In this episode of MarketFoolery, host Chris Hill chats with Chief Investing Officer Andy Cross about some holiday investing takeaways and some listener mail. Andy shares an inspiring tweet thread from Shopify (SHOP 4.14%) founder Tobi Lutke, as well as some boots-on-the-ground Peloton (PTON +4.45%) research. Plus, the guys answer some listener questions. With the gains that Apple (AAPL +0.04%), Microsoft (MSFT 2.77%), and Match Group (MTCH +0.00%) had last year, are they still buys, or should investors wait for their valuations to fall a bit? What should long-term investors make of analyst estimates? Is there any value to be gleaned from all the price targets floating around in financial media? Tune in to find out more.
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This video was recorded on Jan. 2, 2020.
Chris Hill: It's Thursday, January 2nd. Welcome to MarketFoolery! I'm Chris Hill. With me in studio, the chief investment officer himself, Andy Cross. Thanks for being here.
Andy Cross: Chris, 10 years!
Hill: It's the 10th year. We're kicking off the 10th year. A year from now will be our 10th anniversary. But we're kicking off year 10.
Cross: Congratulations! That's awesome. You are really scraping the bottom of the barrel, coming to me on January 2nd here.
Hill: [laughs] We're going to dip into the Fool mailbag, but let's start with the break that we just had. We were talking this morning. I couldn't shut off the business part of my brain over the holiday break.
Cross: Good for you!
Hill: Well, I don't know. I mean, I'll just share one of the ways. I'm curious, your observations over the break. But literally, Christmas Day, the presents have been opened, they're back under the tree, it's later in the day, and I looked at the presents under the tree, and I started looking at everything through the lens of ticker symbols. Which I think may be a sign of madness.
Cross: [laughs] Or genius!
Hill: I was looking at these gifts, which were lovingly wrapped, and bought with anticipation -- a lot of creativity and love went into the gifts, and at some point in the day, I just started looking at it and seeing the ticker symbols. "Oh, AMZN. LULU. CMG," all those sorts of things.
Anyway, during your break, what, if any, business observations did you have?
Cross: I have young kids, Chris. So Christmas day for me was just a blur of lack of sleep from the night before, of course. So, not so much on Christmas Day, but there were a few things. Tobi Lutke, the founder and CEO of Shopify -- which, I think as so many know, it's a $50 billion company now, provides software platforms for entrepreneurs. We've talked to him, we really respect him. He wrote a great piece on Twitter. Series of pieces, of course. Talking about the Shopify culture and how they're different when it comes to the people that they hire and how they think about development and just the way they go about making Shopify different from other software companies, especially because they are not headquartered in California, or New York, or even really Toronto. They're in Ottawa, Canada. And the way they develop and take time developing people. He wrote this line I found really inspiring, to think about how you're going to build a business. And he wrote, "If we can help a young engineer or designer to get 10 years of career advancement in a single wall clock year, then we do it. If the student is ready, the teachers will appear. We get to share that additional skill for the rest of the decade." And he juxtaposed that against the kind of grind that so many software companies go through. When employees come, they're just looking for equity. They're there for 15, 18 months, 20 months at the most, and then they jump. Not all companies, but they really do this well. So, that piece that Tobi wrote. It's out there on Twitter, he's @tobi. I encourage anyone who is a student of business to read that, because it's very insightful.
Hill: You had sent me the link right before we came in the studio. I'll put that out on the MarketFoolery Twitter feed. Hopefully, it all got aggregated. I mean, I enjoy Twitter, but there are times where I'm like, Oh my god, this is a 17 tweet thread.
Cross: I think it was.
Hill: So, the fact that there's a site that aggregates stuff -- I'll include that.
Cross: So, that was really interesting. From an observation perspective, to get to your more direct question, I was in downtown Bethesda, Maryland doing some shopping, picking up something at the Apple Store, and they have a Peloton showroom there. Peloton, the fitness company, that really had a tough holiday season with one of their advertisements. I did not realize how many showrooms they have. They have more than 74 showrooms across the country. 70% of those are what they call large format, which are 1,500, 2,000 square feet. Compared to Home Depot or Costco, it's tiny, but that's their large format. And then they have very small format stores. But I didn't realize how much they'd put into their live showcasing, versus just having the solutions. This is a place where people can go and try the bikes.
And, what frankly kind of surprised me is that there were a lot of people in this store. This was during the holiday season. Not on Christmas Day, obviously, but during the holiday week. It just surprised me that there were people trying the bikes, talking to salespeople, learning about them. And these are very beautiful stores, Chris. Just like their advertisements, which are a little bit, I think ... sometimes, I look at my training bike in my house compared to what Peloton has at their house. Mine's in my basement or garage, surrounded by all kinds of stuff, compared to the beautiful look of the Peloton studios, or their commercials. But these studios are quite attractive, and there were a lot of people in there.
I've been a little skeptical of Peloton' ability to be able to last into the valuation. It's showing in the stock price since the IPO. But clearly, they are resonating with some people when it comes to using their showrooms.
Hill: It is interesting. Until you told me this morning, I was not aware that they had retail locations. It's going to be interesting in 2020 and beyond to see to what extent, if any, they look to grow that footprint. You have to assume that whatever metrics they're using to judge the success of those locations, if it's working -- I think right now, they've got 75, 80 locations. That's not a particularly large base. So, if they start to ramp that up, that's going to be probably telling in a good way for Peloton.
Cross: And they do have their studios that they spend a lot of money on, I think in New York and LA and I think now London. Interesting, as of the last filing, they have more than $800 million in lease expenses, with 70% of that out beyond 2024. A lot of retail companies, obviously, use operating leases rather than own the footprint. But, clearly, Peloton does have a lot tied into the retail experience that they're going to, I would imagine, continue to expand on.
Hill: Last thing I'll just add is, I'm a Disney shareholder.
Cross: Congratulations.
Hill: Like any good Disney shareholder, I went to see Star Wars, The Rise of Skywalker. Very much enjoyed the movie. Checked the numbers, the box office receipts for 2019. Even though it opened on December 20th, that movie finished sixth overall in U.S. box office receipts.
Cross: For the whole year?!
Hill: For the whole year.
Cross: That's incredible.
Hill: It was open for 11 days of the year, and it finished sixth overall.
Cross: In the high bar that Star Wars pictures have opened with, it was one of the lower-performing ones -- did I read that correctly?
Hill: Yeah, it was definitely lower than the last two in this trilogy. But, we'll see where it ends up.
Cross: I have not seen it. I am excited to see it just, frankly, because it'll get me out of the house.
Hill: [laughs] Our email address is [email protected]. Question from Robin Rifkin in Seattle, who writes, "Looking at the price increase we've seen from Apple over the past year, do you believe the company is, for the first time in a while, by the numbers, overvalued, and now merely a hold at best? What about big price increases over the past year like Microsoft and Match Group? Would love to hear your thoughts."
Thank you, Robin. Just to put some context around that, Apple shares up around 80% in 2019. Microsoft close to 60%. Match Group was nearly a double in 2019. I like the way he phrased the question, because it wasn't just, "Hey, do you think this is overvalued?" It was, "If you own this stock, is it now in that category where it's, you're just going to hold it?"
Cross: It was an incredible 2019 for the markets in general. The S&P 500 was up close to 30%. I think almost all asset classes were up in 2019. That's fairly rare, I believe. Obviously, the past decade has been a fantastic time to be a long-term investor. Apple, Microsoft, so many of these large tech companies had done so well. Apple, from the stock performance, looking across, is the cream of the crop, considering how large it was. Now, at the beginning of the year, the stock was actually very reasonably priced. It's now a little bit more expensive. The multiple has expanded. It's more than probably 20X earnings, 24X earnings. But at one time, Apple was in the 12X to 15X times earnings, selling cheaper than the S&P 500. Now, people concerned about the slowing growth. Clearly, Tim Cook and that team have been operating that business from a strategic side as well as a customer side and a solutions side, a product side, in ways that have resonated with investors as they've moved really into not just the hardware game, but into wearables and services and solutions. So really, kudos to that team, because they've done that very well, and investors have woken up.
I think what's very interesting is, the valuation case for a company like this, it really depends on, first of all, if you are looking at this as a long-term investor. I still believe Apple is a business that you can hold, even at a price that's near $300 per share and a $1.3 trillion business, because of all the great things they are doing in the emerging growth areas that they are investing into. I mentioned wearables and services and solutions. That's the real growth catalysts to Apple.
The stock is probably, in my mind, at this level priced to a case that it will be very hard to generate the kinds of returns that they saw last year. But the valuation case, I think you have to give a company that's proven itself, like Microsoft and Apple, a little bit of room. They also offer a little bit more balance to your portfolio. If you have the likes of a Shopify and Apple in your portfolio, while both tech companies, both very different, and the stocks will probably perform a little bit differently over the long term. Even though most stocks are kind of correlated, I think there's some differences there.
So, my thinking around the valuation for those companies is, it's not so much just the past year, but really thinking about, do I want to own this business for the next three to five years? Do I think that the leadership team and the positioning of the company is going to be able to accrue value over time? Apple's making the right investments, not just in their business, buying back stock, you get a little dividend. So, I would feel free to give those kinds of companies that have earned the right a little bit of multiple expansion.
Hill: Also, from a market cap standpoint, you look at Apple, $1.3 trillion. Microsoft, $1.2 trillion. Match Group, it's had a great run, it's only a $23 billion company.
Cross: Yeah, and much different. It will sit in your portfolio differently than an Apple or Microsoft. Even the likes of a Facebook or Alphabet. First of all, in our mind, you have to be investing in these businesses for the next three to five years and beyond. And if they are making the right investments that will generate both sales growth and earnings growth over time, the stock in the near term may seem slightly overvalued, and traders or algorithms may react to that by selling it off. But long-term, if they're going to accrue value to shareholders, and they can do that by growing sales and earnings, the stocks usually perform and move in lockstep to the business performance.
Hill: Question from Dan Beal in the U.K. who writes, "I have a couple of stocks that are currently priced 10% to 15% above the analyst price targets, and they've been lingering at this price for a solid six months. They all seem to be low-growth dividend paying companies. What should I take from this? Is there a general rule of thumb or opinion of what analyst behavior implies? Or should I stick to ignoring what they say because they are almost always wrong?" And then he adds parenthetically, "Apart from you guys, of course."
He concludes by writing, "I'm 26 years old. I love the show. Please give a shout out to my girlfriend Emma. I've talked about investing so much that she is now a fan of the show and is even considering buying some shares."
Shout out to Emma. Emma, thanks for listening!
Cross: Congratulations! Great, Emma.
Hill: And hopefully, just to give a little unsolicited advice here, there's something that Emma is very passionate about in her life that Dan has taken an interest in, just as she has taken an interest in investing.
Cross: I hope so. We can all benefit from our significant others' interests, I think.
It's an interesting question and a good question, because you hear so much about it on the general media. Not so much at The Motley Fool, but if you're listening to the wider media, they talk a lot about analyst pricing, this sort of thing. The very first thing, Dan, you have to understand is the analyst price targets are almost all one-year. They are paid and rewarded based on how their performance does over a very short time period compared to the way that we think about this. So, when they say, "We put a $40 price target on the stock," they really are looking at the next 12 months based on what they see.
The real value to those calls, by the way, Chris, is what is behind the scenes. What are the business reasons, the logic reasons, the valuation reasons? Unfortunately, those don't make the headlines. You don't hear about those. You just hear about the analyst call, and you tend to just see the analyst calls.
So, as Dan mentioned, we tend not to spend a whole lot of thought around that. Instead, we really want to focus on where that business and the team -- as we talked about with Apple -- is going. The fact that it's 10% or 15% higher than the analyst target, I wouldn't worry so much about that. In fact, I wouldn't worry about that at all. I would much more focus on how the business is performing. I think, especially, if he's concerned about some of the lower-growth dividend stocks, those tend to have much more -- without having stats or data in front of me, I would imagine they would have higher accuracy targets from the analysts. But, again, I just don't think the price target, per se, is something you really have to worry about if you're investing the way that we are thinking about. No one on my team thinks about the analyst price targets at all. We never talk about it. We're all looking at the next five years of the business.
Hill: Yeah, you're absolutely right. The thing that gets the headline is the price target. And it's the least interesting thing for me. I'm interested generally in analyst reports, I'm just interested in what is their thinking behind whatever number they come to.
Cross: I will say, sometimes analysts, I think, get panned. They are very smart people and a lot of times, they come from inside the industry, they go to the banks and the investment firms, they go into what's called the sell side to produce these targets. So their analysis is very good. It's just that the track record for one year -- that's a coin flip, Chris, for most investors. We just don't think that's the way. So, Emma, if you are listening to this, don't think about those price targets or the one-year investing timeframe. Really focus on the next five years and own those businesses that will be able to accrue those shareholder gains you believe for that time period and in the meantime. One year, you might as well just flip a coin for that.
Hill: And without naming a company or recommending a stock, Emma, buy a few shares.
Cross: Absolutely.
Hill: Find a company that you understand how the business works. We've talked about this before. Once you own shares of a company, even if it's just a couple of shares, that's when you really start to ramp up your learning about that business and how it works.
Cross: That is so true, Chris. My advice to someone just getting started is, always think about, first, index funds. If you can invest, index funds, ETFs, get started putting some dollars in there. Then, start following some businesses and buying some shares of some businesses that you like. By the way, Emma, unfortunately, almost one of the best things that can happen is that the stock or the business underperforms, the first stock that you buy, because you will learn so much from that experience. It's almost like if your stock just triples over the course of a year and a half or three years, you may feel great, but you might not have learned as much. But the important thing, like Chris said, is just to get started. Buy a few shares if you can, especially nowadays, when commission costs are almost zero or definitely zero.
Hill: Andy Cross, thanks for being here!
Cross: Thanks, Chris!
Hill: As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of MarketFoolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you on Monday.
