about 7% for the week.
Flippen: Yeah, Stitch Fix is an interesting one. It's a divisive one. People tend to have strong opinions about it.
Hill: Why do you think I went to you first?
Flippen: [laughs] I'm no exception myself! Andy is going to counteract everything I say here with a nice bull case for Stitch Fix. The quarter was really interesting. It's not that it was a bad quarter. They actually had some impressive active client growth. Eighteen percent increase; 3.2 million people. Thirty-six percent increase in revenue. Earnings beat. The big question was, why did the stock immediately trade down? It seems like just guidance for the following quarter was weak. They spent less on marketing. And they were like, "We're going to have higher growth in subsequent quarters." The big question was, how? [laughs] You're slowing down next quarter, and you're not spending on marketing. How are you getting that growth? And they're like, "Well, it's our new direct buy feature!" Customers who are Stitch Fix subscribers can then go online and see essentially a tailored feed a 30 to 40 items that they can immediately purchase.
And I think the reason why we saw the stock rebound was because the immediate reaction -- and the reaction I still have -- was, they're turning into a more traditional e-commerce channel. The whole idea of Stitch Fix is, you're supposed to tell me what I like, and you send me a box of clothes. Not, I go onto your website, and then I pick what I want. I can do that anywhere. My impression was, that's going to cannibalize a lot of their own sales. And I think that was the immediate impression. But now, the latter impression is saying, "Wait a minute! This is actually good because it's a tailored feed. You're not getting thousands of items like you would if you went onto Amazon." I don't know if I buy into that narrative. I've been a skeptic for a while. I know Andy will have something to say.
Cross: I think the big concern out of the gate was the profit picture for next year. They continue to invest a lot in their data algorithms, their website, all the features that Emily mentioned. The profitability picture for not just next quarter but next year is looking far less than what they had last year. Even this year, for this fiscal year, it's dropped a little bit, Chris. As they continue to make these investments, and the revenue and client growth, they had a little extra quarter there, so the growth wasn't quite as high. But I'm glad to see their active client growth and revenue per user continue to increase. That's a good sign. I think some of the costs that they're investing, whether they can recoup those.
The features that Emily mentioned are, I think, a differentiating factor for Stitch Fix. That's an advantage for them. Revenue growth of north of 20%. If they can get the profitability picture, if they can get the operating profits in that 10% to 15% sustainable level over the next few years, you have a stock that's been discounted the last couple of months or so. I think it's a good position to have for long-term owners. But I wouldn't overweight your portfolio. More of the 1% to 2% range.
Flippen: There's a lot of ifs in there. I heard a lot of "if they're able to do this," "if they're able to do that." That's a lot of ifs. What I see right now is a business that is operating in a luxury market, with expensive clothing, to an audience that admittedly is growing, but it's not going to revolutionize the way that the average person buys clothes. Ultimately, when somebody is crunched for cash, this is the first thing that they cut out of their budget. It's a lot of money. I'm not sure if I really believe in the idea of aggregating that fashion data. I've said this before, but that you can have two people who look exactly the same, they're exactly the same size, but they both like their clothes to fit a little differently. Having to collect information about two people that your algorithms might say should be exactly the same, and acknowledge that they have different preferences, that's a hard thing to do. It's not surprising to see them investing a lot of money into that. It's going to take a lot of money to get there. I just don't see it. You're using this profitability crunch. You're seeing essentially what is equating to potential for slower growth. The fact that they feel the need to go to a direct sales channel. A lot of red flags here for me. I'm not sure if I buy into all those ifs.
Hill: Shares of Pepsi hitting a new high this week after third-quarter profits and revenue came in higher than expected. Andy, considering the name of the company, the growth story here has pretty much nothing to do with Pepsi. This is snacks, this is sparkling water, this is Gatorade.
Cross: Well, au contraire, my friend, Chris. Their Pepsi brand actually was up. They've seen some organic growth, their first time in maybe years. That was really good. They're seeing growth in Quaker, first time in years. Frito-Lay, obviously, Chris, to your point, has been the big driver, international big driver. But you're seeing organic growth in Frito-Lay, which is the chips business, snacks, Doritos, Cheetos, Fritos, even their new lines like Bare and Off the Eaten Path. That unit was up 5.5% organic growth. 5.5% revenue. That's nothing to sneeze at when you're a company of that size for Pepsi as they can continue to spread those costs out. So you see growth across all the divisions. International and emerging markets are really attractive. The new CEO, Ramon Laguarta, who took over a year ago, has gotten this new vibe feeling for Quaker.
Of course, a lot of initiatives have been put in over the last couple of years. But you're seeing growth across all the divisions. You're seeing a profit picture that isn't super attractive. It's a very profitable company, but profit growth isn't going to be off the charts. But you have a company that, the stock has done very well. Sells at 20 to 23 times forward earnings. It used to be at a discount a Coke. Now it about matches that. It's not as cheap as it used to be. They generate lots of free cash flow. They buy back the stock, they pay that nice little dividend. That's why the stock's done pretty well this year.
Moser: I feel like every quarter I go to the call, the first thing I'm looking for is, give me some information on SodaStream. I want to know how that acquisition is working out. It's not insignificant. They paid billions of dollars for it. Interestingly, you're talking about Mr. Laguarta, remember, the acquisition was made under Indra Nooyi's watch. She made that acquisition and then promptly exited stage left. I just can't help but wonder if maybe the new leadership would have made that acquisition. Again, in the call, there's no clarity, no concrete numbers. It is something they'll use to continue to combat waste and plastic use and whatnot. I just can't help but feel that we're going to see a writedown on that deal at some point here in the near future.
Cross: Interesting. They did mention it a little bit. They said it's going well. They didn't give any hard numbers, to Jason's point, especially in Europe. That is their seltzer play. Their carbonated water play is with SodaStream. I agree. I would love to see a little bit more data behind how the acquisition is going. It was $3 billion. It was significant. At least they did point to a, "Hey, it's going well, especially overseas."
Hill: Shares of Bed Bath & Beyond basically flat this week despite the fact that same-store sales in the second quarter fell nearly 7% and overall sales were lower than expected. On top of that, Jason, Bed Bath & Beyond still does not have a CEO.
Moser: No, they do not. Is there a world where Bed Bath & Beyond can still exist? Absolutely. I can see it. Maybe in a smaller form. But I still don't want to invest in it. I have to say, I'm astounded that they continue to repurchase shares. We've established on this show a very long track record of them getting it completely wrong for years on end. While I will give them credit, those share repurchases are much lower than they used to be, they are still actually wasting money on it. For a company with a net debt position of around $3 billion, no CEO, and no real firm strategy as to how they're going to turn this thing around, I would advise investors to steer very clear.
Hill: Constellation Brands made its name as a beverage company with names like Corona Beer, Ballast Point, and Robert Mondavi wines, just to name a few. But the headline of Constellation's second quarter report appears to be the loss it took on its investment in Canopy Growth, a cannabis company. Shares of Constellation falling 6% this week. Emily, CEO Bill Newlands says he thinks people may have gotten mixed up a little bit by this report. Do you think that's why the stock sold off?
Flippen: I don't think it's not why the stock sold off. Actually, as Newlands pointed out in the earnings call, they've actually made an astounding $757 million in their investment on Canopy because they bought in so early. But recently, it's been a little tough. It's definitely the reason why this company went from being profitable to at least accounting unprofitable. It's an interesting company. It's a little sad that the news about Canopy Growth overtook a lot of their exciting developments, like their launches into hard cider, and my personal favorite, canned wine. But it's a good dividend player. It's a good, solid company. The underlying beer industry is growing a lot.
Hill: Do we think canned wine is going to take off as a thing?
Flippen: I'm not sold it's better than boxed wine, but I'll give it a try.
Moser: I don't not think it's going to take off.
Cross: In Whole Foods, they have it right there. You can buy it as you go buy, at least in places where you can buy wine.
Flippen: Have you done that, Andy?
Cross: I have not yet.
Hill: I was going to say, for all the times I've shopped at Whole Foods and seen those cans, I've still never pulled the trigger.
Cross: OK, I'm buying some today.
Hill: Shares of McCormick up 7% this week. Strong third-quarter results for the spice maker. Jason, sometimes we focus on McCormick's industrial division. It looks like for this quarter, it was the consumer business that was doing the heavy lifting.
Moser: Yeah, the consumer business did very well. The flavor solutions business, that industrial business, was flat, though I think the reaction to the stock this week was partly a little bit of a bump up in earnings guidance and some tailwinds they are going to recognize in that flavor solutions segment. But this was exactly the type of quarter you would hope for from a company like this. It's not some big top-line grower, but it's good at what it does, and it's the leader in the space by a mile. Top line revenue growth of 2%. Earnings up 14% due to, again, the consumer side of the business. Much like Nike, they witnessed some very strong growth in China, which is encouraging.
I think McCormick is just the same old thing every quarter, but management is very disciplined. I think that's the reason why the market continues to give it a lot of credit. It's just now looking for that next big acquisition.
Cross: Credit is right. When you look at this stock over the last few years, it's beaten the market, and it's beaten the market with lower volatility. We talked about this before. It's a very stable performer on the business side and on the stock side as well.
Moser: I'm a very happy shareholder. What can I say?
Hill: Earlier this week, producer Mac Greer sat down with Dan Kline, who covers technology and consumer goods for The Motley Fool, and discussed a range of all American brands, including McDonald's and Harley-Davidson. But they started with wrestling. The world of professional wrestling just got more competitive this week with the launch of AEW, All Elite Wrestling. AEW is trying to stand out by putting the focus on actual wrestling instead of backstage theatrics. Mac began by asking Dan Kline, what does this mean for the biggest player in the space, WWE?
Dan Kline: WWE has focused on what they call sports entertainment. That's the skits, the interplay, the drama. They view it as a soap opera. The AEW presentation is more about wins and losses. It's going to track like a sport. And they'll have some of the shenanigans. There'll be promos. But it'll be much more the old school, you remember the '70s wrestling, where the idea is, "Here's why I don't like you, Mac. Here's why I'm going to beat your face in," and that's to drive ticket sales. Ideally, they're airing on TNT. It's the first non-WWE company with a major platform. They've sold out a bunch of shows. There's a lot of momentum behind them. It should worry WWE.
Mac Greer: I hear all that. I hear that they're going to focus on the wrestling. But isn't wrestling ultimately entertainment? Isn't it all about the personality and the stuff that happens outside of the ring?
Kline: I'm a little biased here. I'm a WWE shareholder. I'm a big, longtime wrestling fan. But I like what the AEW guys are doing. They have some very compelling characters. They're not ignoring that part of it. They're just not going to the silly extremes. Sometimes you can watch a WWE show, and in an hour, not only is there not that much wrestling, but it feels like, "Wait a minute, why did that guy get a title shot? He lost last week." There's no continuity thread in terms of the fake reality of it.
Greer: So, this way, with AEW, I can root for some of these wrestlers, the same way that I would root for a sports team.
Kline: Absolutely. Look, some of the old day "bad guy, good guy" has gone away. Yeah. But the business model of, "Wow, I want to see those guys punch each other in the face" is more at the core of what they're doing. [laughs] Again, wrestling is the least popular it's been in a very long time. WWE ratings are down at a time when they're about to get paid more for their TV rights than they've ever gotten by a lot. It more or less doubled. They're a very successful company for the next five years, with a smaller fan base than they need to sustain that.
Greer: Let's talk a bit more about that. WWE shares down a lot over this past year. But, Dan, over the past five years, up more than 400%. As you look out over the next five years, what do you think WWE's biggest challenge is? And, what's the untapped opportunity?
Kline: There's too much wrestling. If you're a wrestling fan, there is at least two hours on almost every night of the week, not counting some of these minor but still on TV promotions. Also, getting people to leave their house is a harder bar. When we were kids -- and looking, I'm going to guess we're in the same age group -- they came to Boston Garden once a month. It was an event. There was an hour on Saturdays on TV. They teased what was going to happen next month in the live show, which of course is the same live show they brought to every city. Now, why do I need to go out? There's 15 hours of wrestling on every -- so, it's got to be a major event, or someone special coming back, or a debut. That's a very difficult bar as a touring product.
Greer: I quit watching wrestling after Andre the Giant. It's been a while.
Let's move on to the NFL. Ratings up for the second year in a row. Dan, what do you make of the business of the NFL?
Kline: I think the NFL, other than having to worry about the health of its players issue -- which could be a drain on its business --
Greer: "Other than having to worry." I want to revisit that. That feels like a big concern.
Kline: I feel like that could ultimately end the NFL. But in terms of the popularity of it, at the end of the year, when you sit down and look at the top 20 single TV shows for the year, it's always like 18 NFL telecasts, led by the Super Bowl, the championship games, maybe the Oscars sneak in there at No. 16. Even when the NFL is down, it's still immensely popular. It's the only thing where, if you watch a Sunday NFL game that's exciting, either the national one or the one in your market, you can be pretty sure when you come to work, you can talk about it. I don't think the NFL is going to have any trouble, even if they were 20% less popular, getting more money for TV. How many things do you have to sit down and watch pretty much in the moment? You can't DVR a game and delay watching it more than that night, or else it's going to be blown for you.
Greer: Let's talk more about that. ESPN right now, paying the NFL $15.2 billion over eight years for a deal that expires after 2021. When you look at that future, who do you think is going to pick that deal up? Is it going to be ESPN again? Are we going to look at someone like Amazon Prime or a new player?
Kline: ESPN absolutely needs the NFL. I could see nothing that would replace the value of "You're not carrying ESPN on my cable system? I want Sunday Night Football. I want whatever ESPN other coverage they have." That's more valuable to them than anyone else. But, I don't think in five years, you're going to see a major streaming package that is not going to stop the NFL from saying, "Netflix will offer us this," or, "Disney+ is going to offer us that to air exclusive stuff." The reality is, the owners are old, mostly. They still want to be in the way they watch TV, and accessible to the most people as possible. It's why they're not putting a ton of games on the NFL Network. Not everyone has the NFL Network. You can't be the biggest show of the week airing on Hulu.
Greer: OK, fair point. Let's move on to Harley-Davidson, a company that you followed, a company that you've written about. Dan, Harley having a bit of a rough go lately. What's the story with Harley? Where did it all go wrong? What are they trying to do to correct it?
Kline: It's a brand disconnect. A Harley man, a Harley-Davidson driver, means a certain type of thing. It's a powerful American motorcycle. Maybe that brand has gone a little out of fashion. Their efforts to reach a new customer base fly in the face of their classic customer base. If Harley's going to sell you a little electric bike that goes "meepmeepmeep" instead of making the big roars --
Greer: The "potatopotatopotato."
Kline: Yeah. The burly guy in the biker jacket who's proud of his Harley is going to go, "Ugh, what's that?"
Greer: "I'll just get a Vespa if I want to do that."
Kline: Yeah. They sell a premium-priced product when there's similar products for cheaper to an audience that's somewhat aged out. My dad's a Harley driver. He now has a tricycle Harley because he can't drive a regular one anymore. And they haven't replenished those people. And maybe they're going to have trouble doing so because the brand simply doesn't resonate the way it once did.
Greer: Is it fair to assume that your bearish on the stock?
Kline: Yeah, I'm very bearish on the stock. I just think there's too many motorcycle alternatives at more affordable prices. I don't think owning a Harley means -- maybe they go ultra-premium. Maybe it becomes more of a Rolex brand, where they produce less and charge more, and there's a path to success for them. But it's not the path they're following now.
Greer: Let's close with McDonald's, which is testing its PLT -- its Plant Lettuce Tomato sandwich. I know, because you wrote about it, that you're very skeptical.
Kline: Yeah. When you have a product you think is going to be a big hit, you test it in Western Canada in 16 stores, or whatever the number is. I'm skeptical because, if you are someone who eats healthy, and you have to go to McDonalds, it's nice that they have a choice for you; but you are not going to choose to go to McDonald's because they have a version of something you can get better someplace else, that is more attuned to how you eat. I largely eat gluten-free, and I've watched this pattern of stores add gluten-free products, then take them away when they have limited interest. Really, a high-end restaurant needs to have a gluten-free pasta option. A low-end restaurant doesn't because the person who is allergic to gluten isn't going to Pizza Hut. They're making a different choice. That's what's going to happen to McDonald's. This will be very popular with a very small segment of the audience. And like salads before it, it will quietly go away.
Greer: I like this move. I'm a McDonald's shareholder. Let me tell you my thinking here. I think this is a play for families. If you have the one person in the family who's a vegetarian or a flexitarian or they're trying to make healthier choices, this is McDonald's way of saying, "The entire family can still come to McDonald's."
Kline: That part will work. But I don't think the numbers on that are big enough. My kid's picky. He loves McDonald's. But if I said, "Let's go to Chipotle instead," because it's a little bit of a better choice for me, he'd be like, "Alright, I love Chipotle." There's just enough choice for that family. Again, at the airport, when you're in a rush and you have no choice, you're going to be thrilled that they have this option. Maybe it becomes a minor permanent menu item. It is not going to be a runaway hit because people who eat healthy don't seek out McDonald's.
Greer: In terms of the name, PLT, do you like it?
Kline: It's a great name!
Greer: I love it because it reminds me of bacon.
Kline: The weird thing is, they could also get a plant-based bacon and do a PPLT. [laughs]
Greer: But this is a veggie burger, right?
Kline: Right. Do a plant-based bacon. Those exist.
Greer: I like that. PPLT. There you go! You heard it here first. Dan Kline, thanks for joining us!
Kline: McDonald's, I want a royalty!
Hill: Our email address is firstname.lastname@example.org. Question from Isaac Melin, who writes, "I've been a Stock Advisor member for almost three years now. I've slowly built up a retirement portfolio of almost exclusively small-cap companies. I'm 25 years old, and figure I have 40-plus years before I would need to start selling stocks, so I focused on Stock Advisor picks that fall in that small-cap category. In general, the companies have performed well and I see them continuing that trend in the decades to come. However, I wonder if I should be adding in some dividend payers. They may add stability, plus, getting paid quarterly for 40 years sounds kind of nice."
I like the way he's thinking, Andy!
Cross: It's smart thinking, Isaac. First of all, congratulations for your success, hopefully, in owning some of the great companies that we have in Stock Advisor. It is tilted toward growth. The small market, with growth, consumer-friendly, technology, that's what our future is going to be. So, that's awesome! You have 40 years of investing. That's fantastic!
I love dividends! I think bought my first share in Home Depot when I was younger than 25 years old. I probably have held it all the way since. It's paid nice and steady dividends that you can reinvest. If you don't need this capital at all, having some dividend growth companies that you can invest in and build out your portfolio is smart. But don't feel like you have to go to that to replace those Stock Advisor growth companies. Clearly, those are some great companies and the future will be set by those.
Moser: Yeah, it's definitely not one or the other. You can have the best of both worlds. I think that the longer your timeline, the more sense it makes to own those dividend stocks. Pulling some data from our own Rule Your Retirement service, led by Mr. Robert Brokamp, if you look at the performance of the S&P 500 so far this century, the index has returned 105% on a price-only basis. But if you look at the index's total return, which incorporates dividends into the mix, that performance jumps up over 200%. You can see, they have a material impact. It's worth owning some good dividend payers.
Flippen: I went one step further than you, Jason. I went to Brokamp himself. I posed this question. When I read this, my immediate gut -- being a 25-year-old myself -- was, "I don't own any dividend companies," exception of Constellation Brands, which is a cannabis company for me at this point. But, really, I don't focus on dividend-paying companies. So, my first thought was, "No, you don't need to." Going back to what Andy said, a lot of these small-cap companies are the growth stories that I think are going to be important 40 years from now. But Bro said, "Wait a minute! If you look at total returns, as long as you reinvest the dividends, actually, dividend-paying companies tend to outperform." I'm not sure that's true when you look specifically at dividend-paying companies vs. those small-cap companies. But I will say, I wouldn't snark them. I personally still stick with the idea. I don't go out of my way to get them. But if you do get them, Brokamp says, be sure to reinvest the dividends and hold them in a tax-advantaged account -- like, for instance, a Roth IRA -- because you never pay taxes on those dividends.
Cross: Also important to know is that during market slowdown periods, dividend payers and good dividend payers tend to outperform the market.
Hill: You said that like we're about to enter a market slowdown.
Cross: [groans] No promises there, Chris!
Hill: One more question. This time from Keith Inverurie, who writes, "I've recently started my career after graduating from college this last May. I'm starting to build a diversified portfolio of stocks in my Roth IRA account. To help guide these picks, I've subscribed to Motley Fool Stock Advisor. My question is about sector allocation for my stocks. How should I split my assets between each sector? I've heard different lines of thinking on this topic, with a popular view being to stick close to the S&P 500 makeup. That is, for example, 21% of the S&P 500 is made up of information technology companies, so I should have around 21% allocated to IT stocks in my portfolio. Is this a smart way of approaching the weighting of my personal account?"
I have absolutely heard that theory before. Like, if you don't want to go the index fund route, you want to build your own portfolio of stocks, stick to the allocation guidelines of the S&P 500.
Moser: It's not a bad strategy. That's a pretty good place to start off. But I would also argue, if you're looking to mimic that allocation, maybe you should just be investing in the S&P 500 index fund anyway. Do something a little bit different. For me, I try not to get too granular. I like to find the four or five big market opportunities out there that I like -- for example, healthcare or payments. Find good companies in those markets and then invest in them.
Flippen: Yeah. I think there's three major problems with this. You're overthinking it if you're trying to match allocation. The first thing -- OK, the S&P 500. That within itself is a choice. Why not the NASDAQ 100? The difference being information technology there is something like 20% vs. 50%. So, inherently, choosing S&P 500 is within itself an investment decision. Additionally, you have sector weightings that have drastically varied over time. It's not like the S&P 500 has always been weighted the way that it is today. Then you're talking about reweighting at some undefined point in the future based off how those have changed. The third is the criteria for the selection of the companies within these different sectors. For instance, earlier this year, Facebook and Apple were changed from tech companies to communication companies. There's a lot of processes that go into actually trying to match weightings. Here at The Motley Fool, we tend to be much more business focused investors. Put a priority on finding good companies. I would just sanity-check against the benchmark. I'd say, do I not have any healthcare exposure? Then you might think, maybe I should at least have one company that's exposed to the healthcare industry, for instance. But yeah, I tend to be much more focused on the business than the index.
Hill: Also, sounds tiring.
Flippen: It really does!
Hill: Keith is younger than me. He's got more energy. Quick shout out. Joining our man on the other side of the glass this week is Josh Brist, a listener visiting from Minnesota.
He's on vacation with his family and wanted to come hang out with us.
Cross: That's so nice, spending some time with us!
Hill: Thank you for that, Josh! Real quick, with all the mention of Motley Fool Stock Advisor, if you're interested, you want to check out Stock Advisor, it's our flagship service. You get monthly stock recommendations from Tom and David Gardner. You get their Best Buys Now and a lot more. You can go to radarstocks.fool.com. 50% off for our dozens of listeners.
Let's get to the stocks on our radar this week. Our man behind the glass, Steve Broido, will hit you with a question. Emily, you're up first. What are you looking at this week?
Flippen: I am looking at Square, ticker SQ. This is a company that I'm a huge fan of. The reason why I'm riding this high right now, no pun intended, is because they announced that they're officially launching the expansion of their payment processing service for CBD companies based here in the United States.
Hill: Steve, question about Square?
Steve Broido: Who is Square's primary customer? Is it me if I have a store? Who's using Square?
Flippen: Yeah. Small to medium-sized businesses. Anybody who needs help controlling their finances for their businesses. Payment processing, mainly.
Hill: Jason Moser, what are you looking at this week?
Moser: Sounds like radar stocks this week are brought to you by the war on cash, Chris. My radar stock is PayPal, PYPL. You may have seen news this week that via a 70% interest purchased in Chinese payments company GoPay, PayPal will now be granted license to provide online payments services in China. A big hurdle to clear, just getting in the country. When you look at the opportunity -- and we're talking about trillions and trillions of dollars flowing through those networks -- there's a big opportunity for PayPal over the coming years to take advantage of this. You ask, why PayPal? Maybe it's that they're seen as the best option in a tech-driven payments world. Certainly, Square is on that level as well. But it's a company that was built obviously on the technology vs. one that is pivoting toward technology. Big cross-border opportunity as well. We've seen MasterCard and Visa both make big investments in that area.
Hill: Steve, question about PayPal?
Broido: I find myself using PayPal a lot when I'm checking out online. "You can enter your credit card!" Ugh. Or, "You can just use your PayPal account." Perfect! Is this where PayPal shines? Am I using it correctly?
Moser: I think you are. I also find myself using it more and more for everyday life things. When I pay for my daughter's horseback riding lessons, for example. I think what they're doing is wonderful in that they're making themselves accessible to everyone. That's thanks to them and thanks to mobile technology.
Hill: Andy Cross, what are you looking at?
Cross: Sorry to break the trend here, team, but I'm not going with another payments company. I'm going with Delta Airlines, DAL. They announced they report official third quarter earnings next week. But they updated guidance. Looking at revenue, sales to be about 6.5% for the third quarter. What really caught my mind, though, is a little increase in some of their non-fuel costs driven by weather impacts and employees. I want to see on the call how they talk about that. They will probably earn $7 per share. The stock sells at $52, so it has a P/E of less than 8X. Looking to see what happens with Delta.
Broido: Where are fuel prices going, and how can that affect Delta?
Cross: They're going down, but they have a refinery. It's very interesting for Delta.
Hill: Three stocks, Steve. You have one you want to add to your watch list?
Broido: I recently bought PayPal, so I'm going to double down on that one.
Moser: Oh, yeah, man!
Hill: Alright! Jason Moser, Emily Flippen, Andy Cross, thanks 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!