In this episode of Motley Fool Money, host Chris Hill is joined by analysts Jason Moser, Andy Cross, and Ron Gross to discuss some of the latest headlines from Wall Street. They take a closer look at the downturn facing the global economy. Bob Iger stepped down as the CEO of Disney (DIS 1.24%), but remains executive chairman. Teladoc (TDOC 0.90%) had a stronger-than-expected fourth quarter. Home Depot (HD 1.24%) increased its dividend. The analysts talk over updates from Best Buy (BBY +4.60%), Shake Shack (SHAK 4.84%) and others. This week has not been great for Wall Street, but they've got three stock picks for your watchlist.
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 Feb. 28, 2020.
Chris Hill: Hey, it's Chris. Thanks for listening to this week's Motley Fool Money. If you're like me, you're probably seeing a lot of red in your portfolio, it has certainly been a very rough week and we're going to get to that right off the bat.
We begin with the worst week for the stock market since the financial crisis in 2008. More than $6 trillion in global market value has disappeared, gentlemen. The S&P 500 hit a new high just over a week ago, and by Friday morning, it had fallen to 15% from that point.
There is a lot to get to, including some company-specific news. But Ron Gross, let me start with you. Generally, when you look at this as an investor -- and we've seen entire years when the market goes down 15% -- but when it happens this quickly, when you look at your portfolio and everything is red it's really, really jarring.
Ron Gross: It's jarring, and I try not to focus too much on my portfolio during times like this. It's just not healthy, it doesn't feel right, it doesn't feel good. I focus on, if I have cash to put to work, what do I want to do with it? I am doing that now to a certain extent. We're at the early stages of this, this could be a recession for all we know. With the Fed, kind of, powerless to do much about it, because this is really a supply problem, not a demand problem, and the monetary policy doesn't really address supply chain problems that well. Nevertheless, investors are pricing at 100% likelihood that the Fed will cut on March 18, which is interesting. But listen, there's disruption all over the place, the health concern, obviously, a major, major factor; disruption of travel, commerce -- as I said -- the global supply chain; near-term hit to earnings for sure; near-term hit to stock prices, we're seeing. We just don't know how long this will last, but, for sure, panicking -- both, from a health perspective and a stock perspective -- won't help anything.
Andy Cross: Yeah, it's certainly natural when you think about how individuals, and individual investors, for sure, may react to a situation like this. There's so much uncertainty, it's a very fluid situation, we don't know. Our minds tend to play tricks on us and we start to expect the worst and then you can just see how it plays forward. Let's not forget, we haven't seen a real pullback like this in over a year, at least. And, on average, pullbacks like this happen every 12 to 15 months or so. This is pretty exceptional because of where we are coming off of a fantastic 2019, that investors really got -- in some ways -- a little bit complacent. We've been talking about raising some cash in your portfolios, being ready for a situation like this so you can, both, have a little ballast to your portfolio from a volatility perspective, but as Ron said, have some money ready to work.
So, when I think about the investing landscape, you know, this may continue for the next few months, we don't really know, investors have to be ready for that situation. I think, more importantly, you have to use this as an opportunity to make sure you're ready for the next three to five years of investing, because that's the time frame you want to be looking at as the investor.
Jason Moser: Yeah, I love that perspective, use this as a time to prepare and a time to learn. I think a lot of us have looked at this past week. And, I know, I certainly harken back to being an investor through the Great Recession. That was a unique point in time where we witnessed some market behavior that just had not happened, either ever before or in a very long time. So, if this is your first massive market correction that you've been through, it's scary, no question, utilize this point in time to learn more about yourself as an investor and perhaps incorporate some heuristics, some ways to teach yourself how to cope with these periods of time.
I will remind you, as investors, it is not a loss until you sell, OK. So, while the market being down, you see a lot of your holdings down and that doesn't look good, you haven't lost anything yet, OK; it's not a loss until you sell.
And going back to the cash point, I do think, with the ferocity of this sell-off -- I mean, this past week has been phenomenal for a number of reasons. This is a great reminder of the value of holding cash in your portfolio. I mean, the levels will vary from investor to investor, but having that liquidity, that ability to pull the trigger on anything that you want, whenever you want, that's the return, and I think that makes a big difference. And it's a great reminder too that you don't have to do it all once, do it slowly, because this will likely go on for some period of time, it's very difficult to quantify the impact of the market. And clearly, we've seen a lot of selling thus far this week, but it's OK to take it slow.
Gross: Yeah, I agree, definitely. It's easy for us to say, as professionals, to put cash to work and to buy when things are down, but it's scary, it's very scary for the individual investor and I completely understand that. I do like how Warren Buffett tends to put things into perspective. And he recently says, he's buying stocks for 10 or even 20 years, and he doesn't see anything coronavirus-related that would upend any of those investment theses he has for the next 10 or 20 years. So, if we widen the perspective, widen the time frame, I think it can help lower our anxiety.
Hill: And we've been saying since the coronavirus first broke that, among other things as investors, this is an opportunity to pay extra attention to the leadership of the companies that you own shares of, how are they communicating, what are they doing with guidance. And to go to a point that you touched on, Jason, when we think about earnings over the rest of this year and possibly into 2021, it's going to be interesting to see the ripple effect of this. Here are just a couple of the big tech companies and moves that they've made, which may not necessarily have a direct impact on earnings, but I think it's worth noting things like, Facebook has canceled its annual developer conference and that was scheduled for May. Next month, there's going to be a game developers conference in San Francisco, both Microsoft and Facebook have pulled out of that.
And when you look at Japan, where schools are closed through the end of March, Japan is looking to host the Summer Olympics in Tokyo this summer, and there is a window of opportunity for this to be contained, and if we get past that, it's not inconceivable that the Olympics get canceled. And then, if you're a Comcast, which owns NBC, and you've sold over $1 billion worth of ads, Andy, yeah, there's going to be a financial impact there.
Cross: Yeah, as a Comcast shareholder [laughs] my portfolio would definitely feel it. You're starting to see analysts cut their earnings projections for the stocks in the S&P 500. I've seen them down 5%, 10% from where they were just a few months ago. We're seeing yields at all-time record lows; the 10-year and the two-year now are both record lows. So, I think the Fed will have to feel, like, they have to cut. Even though I agree, I don't know if it will do much. This is, as Ron said, it's really a supply challenge, not a demand challenge, as so many other of the Fed cuts do benefit.
So, it'll be interesting how the reaction from the financial players go forward looking at the coronavirus. Bank of America has cut their GDP estimates now 2.8% globally, down from 3.1%. So, you're starting to see these numbers go out into the public markets and that's having even more of a ripple effect, but it's actually very real. As you said, companies, smartly, are starting to react, and hopefully the best ones are getting ahead of it.
Moser: I think it's going to be really fascinating to see what happens over this weekend, because I think when you look at Monday through Friday, normal market hours. And I mean, it's easy just to think about things domestically here, but I mean, you can go halfway around the world, it's a time change, right, Chris. I mean, the market is open at all times in the end. So, it's really difficult to get out in front of any kind of news here to stanch the bleeding, so to speak.
I would be very surprised, if we didn't see this weekend the Fed jump in and really try to control the narrative here in some capacity to calm people down. It's weird, it feels like we hear more about the Fed in this coronavirus as opposed to the CDC. And the CDC, [laughs] seems a little bit more relevant. But I mean the Fed has a lot of levers to try to at least settle things down on the market. I would be very surprised if we didn't see some type of headline, some type of official statement coming out of the Fed here over the weekend to try to stanch the bleeding, so to speak. Now, whether it works or not is another point entirely.
But, I mean, yeah, it's not like this is going to get contained overnight, it's going to take time to develop a vaccine and then to produce it and then to administer it. I mean, this is something that could stretch out for many, many months. And I would not be surprised at all, if we saw a mild recession as a byproduct of this toward the end of the year. I mean, it's totally within the realm of possibility.
Gross: Agreed with that. From an optimistic perspective, I will say, the strength of the U.S. economy it's pretty strong right now. And so first, to hit us while we're strong is a good thing. The strength of our healthcare system, despite what you'll listen here on the debate stage, is very strong. We're able to handle a contagion like this. Especially, one that luckily doesn't actually appear to be that severe; this is not killing everyone it touches, thank God! So, we are in a relatively good position to get through this.
Cross: You know it's interesting, on Friday, I think part of the news was also that the inflation data that came out in the U.S. was actually not that robust, so I think that put even more pressure on, like, "Wow! is the economy really in a position where it can thrive in a case of an exogenous factor like this coronavirus?" So, there is a little bit of more of looking at the Fed and looking at interest rates, given the conditions of the U.S. economy that inflation is just not growing very fast.
Hill: So, as we wrap up on this topic -- and, Ron, I'll start with you -- what do you tell investors who are -- however nervous they are, they're looking at their portfolio, maybe they've got a little bit of cash to work with, what advice do you give investors who are thinking about maybe making a move here?
Gross: I find it easiest to just tell them what I'm doing, which is, I'm not focusing on my existing portfolio and how it looks compared to how it looked a month ago; that's just not helpful. I am a buyer of stocks, I have put money to work this week, if things continue to go down, I will continue to do that. I looked across my cash balance, I divided it by approximately five, and I said, "I'll buy in five different stages over the next weeks or months," depending on how this goes. And I think that's a relatively measured approach.
Hill: Jason?
Moser: Yeah, I like that. Take it slow, take the cash that you have, try to give yourself a formalized plan as far as the time frame, because you see it, time and time again, people want to just plow everything into one market sell-off, thinking it couldn't get any worse, and clearly it's gotten a lot worse. But for investors -- before this happened, after it happened, during -- go through your portfolio, assess the businesses that you own today, take a look and ask yourself the simple question, "Is this a good business?" And I know it seems like a silly question, but the fact of the matter is, in times like these, you can change your opinion a little bit. So, asking yourself whether this is a good business or not, that can really help dictate, No. 1, whether you want to hang on to those businesses, but also, it can help dictate what kinds of businesses you want to add to your portfolio in times like these.
Hill: Andy?
Cross: Yeah, nothing more to add -- I mean, two smart pieces of advice. I add a little bit of some stock this week as well too, I think that advice is great. I might want to also use it as an opportunity, to Jason's point, when I look forward over the next five years, maybe I have some businesses in there that I'm just not that excited about. Yes, they're going to be down, and to Jason's points, it's only a loss if you actually sell it, but maybe use it as a chance to trim your portfolio, maybe get rid of ones that you're not so excited about. Because the prices -- you're going to have opportunities to buy stock in prices very attractive, I think, over the next few months here. So, you want to have that cash ready to go.
Hill: Shares of Teladoc up 20% this week after fourth-quarter revenue came in higher than expected. Teladoc posted a loss, but that was smaller than expected. And, Jason, I'm guessing, given the current environment, at least a few more people are open to the idea of seeing a doctor through videoconferencing.
Moser: I think that's a safe assumption. I think this very well may be the point in time, the event that seals the deal on total buy in regarding the merits of telemedicine. Fortunately for shareholders, Teladoc is building up the most comprehensive offering in the industry. The numbers are really impressive -- U.S. paid members up 61% now, to 36.7 million. Visit fee only access members up 104%, to 19.3 million. And total visits for the year were up 57% to more than 4.1 million. Revenue growth was 27%, most of that was organic. Guiding for 2020 in very much the same fashion.
And they've got really, I think, a big and continuing tailwind in the Medicare Advantage patients that are going to be coming into the system here as the Centers for Medicare & Medicaid Services, they can do to bring down the barriers in making telemedicine more accessible for those senior citizens.
So, I think it was a smart move on their part to not focus on the coronavirus in the call, because in theory, really that probably is a tailwind for their business, but nevertheless, again, I think we are at a point now where buy-in is inevitable and that is ultimately a good thing.
Hill: Home Depot and Lowe's (LOW 0.06%) wrapping up their fiscal years this week. Let's start with Home Depot. Andy, fourth-quarter revenue was a little light, but profits, higher than expected. Shares of Home Depot down a little bit, but not nearly as much as the market.
Cross: It was actually a very nice quarter. Comp growth, the same-store sales growth, up 5.2%, that's on the 52-week measurement period was higher, the estimate was around 4.7%. Transactions, up about a little less than 1%. Average ticket price, up 4.4%. So, it was nice to see that growth in, both, their pro and their do-it-yourself markets.
Big-ticket sales are now 20% of their overall sales; and that was up double-digits. Gross margin was a little bit lighter. Operating margin up nicely. They continue to invest in technology to grow the business.
Store sales growth for the coming year, the guidance is for 3.5% to 4%, which is pretty nice. Also, some nice growth on the EPS line. So, overall, a pretty nice quarter for Home Depot, $245 billion market cap. They increase the dividend 10%, which I like to see, and are now targeting to increase that every year that they grow operating profits.
Hill: Lowe's fourth quarter, not as strong as Home Depot's. And, Ron, when you combine that with Lowe's guidance for 2020, stock down around 14%, 15% for the week.
Gross: Yeah, that's the headline, not as strong as Home Depot and kind of weak overall. Same-store sales up only 2.5%, lower than expected. Growth driven almost entirely by U.S. brick-and-mortar stores. Online sales up only 3%. Management fell on the sword a bit saying, "Marketing activities should have been launched earlier in November, not as close to Black Friday as it was." They are investing about $1.7 billion in the supply chain; very necessary. So far have added three new bulk distribution facilities and four cross-dock terminals; this will help them supercharge their e-commerce business, which I think is essential at this point.
As you mentioned, guidance was a bit weak; investors were not happy to see that. You see a divergence between Home Depots and Lowe's valuation more so than in the past. 16X forward earnings for Lowe's, Home Depot at 21X. That's a bigger spread than you typically see.
Hill: Marvin Ellison was brought in to run Lowe's in the summer of 2018. A lot of attention, talk of a big turnaround. We're closing in on two years on the job, how do you think that's going?
Cross: Am I correct, that he was the CEO of JCPenney at one point?
Hill: You are correct.
Moser: Well, there you go.
Cross: Not great. The online business is weaker than it should be. They should have taken action, I think, more quickly, but they do have investments there. They're trying to work this out.
Hill: Shares of Etsy (ETSY +0.41%), up 16% this week after a strong holiday quarter. Jason, Etsy is still lower than where it was a year ago, and I'm wondering if this fourth quarter report is a sign of good things to come?
Moser: I think it is. I mean, this has become, I think, a really impressive business given its marketplace model and the constant focus on the part of CEO, Josh Silverman, to continue to bring more service and value to not only sellers but buyers as well. All of those efforts are starting to pay off. They just quarter-in and quarter-out chalk up these impressive growth numbers. For the quarter, the total sellers was up 28%; active buyers of 17.5%. Mobile continues to gain share of overall gross merchandise sales, which by the way, those gross merchandise sales grow 33% to more than $1.6 billion flowing through their network. And they're calling for 25% to 28% gross merchandise sales growth for 2020, and revenue with a range a little bit higher than that.
So, I think one of the big questions for Etsy has been around their Etsy ads product. And it's what ultimately helps sellers in advertising around the internet. They are iterating, they're developing that program, so it's going beyond Etsy ads, and they're also going to have Etsy offsite ads, where it's going to be more promotion on Google properties, Facebook, Instagram, Pinterest, things like that. I think there's a lot of potential there. I think sellers can benefit a lot from that, as long as it's executed in a thoughtful fashion; and we have every reason to believe they will.
One final lever, that's really starting to play out, is free shipping. And just an interesting little datapoint here. A survey they conducted in January, only 12% of Etsy buyers were actually aware that they offer free shipping. I would imagine as that number goes up that should boost traffic and gross merchandise sales.
Hill: Best Buy closed out the fiscal year in style. Fourth quarter profits came in higher than expected. Ron, you can add Best Buy to the list of retailers having a good holiday quarter.
Gross: Very impressive. Same-store sales up 3.2%. This is their 12th straight quarter of comparable sales growth. Who would have thunk it back in the day? [laughs] Investments to beef up their e-commerce business have paid off. Online revenue up 19%. Gross margins narrowed a bit, just because of product mix, but adjusted earnings up 7% almost. They did mention the coronavirus on the call, they think it'll be mostly a first half of the year impact, how they know that, I don't know, but they're looking at it as a relatively short-term disruption that does not impact their long-term strategy and initiatives.
But, of course, there are some supply chain related issues that they called out, they took that into account when giving guidance. As a result, guidance was relatively weak compared to what investors were expecting, but the stock's only 12X earnings and they continue to put up good, good numbers.
Hill: That's pretty impressive that they've had comp growth for three years in a row, when you consider, ten years ago -- I don't want to say that Best Buy was at death's door, but it was the quintessential big box retailer, the jokes about it being Amazon showroom, and the way that they retooled that business is really impressive.
Cross: I'm as guilty as the next guy about really thinking they were dead in the water, and it's very impressive how they turned it. The service aspect of their business was a big, big push, and it has paid-off for sure.
Hill: Fourth quarter profits for Booking Holdings (BKNG 0.58%) came in higher than expected, but shares down more than 12% this week, because, Andy, Booking Holdings is Priceline, it is booking.com, it is in the travel business.
Cross: Yeah, 20% of the room nights booked are over in Asia, so obviously a lot of conversation in the guidance that they put forward for the first quarter, not so good, but the results for the fourth quarter were pretty impressive. Dollar bookings, up 6%. Room nights booked, up 12%. Revenues, up about 4%. Advertising and sales, up 3%; so, nice little advertising business they're kind of working through. They're spending less on brand and advertising. They are continuing to invest in technology as a tech company in tech platform. People expenses, up 16%. IT spending, in general, up more than 40%.
So, making the investments, but Chris as you mentioned, the concerns about the coronavirus really kind of overshadowing a very nice quarter. The guidance for the first quarter -- and of course, they said they don't know for sure -- is, room nights booked is going to be somewhere between down 5% and down 10%, and revenues down somewhere between 5% and 10% as well too. So, obviously, that's going to hit on the earnings per share line, which is expected to drop somewhere around 15%. And of course, investors got nervous about that and sold the stock off.
Hill: See, this takes me back to the point you made, Jason, about looking at a company in a time like this and saying simply, "Is this a good business?" And Booking Holdings, unlike -- and not to pick on them -- but unlike the cruise lines, I look at Booking Holdings and think, "Well, there's a stock I don't own." And, yes, it's in the travel business but I'm going to put that on my watchlist, because at the end of the day it's a good business.
Moser: Yeah, I mean it is a simple question, but it can be very, very helpful in just trying to make those simple assessments and what you want your portfolio to look like going forward.
Hill: Big CEO move this week. Bob Iger stepped down effective immediately as the CEO of Disney; he is staying on as Executive Chairman. Bob Chapek becomes the seventh CEO in Disney history. Jason, I say this as a Disney shareholder. Who is this guy?
Moser: [laughs] I mean, I think that's a fair question. I mean this was probably a bit of a shocking headline at first for a lot of us, but once we got a little bit more clarity as to what Bob Iger really wants to do, I don't think it's that big of a deal. The question, to your point, is: Is Mr. Chapek the right person for the job? I know there are some questions in regard to his background with Parks and Experiences. Maybe most in the financial media think this is more of a streaming company and therefore a streaming expert should be leading the way. Let's not forget that Parks and Experiences really still are the bread and butter of this company. Even though we know the future is going to streaming and over-the-top entertainment is going to play a big role.
Listen, I think, Chapek is a fine choice, and most of that comes from the fact that he has the blessing of Bob Iger. And I don't want to put Bob Iger on a pedestal, no one's perfect, but he certainly did one heck of a job during his tenure there with Disney, and it's worth noting that he's going to spend the last year-and-a-half of his time to 2021 working on the creative side and really helping address, I think, one of the biggest challenges this company has in the near term. And that is, building out a content library for Disney+, because as cool as it is, a lot of that content is pretty old. And so, they're going to have to start getting some new content in there to keep viewers interested in coming back for more. I like knowing that Iger is going to be running that. And I think having Iger as a resource is going to serve Mr. Chapek very well over the course of the next year, as he gets settled in his new role.
Gross: Yeah, agreed. With Iger as Executive Chairman and In-Charge of Creative Direction, I feel like Chapek is more of a COO at this point, at least for the next year-and-a-half and he appears to be kind of this no nonsense, nuts-and-bolts and numbers guy. Which is kind of what you want in a CEO often. Now a year-and-a-half from now, when he takes over more creative control and more of the future control of this company, I might get a little nervous than, when Iger actually leaves.
Moser: Yeah. That's certainly a fair point, something worth keeping in mind, I mean, I think a good analogy here is that Kevin Johnson-Howard Schultz dynamic at Starbucks. I mean, it's working out so far but it's certainly worth noting that Mr. Johnson had a lot of time to learn from Howard Schultz along the way, and I think that plays out on their business well also.
Cross: Interesting on how the partnerships work. We saw over at Salesforce, the Co-CEO situation changed a little bit, and the CEO stepped down, stepped away, so, now Marc Benioff is back in running as the CEO solely. It is interesting, the hand-off as they think about. These businesses are so complex and there is so much now goes into running these massive organizations that having someone in distributed capacity that can really work well together could actually be, maybe, a little bit more of the future, although it's really hard, I think, to get right.
Hill: And like you, Jason, I don't want to put Bob Iger on a pedestal; I do think we should take 30 seconds and give him his due, because Bob Chapek has a tough act to follow. Even if you only look at Disney through the lens of acquisitions and the way Iger was able to buy Pixar and Lucasfilm and Marvel Entertainment, and what that did to open up every other part of Disney's business.
Moser: Yeah. And I think it's also important to think about, going forward, is Mr. Chapek view going to line-up with what Mr. Iger view has been in regard to the company. And all the interviews I've seen with the two, since this was announced, it really does look like Mr. Chapek is looking to just keep the ball rolling on the foundation that Bob Iger has built.
And, listen, it seems to have worked thus far. I like that philosophy, so I expect good things.
Hill: Shares of Shake Shack down around 20% this week. Fourth quarter profits look good, Ron, but same-store sales were down 3.5%, and overall sales -- they're still growing, but that growth is slowing.
Gross: Yep. Not a great quarter, and guidance was weak as well. Company saw growth in deliveries slowing amid a shift to a sole partnership with GrubHub, which is relatively unique for these restaurants to go with one delivery partner. As you mentioned, same-store sales down about 3.6%, that includes 1.8% increase in ticket prices, but offset by 5.4% decline in traffic. I'm no restaurateur, but I don't think you want declines in traffic. Operating expenses were up. Margins narrowed. The company generated a net loss of $2.1 million for the fourth quarter.
In their guidance, they also talked about coronavirus, they do have some international locations; about 95 out of their 280 are located internationally. They do have some in China as well. We'll see what impact that has.
Moser: So, Ron, you're a New Yorker, right?
Gross: Yeah.
Moser: Okay. So, we were talking about this earlier this week, Chris and I, on MarketFoolery. And I can't help but wonder, if Shake Shack doesn't have that Bojangles' dynamic, in where it's a good concept, good food, good brand and everything, but given their regional popularity and given that's a burger joint at the end of the day, I wonder that maybe they just have trouble leaping out of that geographic footprint. Maybe it's not something that translates so well nationwide. I mean, I don't see them ever getting to a Chipotle-like 2,500 stores, do you?
Gross: No. I haven't even heard them say that that's their goal. I mean, you are right, it's a burger and shake shop at the end of the day, which I think does transfer through to most parts of this country. Interestingly, they rolled out a chicken nugget line this year, which was a bit of a misstep, and they've spent a lot of time focusing on it --
Moser: ... a bit of a stumble.
Gross: [laughs] A bit of a stumble. And that kind of impacted results as well. So, they probably should just stick to their knitting.
Hill: I was just going to say, you know, at least the one thing you can say about Shake Shack is they stick to their knitting, they're just burgers and shakes. I wasn't even aware that they were attempting chicken nuggets.
Before we get to the stocks on our radar, guys, one story caught my attention this week and I think it could have some interesting ripple effects. Panera Bread which is part of JAB Holding Company, a private company that owns Krispy Kreme, Insomnia Cookies, Peet's Coffee and other delicious businesses.
Panera Bread is launching a monthly coffee subscription. So, for $9 a month you get unlimited coffee and tea. And as someone who works in a building that is across the street from a Panera, I am very, very interested in this opportunity. And they're going to lose money on me, because I'm absolutely going to drink more than $9 worth of coffee a month.
Cross: But you'll take an extra egg sandwich here and there, I bet?
Hill: I probably will, but I'm curious to see not only how much coffee I can drink, but also, how this plays out, first-and-foremost, in the world of coffee. I mean, our building is on a corner and across the street is a Panera, and on the next corner is a Dunkin' Donuts, and on the next corner is an Einstein's. So, I'm just going to say right now, Dunkin' and Einstein's are going to be getting less of my business in the immediate future because of this.
This is absolutely, Ron, something that other businesses are watching, even if they're not developing their own plans to jump into this model, right?
Gross: It's a very good idea. It's very well-priced. They'll probably still make money because coffee is basically water plus some coffee. [laughs] But even if it's a loss-leader, it probably makes sense to bring folks in to buy the extra pastry, the extra egg sandwich. It definitely puts the pressure on the competition, as you noted. It's a big deal for my family, in fact, I texted my wife about this earlier, and her response is, "Wow, this is amazing news!"
Hill: [laughs] She's right, it is amazing news.
Moser: [laughs] Well, I was doing the math and we probably spend $40 to $50 on coffee beans in our house every month, and we make most of our coffee at home. Well, Chris, last I heard, $9 is less than $40 to $50, so I'm compelled to at least give this a shot. But further to your question in regard to, other restaurants taking this into consideration, I mean, imagine the direction this could go. I mean, you have a Chipotle guacamole club, you've got a Chick-fil-A waffle fries club. The possibilities are endless.
Hill: I don't think that's an overstatement. I think, Andy, when you look at any number of businesses, not just restaurants, but across retail, the recurring revenue model is one we like to see as investors.
Cross: Yeah. We have Software-as-a-Service, this is basically "Coffee-as-a-Service," it's a subscription business. I imagine that the retention rates will be fairly high. You have to join MyPanera, their membership club, so it's --
Hill: ... which is free.
Cross: Which is free, exactly. Now, you can only get one cup of coffee every two hours, Chris. There are some restrictions. And only during, you know, when it's open. So, there are some slight limitations to it.
Gross: It helps that they have actually good coffee. If it was just mediocre coffee, whatever --
Cross: Yeah. And also, tea, you can get tea with it too.
Moser: This is a Disney+ price point. I mean, whoever priced this thing, they put some thought into it, because you're almost doing yourself a disservice if you do not subscribe. I mean, if you're a coffee or a tea drinker, you're losing money if you don't subscribe to this.
Cross: Great! something else I have to subscribe to now.
Hill: Well, but to Ron's point, I mean, they've picked not only a good price point, but they've picked the right product, because it is a product that lends itself, "So, I'm going to have -- yes, I'll have coffee on its own, but maybe I want a little snack in the afternoon or maybe I want a breakfast sandwich to go with it."
And I think to your point, Jason, whether it's Chipotle, Bojangles', any of these burger joints, any of these fast-casual places, they got to figure out, what is that thing for them?
Moser: Yeah, I still think it's -- I looked at Chipotle and guacamole. Chipotle's chips, they're like the new McDonald's fries. They're just so good, they're not as good, I don't get anywhere else. But the guacamole is just ridiculously good, I feel like there is something there.
Gross: And their third iteration of queso may finally be the ticket.
Moser: The queso blanco.
Hill: I was just going to say, yeah, it's interesting and probably correct that Jason is suggesting guacamole and not queso, because they got guacamole right, right out of the gate.
Moser: And I mean, there's nothing to say, you can't throw a choice in there, right? It could be the queso/guacamole, because you get to choose which one you want.
Hill: Definitely going to be watching this business and I will be highly caffeinated while it's going on.
Hey, real quick. If you're just starting out investing, we've talked about a lot of stock ideas and the idea of putting cash to work in the market. We have a free investing starter kit, it covers everything from saving money, to 401(k) plans, to buying your first stock, and it does include five stocks that were selected by our investing team. So, a little instant watchlist, if you will. And it's free, you can find it by going to fool.com/starterkit. That's fool.com/starterkit.
Let's get to the stocks on our radar. Our man behind the glass, Steve Broido is going to hit you with a question. Ron Gross, you're up first. What are you looking at this week?
Gross: I'm going back to Waste Management (WM +0.74%) trash removal, recycling, other services to residential and commercial customers. Going with it, because it feels safer to me in this current environment, this uncertain environment, even though the stock is off about 13% this week. But it is a dominant company. An essential business. Limited outside threats. Competitive advantages in the fact that they have North America's largest network of landfills. They've succeeded both through organic growth and acquisitions. They've increased their dividend for 16 consecutive years; and their yield currently stands at 1.9%.
Hill: Steve, question about Waste Management?
Steve Broido: Does Waste Management have a total monopoly, like, when my trash gets picked up, is it just de facto go to a Waste Management facility?
Gross: Not de facto, but there are regional monopolies and they control them very nicely.
Hill: Jason Moser, what are you looking at?
Moser: Sure. I'll go with what I personally bought this week. We're talking about slow and methodical, right. Well, I opened a position in Adobe (ADBE +1.53%), ticker ADBE. Adobe, as we know, is a digital media company, shares are down 12% since February 19th, but, Steve, I know you're very familiar with Adobe. So, I'll keep it tight.
Ultimately this is a subscription business. 90% of its business is tied to subscriptions. Gross margins closing in on 90%. Net margins in the 25% to 30% range. And it's such a good offering through their Creative Cloud and this new Aero product that they have that focuses on immersive technology. It gives management the ability to consistently invest 15% to 20% of revenue back into research and development, which just keeps the good times rolling with a company like this. Just a wonderful business; I think, still plenty of room to run.
Hill: Steve, question about Adobe?
Broido: They're certainly dominating the creative space. Is there a market they should be in that they're not?
Moser: Perhaps queso, I mean, Chipotle has opened the door, I think there's really a lot of opportunity in queso.
Cross: [laughs] Coffee.
Hill: Andy Cross, what are you looking at?
Cross: Stevo, looking at Kinsale Capital (KNSL +2.35%), symbol is KNSL. It's a $2.7 billion, so it's a small cap specialty insurer; writes what's called E&S lines -- so, it's excess and surplus lines -- of insurance. These are very hard-to-price insurance. So, construction, mining, marijuana dispensing. It's a recommendation in a few of our services. The stock has done really well for an insurance company. It grows very fast. They grew premiums more than 50% last quarter. It's a really good market right now, growth across all of their lines. IPO-ed at about $16 in 2016, it's now at $116. Had a very nice run. The stock is a little bit expensive, 40X earnings and 6.5X book value. So, just looking to see how the price reacts in this market, because it could be one that I would go shopping for.
Hill: This is a fellow Virginia company, isn't it?
Cross: This is a fellow Virginia company. Michael Kehoe founded the company and owns 4.5%.
Hill: Steve, question about Kinsale Capital?
Broido: You bet. Does this company have outsized risk with things like that coronavirus that could ripple down across multiple industries?
Cross: It could. Interestingly, they had earnings a few weeks ago, and they didn't mention it on the call. So, not sure how that plays out long-term for them.
Hill: Adobe, Waste Management, Kinsale Capital. Three very different businesses, Steve. You got one of those you want to add to your watchlist?
Broido: I love trash and I love Ron Gross. Let's go with Waste Management.
Gross: I love you too, Stevie.
Hill: Am I the only one who now wants to watch a reality show where Ron and Steve throw up their own trash collection business?
Cross: [laughs] Yeah --
Moser: [laughs] They're on to something big.
Hill: Alright. Jason Moser, Andy Cross, Ron Gross, guys, thanks for being here.
All: Thanks, Chris.
Hill: That's going to do it for this week's edition of Motley Fool Money. Our email address is [email protected]. Drop us a note, ask us any question about the stock market. And if, like us, you're putting your cash to work, let us know what you're buying.
Our engineer is Steve Broido. Our producer is Mac Greer. I'm Chris Hill, thanks for listening. We'll see you next week.
