Toward the end of 2018, Industry Focus: Financials contributor Matt Frankel, CFP, made five bold stock market predictions. Some didn't turn out quite as planned, while others played out quite nicely.
In today's episode, Matt and host Jason Moser go through each prediction and what went wrong (or right). Plus, we answer a listener question about what a post-Buffett Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) might look like, and we discuss why Upwork (NASDAQ:UPWK) and Slack (NYSE:WORK) are on our radar this week.
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 Dec. 2, 2019.
Jason Moser: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market each day. It's Monday, December 2nd. I'm your host, Jason Moser. Joining me in the studio today via the magic of Skype, he's been through the wringer here, folks. He had Thanksgiving, he had a wedding anniversary. Now he's getting ready for Christmas. The kids are just running him ragged here. Mr. Matt Frankel. Matt, how's it going?
Matt Frankel: Other than a terrible football weekend, it's going pretty good.
Moser: Yeah, it wasn't the greatest football week for you between your Eagles and the Gamecocks. South Carolina, that's not the biggest surprise. I remember South Carolina back in the day of George Rogers. That was the South Carolina that I remember growing up. It does seem like Clemson has always been the South Carolina football school.
Frankel: Especially lately. There's no shame in losing to Clemson right now.
Moser: Not at all.
Frankel: There is shame in the Eagles losing to the Dolphins right now.
Moser: Yeah, that was a bit of a surprise showing there. But you got, what, four games left this season. Time for them to turn it on and see where it gets them. But yeah, NFC East is certainly earning that nickname of NFC Least this year, isn't it?
Frankel: [laughs] I can't argue with that. The Redskins look good this week. That's saying a lot.
Moser: Listen, they're mathematically still in it, which is just astounding. I think we'll just leave it at that and move forward, how about that?
On today's Financials show, we are going to get to a listener email. We've got more of "The Last Stock You Bought and Why," not to mention the stocks that Matt and I are both watching. But we're going to start off today looking back all the way to the end of 2018. Why, you ask? Well, that's when our own Matt Frankel published his five bold predictions for 2019. We talked about these on a show as the year began. We want to just check in and see how these predictions are shaking out. And let's be clear, these are bold predictions. These are not predictions that are wishy-washy. "The stock market might go up; the stock market might go down." You're making some bold calls here, Matt. We're going to tackle these five. We'll go one at a time. We'll see how it's shaking out thus far. We'll talk a little bit about why it's working out, or maybe why it's not. And maybe we'll get into what we're thinking 2020 holds as well.
Let's start off here with the very first bold prediction, your prediction that the trade war will come to an end. Matt, it does seem like, at this point in the game, the hyperbole has only increased regarding the trade war. It's almost like it's a weekly back-and-forth about what headline can make this market go up or down.
Frankel: To be clear, it's totally possible we could still get that phase 1 deal by the end of the year.
Moser: Yeah, that's a good point. It is just the beginning of December. That's fair.
Frankel: So, I'm not giving myself an F on this one just yet. But [laughs] having said that, the trade war is not close to over yet. I'd be surprised if the trade war extended past the 2020 elections. That's something that people want to see over. I think Donald Trump's going to turn up the heat on China, and, on the other hand, be more willing to compromise, if you will. But so far, the trade war's heated up a little bit more than I had predicted at the end of 2018. I'm not saying I totally disagree with everything that's going on. Both sides have been very slow to blink on this one.
Moser: I started thinking about it more and more as the year was going on. It's almost like you have two different forces at play here, and they're working against one another. It's what is best for everyone, coming out with some sort of fair and equitable solution, versus perhaps the political side here, right? And I'm not blaming President Trump for this. I think any politician is going to look at a situation like this and try to play to their advantage. But it almost feels like he's trying to take this and play this card more or less going into this 2020 election season. It's starting to feel like, to me, at least, he wants to drag this out as long as he can so that he can paint as positive a picture as possible leading up to the election in November next year.
Frankel: That's how I'm feeling about it. A big campaign promise of his was that he was going to get China to play ball when it comes to the trade. He wants to do that as close as possible to the next election for obvious reasons. We'll see how it goes. But that's one that so far, I've gotten wrong.
Moser: OK. There's still some time left, so we'll hope for the best for you. Let's jump to No. 2. [laughs] This one's kind of funny, it actually just made me chuckle when I read the lead here. No. 2: the Fed will raise interest rates, not just once or twice. This is probably not going to work out in your favor, regardless of how much time we have left in the year.
Frankel: Yeah, no. If I had to give myself an F on one of these, it would probably be this one. [laughs] In fairness, that one ties in with the first prediction. If the trade war had ended, the economy could be in a completely different position. The economy slowed down a little bit more than I thought. To be clear, I don't agree with what the Fed's done. I don't think they should have cut interest rates like they have. We've both discussed that on the show.
Moser: Yeah, we talked about that through the year.
Frankel: Unemployment still looks great. Economic growth looks good. We're finally getting some wage growth. The only thing that justifies rate cuts is the lack of inflation. But I don't think that was enough to pull the trigger. I think the economy was just humming along. Maybe with the trade war going on, and escalating like it did, you couldn't justify any rate increases anymore. But I still don't think you needed to cut as much as they did. But, that's definitely a bold prediction that went in the complete opposite direction of what I said.
Moser: Your inflation point there is a good one. That's what's been guiding this logic, for the most part. It's all been about inflation. As long as inflation remains in check, then there are no concerns there. But there at least is the feeling, and I know I'm not alone here, that there was some political pressure applied here. While I'm sure the Fed would never admit this -- there is supposed to be that separation, right, making decisions based on the state of the economy, not on a political agenda -- it does feel like there was some political pressure there applied via Twitter, [laughs] almost on a weekly basis. It does feel like the rate cuts weren't necessary. It does feel like it was something that was just added to the mix to try to keep this market chugging along. Investors have obviously loved that byproduct of it, but by the same token, we've talked about this before, particularly with the negative rate discussions that we've had, and the listener questions that we've had throughout the year -- you can only go low. After you run out of that ammunition, what do you do next?
Frankel: Right. That's where I'm standing. I think they should have kept that ammunition in their back pocket for when we actually needed it, not just to extend this market rally. The flip side of that is, if things go wrong and you need to cut rates, then you have limited room to do so at this point.
Moser: Yeah. Well, I think it's probably a safe bet. Maybe your bold prediction for 2020 should be that rates will go up. [laughs] I think you could use that one again for 2020, you'd probably be right. We'll see.
No. 3: bank stocks will stage a big comeback. Matt, how have bank stocks fared so far this year?
Frankel: I give myself an A on this one.
Moser: Me too. I was thinking the same thing. You got that one.
Frankel: Bank stocks have outperformed the market. In a year when the S&P is up 27%, bank stocks are up about 30% when you look at total return. Bank stocks were one of the worst-performing areas of 2018. They're one of the best-performing areas of 2019. Of course, we still have another month to go. But I think that's especially impressive given that we've had a couple of rate cuts, because banks tend to make more money when rates are higher.
Moser: I was going to jump in with that. That to me flies in the face of what we would have thought would have happened here. Like you said, in these low-rate environments, it's a more difficult time for banks. It's more difficult for them to wring that profitability out. But for whatever reason, the market has been willing to look past that. Net interest margins are low. It's not like these net interest margins are all of a sudden shooting back up. There's not some big acceleration in growth there. Why do you think it is that bank stocks have performed so well in the face of an environment that would lead us to believe they wouldn't?
Frankel: Well, they generally keep growing more than experts thought they would. Banks are still growing their loan and deposit portfolios. Consumer confidence remains high. People are still buying cars and borrowing money for that, buying houses and borrowing money for that. The personal loan market is growing. All the big banks are throwing their hat in that. So there's a lot of big growth avenues that are going on. So even though the interest margins aren't what they would hope for it, they're still growing. The market was fearing that interest margins would fall off a cliff and growth would go away. The growth didn't really go away. Banks are in a great position right now if interest rates do start coming back up, as you mentioned.
Moser: One thing I was thinking about over the course of the year -- banks clearly are in the business of money. They're loaning out money, they're lending money to borrowers, and they are taking money in for deposits. We're seeing a lot of banks that are really focused on getting those lower-cost deposit bases so they can at least handle this lower interest rate environment. But we saw through the year, there were some adjustments made to how FICO scores, credit scores, are calculated. Ultimately, it's giving consumers a better opportunity to borrow through improved FICO scores. I think FICO scores now are better than they have been in a long time. That can be for any number of reasons. Part of that, I'm sure, is probably making it a little bit easier on the consumer. Part of that is that the consumer is in a pretty good spot right now via employment and whatnot. But it does seem like, at least, through those conditions, between low rates and more qualified borrowers, you're going to have more people borrowing more money, and that ultimately is what banks are looking for.
Frankel: Yeah. It's been a good year for the banks, better than experts had predicted. I think we'll get another good one in 2020, even if the economy doesn't do that great, just because, like I said, more qualified borrowers, the markets are bigger, and consumer confidence remains high. Normally, when the Fed's cutting rates, you think it's going to be a bad economy. But that really isn't the case. We're seeing that reflected in bank results.
Moser: Certainly, these big banks are making a lot of investments in fintech. A lot of these big banks are making investments in this new technology that's helping guide our banking system, our financial system forward. I don't think we want to overlook that. We talk a lot about companies like Square and PayPal and all the great things that they're doing, Stripe, which isn't publicly traded, but still in that same sandbox. The fact that you have big banks like JP Morgan, Bank of America, these are banks that are not only investing a lot of money in technology today, but they invested a lot of that money a number of years back. They've got tremendous online banking presences today. It's not like that just happened overnight. I think there was some seeing around that corner a number of years back and understanding the value of having that robust tech presence. It seems like, to me at least, a lot of the big banks are benefiting from that today.
Frankel: Sure, that's a good point. Banks are as a whole becoming more efficient, and that's accelerated in the past few years. Just to give you an idea, if you make a deposit through a mobile app, it costs the bank roughly one-tenth of what it does if you go into the bank and make a deposit in person.
Moser: It's so key to be able to take a picture of that check and just deposit it in your account. I never get checks anymore, but the two times a year that I do, instead of having to actually get in my car and go somewhere, to photo capture that thing and deposit it, man. That's an advancement.
Frankel: That's something that I think will keep driving margins higher over time and being a nice positive catalyst for the sector, regardless of what the economy is doing. The tech has just advanced so much in the past few years, and it's saving banks a ton of money. In my immediate area, there used to be four Bank of America branches. There's now two, because they just don't need that much of a physical presence. They're running a more efficient operation. I see that trend continuing.
Moser: Yeah. The other trend that I'm looking for, certainly, is consolidation. We saw a little bit of it this year. BB&T and SunTrust being one of the more obvious ones. I think we'll see a lot of consolidation, even with the smaller banks as well. We talked earlier in the year about the Ameris Bancorp and Fidelity tie-up there, which gave Ameris bigger presence certainly in commercial markets, real estate markets like Orlando and Charleston and Atlanta. I suspect consolidation will be another theme for 2020 as well. Maybe that'll be my prediction for 2020, is we'll see accelerated consolidation.
OK, moving on. No. 4: Apple (NASDAQ:AAPL) will become the largest U.S. company once again. Probably not the boldest of your prognostications there, Matt, but we certainly hit a point at least where Apple did become the largest company once again.
Frankel: Well, let me push back on you for a second there. [laughs] I think this was a bold prediction, and I'll tell you why. At the time I made it, Apple had just plunged 27% after its earnings. That's a big drop for a company that was worth about a trillion dollars.
Moser: That's a very big drop.
Frankel: At the time, the gap between Apple and Microsoft (NASDAQ:MSFT) and Amazon was pretty wide, actually. Microsoft was $300 billion more than Apple at one point. And it was a very specific prediction. I predicted not only would it get back to a trillion, not only would it reach a new all-time high -- which it actually did today, it just reached another new all-time high -- and that it would surpass Microsoft -- right now, Apple's back up to $1.18 trillion, so it beat the trillion --
Moser: Looking like it's got Microsoft by just a tad.
Frankel: Microsoft is $1.14 trillion. Like I said, Apple continues to hit new all-time highs, and it just did this morning before the market reversed course. It's a good time to be an Apple shareholder. Actually, out of the five, this is the one I think I got the most correct. Like you said, this was not my boldest prediction, being totally honest. Apple was worth about $100 a share less than it is now at the time. Apple's up something like 50% this year. It might have been a bold prediction.
Moser: Now that you frame it that way, you make a good point there. The stock really had taken a big tumble. For you to say what you said required the company to fire on all cylinders, and then for the market to recognize that. To your point there, that actually was a little bit bolder than I was giving you credit for.
Listen, whether it's Apple or Microsoft, two companies that have done phenomenally well, not only this year but over the past several years, and companies that are just lighting the path forward in all of this cool tech stuff that we're doing. I tell you, with the augmented reality service that I run here, Apple and Microsoft are two bedrock holdings in that portfolio. When you look into why, between Apple's ARKit software and Microsoft's hardware with the HoloLens and all of the software that they're developing in it, it really is just phenomenal to see all of the different things these companies are doing. That growth won't be as torrid, but I really do expect these two companies to, again, have terrific 2020s and beyond.
Frankel: Ten years ago, if I had told you that Apple, Microsoft, and Amazon would combine for more than $3 trillion in market cap, you would have called me crazy. But all three of those companies have done phenomenally well.
Moser: Yes they have.
Frankel: And like you said, they still all have some growth avenues ahead. Tech isn't my specialty, but I know business, and I know recurring revenue models and things like that. Apple has those going for them and has a lot of potential to keep them growing. That area of the business is definitely a growth company, and it's altogether trading like a deep value stock.
Moser: Indeed. All right. Well, No. 5, lastly: Warren Buffett will buy something big. I don't think he did. He didn't buy anything big yet this year, has he?
Frankel: No. He's tried a few times. His biggest investment this year was the $10 billion debt investment in Occidental Petroleum. That's the only real big thing he's done, and I wouldn't call that big, even by Buffett standards. Buffett had over $100 billion at the end of 2018. Now he has $128 billion. He's definitely been a net recipient of cash.
Moser: Sounds like he's really concerned about valuations. That seems to be what is stopping him from doing anything. He doesn't like valuations where they are today.
Frankel: He's tried to make a few other investments, and just refuses to get involved in any kind of bidding war, because he already thinks things are generally expensive. He's not going to get sucked into a bidding war and pay more than he's comfortable doing. As a shareholder, I get that. I'm hoping he gets that cash pile up to about a trillion dollars and buys Apple.
Moser: [laughs] Yeah, that would be nice. Shoot, I could see him going a number of different ways. You and I both talked at one point about them buying Square, and being a little bit more of a part of that financial system of the future. To the point on valuations, and I do get that, I understand his history as an investor, how he grew up, and how he's invested all of his life; it is one of those things, I want to push back on the valuation stuff a little bit because we've seen it time and time again, where really good businesses just tend to command these higher valuations. Sometimes that's OK, particularly if it's something that's got some kind of a recurring revenue model or if it just encourages repeat purchases. I don't understand why he invested in Kraft Heinz when -- listeners are going to know, I've said this more than once -- to me, the McCormick idea was a far better one. I remember looking at McCormick back after they had just made that RB Foods acquisition, and the stock sold down to somewhere in the $90 range, because the market was very concerned. It was going to cost a lot of money for them to make this acquisition, and they didn't know that it was going to work out for them. Today, we obviously see that it has worked out for them. But my point is that McCormick's stock looked expensive back at $90. You look at it today, it's closing in on around $170. I don't know that it ever looks cheap. Sometimes really good businesses don't ever look cheap.
Frankel: It's also the point where, OK, you have $128 billion. I get that things are expensive right now, but is it really worth the opportunity cost of just leaving that stuff in cash at zero growth, as opposed to putting it to work and earnings returns for your shareholders, even if you think you're paying a little too much? I'd have to think at some point, it becomes silly to have that much idle cash sitting around earning nothing. But, I'm not Warren Buffett.
Moser: Nope, you're not. I imagine he will not let that money just sit there in 2020, either. I have to believe he's going to put something to work, doing something. Speaking of bold predictions, you have anything in the hopper here for 2020?
Frankel: I think we're going to get a recession. That's my bold prediction for 2020. I'm a little more negative going into this year. We're well overdue for a recession, but I think the ongoing trade war, the election coming up, depending on the outcome of the election, it could really determine whether this prediction is correct or not. But I think we'll finally get a recession, at least beginning in 2020.
Moser: I saw a data point a while back, and it goes back several, several decades, a hundred years or something, that we've had at least one recession every decade. We're getting ready to wrap up this decade sans recession. No recession in this decade. So to your point about being overdue for one, yep, I think we are overdue for one. Whether that's something that occurs because of fundamentals or political concerns later on in the year, I don't think anyone would be too terribly surprised. It does feel like maybe a nice culling is in order at some point here sooner rather than later.
OK, let's pivot from the bold predictions. Given our last point there talking about Buffett, we've got a listener email from Ron Burkett. It talks a little bit about Berkshire. Ron asks, "Hey, guys, just some thoughts on the Berkshire situation, of which I am not a shareholder. I seem to remember that during the Steve Jobs era, people were calling for a dividend from Apple. They too said they could use the money better. Do you think that after Buffett and Munger are no longer running the show, there's a better chance of dividends and possible better investments? I know they don't want to overpay for anything, but can we all say Kraft Heinz?"
What do you think there, Matt? Is that something that is more Buffett and Munger specific as to why they don't pay a dividend? Or do you feel like that's a culture thing that is enmeshed and in going to be more difficult to uproot?
Frankel: I can answer both sides of that question. I think no, you're not going to get a dividend. That's just not in Berkshire's culture. They're different than Apple in the sense that they can invest in pretty much anything that they want to. Apple's never going to buy a furniture company, whereas that's a viable option for Berkshire. So I don't think you're going to get a dividend.
But I do think, once Buffett and Munger are not running the show anymore, you're going to see the investment strategy pivot. The two guys who are going to be in charge of Berkshire's investment portfolio, Todd Combs and Ted Weschler. Right now, they're managing about $12 billion each, which is a drop in the bucket for Berkshire. But when you look at some of the recent investments they've made -- they were the ones responsible for the Amazon investment, for example. StoneCo, that we've talked about many times. They were the original purchasers of Apple's shares and got it on Buffett's radar. Buffett doesn't really understand tech, nor does Munger. So I think you're going to see a more tech-y investment strategy coming from Berkshire. Once Ted and Todd are in charge of the whole portfolio, I could see a Netflix or something like that being a target for Berkshire. Those kind of companies. Not necessarily Netflix, but something in that realm. Something that big. You're going to see a lot of larger tech acquisitions, I think.
Moser: Yeah, that makes sense to me. Ron, thanks for the question. I'll also make sure to add here, Ron says, "Also, the last stock I bought was American Tower. I don't see any smartphone data usage slowing down anytime soon." Ron, I tend to agree with you there. Those towers serve a very valuable purpose. That American Tower purchase ought to work out very well for you.
That is a nice segue into our next segment, one of our favorites every week, "The Last Stock You Bought and Why." We always hear about the last stock you bought and why. Want to hear all about the stocks that you guys are buying out there. Make sure to email us at firstname.lastname@example.org, or hit us up on Twitter @MFIndustryFocus. Let us know the last stock you bought and why.
Got a tweet from low-key Luciano, @lowefl. He says, "The last stock I purchased was Independence Realty Trust, ticker IRT, and Digital Realty Trust, DLR. Both real estate positions with large growth opportunities." Matt, I bet you those are right up your alley.
Frankel: Digital Realty is one of the biggest stocks in my portfolio. I love the REIT environment right now. It's a great growth environment for those companies. Digital Realty just announced a big acquisition not long ago. They're going to be even larger. They're already a massive company. Data centers, there's no shortage of growth in the need for secure data solutions. I love those investments, especially Digital Realty. I don't plan on selling that one anytime soon. I've owned it for a while now.
Moser: Nice. We got Blake @cbk_91. Blake says, "The last stock I bought, Livongo Health ticker LVGO. It's been on my watch list since its IPO earlier this year. Started my position before earnings last week. It passes the rule of 40. It's making the world healthier, happier, and richer with its management of diabetes and hypertension."
And finally, Matthew Klyman, @mattk520, says, "I just opened a small position in Virgin Galactic, ticker SPCE, following David G. Fool's advice to invest in our best future. Space tourism will de-risk the technology and business. Suborbital point-to-point transport will change the world." Matt, I'm a space guy. I like this investment. It's one of those companies I've enjoyed following since it went public. It's a little bit of a unique situation there. We're going to see more and more of this stuff as time goes on. To see Virgin Galactic out there making waves early on is a lot of fun. You get two thumbs up from me on that purchase.
Matt, it's time for us to jump into the ones to watch. Not the stocks that we're buying but the stocks that we're watching. What's the stock you have on your watch list here this coming week?
Frankel: I'm watching Upwork, ticker is UPWK. Upwork just hit a new 52-week low today. They really crashed after their last earnings. They're below their IPO price, which is $15 a share. This is the company that is a portal for freelance work. If you want a side hustle, check out upwork.com. I am an independent contractor for The Motley Fool, and I get paid through Upwork. Love the platform. Love what they're doing over there. I think the gig economy is just going to get better. Just to give you one stat, 10% of the population participated in gig work in 2005. Now it's closer to 20%. I see this trend continuing as technology evolves, and it becomes easier for people to work remotely. I think Upwork's a great play on that, and especially now that it's so beaten down, it's about half of what it was trading for at the end of its first trading day.
Moser: All right, Upwork. I'm going to be keeping my eye on Slack, ticker WRK. Everybody knows Slack at this point. Earnings are coming up on Wednesday. Been a very volatile short period in the public markets for this company. I certainly understand the concerns with Microsoft Teams. I think Teams' user data can be a little bit tricky to fully understand, given how it interacts with the Windows operating system. But the fact of the matter is, Microsoft Teams is a very good product. Slack has its work cut out for it in trying to compete in this space. I've been very critical of Slack for seemingly being very slow to iterate and become more than just what it was. The one thing that was always killing me, for example, was to italicize something or to put something in bold, it was almost like you had to code it, as opposed to having a nice little toolbar where you can just click a button. They finally seem to have fixed that issue. But, yeah, it does seem like Microsoft Teams is gaining some traction, particularly with bigger enterprises. That could be a problem for Slack. I'm sure this earnings report will give us some more insight as to the number of users, how much those users are getting out of the platform. Really, what I'd like to see is, I'd like to see something, I'd like to hear something convincing me that they are working on making this platform something more than it currently is. It really still feels exactly the same as when we started using it over three years ago here at The Motley Fool. It's helpful, but it's not that helpful. I'd really like them to become something more. If we can see signs of that, maybe there is something here from an investment standpoint. But for now, just going to keep my eyes on it and learn.
But I think that'll do it for us for this week. Matt, appreciate you taking the time out of your busy day to join us in the studio as always. You got any big plans for the rest of the week?
Frankel: Not too much this week. Thankfully, college football's over. I normally don't say that, but this year, I do.
Moser: Well, we will just look forward to next year, then.
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. Today's show was produced by Austin Morgan. For Matt Frankel, I'm Jason Moser. Thanks for listening, and we'll see you next week.