MarketFoolery Mailbag Bonanza

In this episode of MarketFoolery, Chris Hill talks with analyst Bill Mann about some of today's biggest business news, plus some listener mail. Lands' End (LE 0.49%) is up big on a good report and, probably, more freedom from Sears. Ollie's (OLLI 0.15%) shares were crushed after the passing of longtime CEO Mark Butler. Bill and Chris reflect on Butler's legacy and explain what comes next for Ollie's. Also, they have answers to some listener questions: Is 5%-10% of your portfolio in cash really enough for a big, long-lasting recession? Whatever happened to Chesapeake Energy (CHKA.Q), and is there a value play opportunity in the beaten-down company? Tune in for more.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on Dec. 3, 2019.

Chris Hill: It's Tuesday, December 3rd. Welcome to MarketFoolery! I'm Chris Hill. With me in studio, the one and only Bill Mann. Thanks for being here!

Bill Mann: How are you, Chris?

Hill: I've got coffee, so I'm good.

Mann: It smells delicious.

Hill: You should've gotten some.

Mann: I've heard a lot about coffee, I'm going to give it a shot at some point.

Hill: We're going to dip into the Fool mailbag. We're going to pay tribute to a retail visionary. But we're going to start with what I think is the surprise of the day, and that is Lands' End up 12% after third quarter profits came in higher than expected. Revenue was a little light. Same-store sales for Lands' End came in north of 8%. That is strong growth.

Mann: Yeah. Some of that has to do with the fact that there were 89 Lands' End stores that closed. I think in every case -- someone will certainly correct me if I take one side of this issue or the other -- it was because of Sears closing, and Lands' End was an integral part of the Sears experience such that it was. So, certainly, that helped the tick-up.

But, you have to say, looking at the revenue numbers, it doesn't look like an up-double-digits result.

Hill: It really doesn't. I know that at least part of that is Lands' End raising guidance. We're going into the holiday quarter, maybe there's optimism there. I don't know. This is one of those businesses that is a little puzzling to me, just because they appear to have the product right. It's like I say about Under Armour. They've got good products, it's just the rest of the business they're struggling with. Lands' End makes quality stuff, they just appear to struggle with most other parts of retail.

Mann: I don't think that you would look at Lands' End -- maybe this is for better or for worse. You look at the nosedive that North Face has done, for example. Lands' End isn't going after being the hot brand. They are a steady-as-she-goes brand. They are very credible. It's funny, I never noticed until I was actually doing the research, did you ever notice that the apostrophe for Lands' End is in the wrong place?

Hill: It is?

Mann: The grammar scold in me is really angry that I never noticed this. So I looked it up, and it turns out that when Lands' End was founded, the first time they had made enough money to make a catalogue, the printer put the apostrophe in the wrong place and they didn't have enough money to fix it. So they just rolled with it. And not only did they roll with it, they just embraced it. So it's still Lands' End.

Despite the grammar scold in me -- I will never unsee that -- it's a really great brand. It's a great brand that they have taken pains to maintain. And I think that helps.

Hill: It absolutely helps. This is a company where the market cap is about $450 million. This really seems like, because of the quality merchandise, because of how solid the brand is, it really seems like it would make for a good smart tuck-in acquisition for --

Mann: For the next Sears? [laughs]

Hill: Not for the next Sears. And I wasn't going to say for Tapestry, per say.

Mann: That's exactly who I was thinking of.

Hill: But, those types of businesses that say, "We've got a portfolio of brands, and we're going to make this part of it."

Mann: Sure. A Tapestry, a VF, it would be a very smart acquisition. Lands' End to me is a company that -- although, as we're recording now, it's up 17% -- despite that, it's not something that really is going to surprise you that much. I'm not sure that the brand gives it permission to push into a bunch of different verticals. It is what we think it is. So, yeah, I would think that, now that it's cleaned up a bunch of its operations, now that Sears is taking itself out of the equation, I would think that this would be a really good acquisition for a Tapestry, because it's a good cash flow story. It's just not one where I would expect hyper-growth without taking some risks to the brand.

Hill: Shares of Ollie's Bargain Outlet are down more than 12% so far this week due to the passing of CEO Mark Butler. Mr. Butler was 61 years old. He was with his family over the Thanksgiving weekend when he died. Our sympathies to his family and friends. We will get to the business of Ollie's Bargain Outlet in a minute. But I think it's safe to say, Mark Butler, definitely a Fool favorite when it comes to CEOs.

Mann: Yeah. For the Partnership portfolio, we spoke with Mark Butler back in July of this year. It was a really wonderful interview. Ollie's is a company that was really built in his image. There are very few [CEOs] that are quite like Mark Butler. You would point to Jim Sinegal at Costco, people who have done things in an entirely different way. One of the things that Mark Butler always bragged about at Ollies was, they had zero revenues that came from online. Everything was based on their stores. If you think about that, you're like, "Oh, that's kind of interesting." But to me, it's more than interesting. It's brave. Given the environment that we've operated in in the last 15 years, with so much being pushed online, the fact that he decided, and that company decided that that's the route that they were going to go, that the in-store experience is what they were going to favor, it was a brave move. And it's worked out really, really well.

It's obviously not great news for Ollie's shareholders. We are very sad because we have learned so much from our time getting to know Mark. Our condolences go out to both of his families.

Hill: Also, I read this interview he gave where he was talking about, part of his approach for this business. And he said something, and it's one of those things that, yes, as any good CEO would, he's talking his own book. But it also struck me as being completely true. And in this interview, he said, "Why does this work? Because America loves a bargain."

And he's absolutely right about that. It's the sort of thing where you look at Ollie's, you look at Five Below, Burlington Stores over the past five years, done correctly, this approach to retail is a profitable one, and it is one that rewards shareholders, when it is done correctly.

Mann: I actually have spent some time going to Ollie's stores. Actually, if come to my Twitter feed, @tmfotter, I'll put a picture up from the most recent time I went to the Ollie's in Lynchburg, Virginia. The store is mobbed, and you can see, this being Lynchburg, right across the street from Liberty University, there's a massive Bibles and devotional study book section. They're really smart retailers. They call the stores "semi-lovely." That's why I took some pictures, because you see exactly what they mean.

Hill: You see the "semi" in the "semi-lovely."

Mann: [laughs] That's right. The "lovely'" is a little bit harder to discern. But the thing about it is, you come in, it looks a little bit like chaos, but it really is, every bit of what they were doing for the store experience at Ollie's was thought out. It's done on purpose.

Hill: John Swygert, the longtime executive vice president, is now the interim president and CEO at Ollie's. We were chatting briefly yesterday. You were saying, you think this is a smart move, even though he's been there, to keep the interim title with him for now.

Mann: Yeah, it gives them some optionality. The thing that impresses me about this is that Ollie's obviously had in place a, "What do we do if Mark Butler gets hit by a bus plan." Unfortunately --

Hill: They had to put that plan into action.

Mann: They had to put the plan into action. Particularly for companies that are dominated by a charismatic founder CEO, that's a really hard thing to put in place. They have done so. So, Ollie's, I think, is in better stead than I might have feared it would be. So, it gives them some optionality. They'll do a search. I would suspect that the interim will be dropped at some point. This is not a company that's going to go out and hire the next hot shot who wants a new challenge from Apple or whatever. This is an iconoclastic company.

Hill: Our email address is [email protected]. Question from Gilbert in the Netherlands, who writes, "First of all, thank you for your wonderful podcast. I'm a daily listener." Thank you for listening, Gilbert. "You guys keep saying that you should only have 5% to 10% cash in your portfolio. But if you do that, with what cash are you going to sweep up all the bargains once a recession is a couple of months or years old?"

This was one of those questions that, when I first read it, I thought he was being cheeky. Then I was like, "Oh, no, wait. I get what he's saying." And he's absolutely right. The prospect of a recession lasting six months, eight months, 12 months, that sort of thing, where it's like, "Oh, right." So, what do you think?

Mann: Well, first of all, the market tends to go up around 10% a year. If you have 10% of your portfolio in cash, let's just call that a year's worth of gain potential. 10% is a lot. I actually have more than 10% in my own portfolio in cash right now. I'm not quite sure where he's gotten the 5% to 10%. It's a reasonable number. I actually have more than that, but 10% is plenty. And keep in mind that when, inevitably, the market drops 20%, that 10% isn't going to be 10% anymore, because it doesn't move. It will suddenly become 14-15% of your portfolio. You will have plenty of ammunition to invest in companies that you think have become bargains.

Hill: As a general rule of thumb, because Gilbert's question got me thinking about --

Mann: It's a great question.

Hill: -- figuring out a way to have cash in your portfolio. And one way to do that is just to say, for some stocks, I don't want to purchase additional shares. When I get the dividends, I just want the money.

Mann: Take the money. Yeah.

Hill: Is that your move generally when it comes to dividends? Or does it depend on the business?

Mann: It kind of depends. I don't happen to own any now since Oaktree was taken out, but I have owned companies in the past that I consider to be cash generators. Those types of companies, I would allow the cash to accrue. You should know, once again, why it is that you own companies.

The other thing to keep in mind is that prices are information. While we always talk about, don't sell your winners, when the market gets hit really, really hard, sometimes the relative attractiveness of certain companies is going to change. Not even sometimes, it will do it every time. So, you have to be willing to harvest from some positions into others. Every single bit of your portfolio is potential cash.

Hill: I remember we had an event. This might have been one of the first member events we ever had. I remember, you were on a panel. And one of the things you said was, "I'm a long-term investor, but make no mistake, every single company in my portfolio is for sale at the right price."

Mann: Every single day.

Hill: "Every single day, at some price, no matter how much I love this business, at the right price, I am selling the hell out of this thing."

Mann: That's right. I'm glad you remembered that. I did get some flak from people. They said, "Well, then you're not a long-term investor." No. [laughs] Yes, I get it. I can't remember the last time that I sold a stock on purpose. But when the market is in dislocation -- and dislocation can be because people have gone crazy on the upside, or it can be on the downside -- you would be absolutely insane just to stand upon, "Well, this is what I am, and this is what I do." When bargains come out, you have to be willing to act.

Hill: Question from Sam Gorashi, who writes, "My question is about," haven't heard this name in a long time my questions, "Chesapeake Energy. From my early days of being a young Fool, I recall listening to the stories of former CEO Aubrey McClendon and his thirst for collecting everything rare. At one point, Chesapeake Energy was a top natural gas player. Now, it trades for $0.60 a share. Is this a value play? Thanks for helping me convince my bride that investing in stocks is not gambling."

You're welcome!

Mann: [laughs] That's so great. I haven't heard those names in a while, either.

Hill: I'm surprised that Chesapeake Energy was -- when I looked at the question, I was like, "Wait a minute, is it really that low?" Yeah, it's really that low.

Mann: It's a wonderful question, and it's a wonderful example. He's exactly right. The assets that Chesapeake holds are rare. But ... I went and researched the capital structure of Chesapeake, Basically, it's valued at a little over a billion dollars. It's got $9 billion of debt, and that debt is about 6% in interest they have to pay each year. You can do the math on that. That's a lot. And, they have preferred a class of stock, which at present, pays a 20% dividend. Which sounds awesome, except, a lot of times, that dividend is information, and what that information is, is that the market believes that the company will be unable to pay its dividend from cash flows. So, they will either need more debt, or they will have to start selling some of those assets. The assets themselves are somewhat irrelevant.

Now, the reason that you might invest in Chesapeake -- this is not advice, and I will say very strongly I would not do this -- is if you believed that the market is wrong about Chesapeake's ability to pay and operate. If it is wrong, then the stock is an absolute bargain. But I tend to think that the debt market and the preferred markets tend to be pretty efficient.

Hill: Last but not least, quick shout-out to Sam Muffley, longtime listener. Mentioned on Twitter, nice reminder, for all of the talk -- and we talked a lot about this yesterday, about Black Friday and Cyber Monday -- that today's Giving Tuesday. As Fools, we like to look through charitables through the lens of investing and long-term solutions. And also, let's face it, some charitable organizations are better-run from a financial standpoint than others, and do a better job of getting more of the contributional dollars to whatever the cause is. So, yeah, great reminder. Take a couple minutes today and think about --

Mann: Please do. It's funny. I always think, whenever I hear Cyber Monday and Black Friday, they sound like war scenarios in an Orson Scott Card novel. [laughs] So, to be Giving Tuesday, and I've been involved with a foundation for a number of years that addresses impoverished women in Africa, I have chosen to think like an investor in terms of my own charitable giving. That means you're trying to alleviate pain rather than anything else. It's a wonderful thing to do. For me, to have Giving Tuesday just after Thanksgiving is a really wonderful thing.

Hill: For those unfamiliar, go ahead and --

Mann: It's called the Fistula Foundation, fistulafoundation.org. It was originally primarily focused in Ethiopia. It's now throughout Africa and in places like Afghanistan. We basically provide surgeries for a childbirth injury that is completely unheard of in the West. We help some of the world's most disenfranchised women. It makes me feel good to even talk about it, so thank you for giving me that opportunity.

Hill: Thanks for being here!

As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That'll do it for this edition of MarketFoolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow.