In this week's episode of Industry Focus: Financials, host Jason Moser and Fool.com contributor Matt Frankel, CFP, take a look at some important questions on listeners' minds. With its malls closed and a 17% dividend yield, is Simon Property Group (SPG -1.12%) a good stock to buy now? Does Axos Financial (AX -1.97%) still have competitive advantages? Why has Seritage Growth Properties (SRG 1.26%) fallen by 80%, and is it worth buying now? The answers to these questions and more on this week's show.
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This video was recorded on March 23, 2020.
Jason Moser: It's Monday, March 23. I’m your host, Jason Moser, and on today's Financials show, we're going to dive into some more listener questions, as we’ve got folks asking about all sorts of things during these challenging times. Things like particular stocks, stocks like Axos and Upwork (UPWK -0.53%). And we got some questions on what to expect this coming earnings season and much more.
And joining me, as always, Certified Financial Planner Mr. Matt Frankel. Matt, how is everything going?
Matt Frankel: Well, wishing I could leave my house, but other than that, it's going pretty well. You see, you sit there on your bed, so you're in the same predicament as I am.
Moser: Yeah, well, I mean, I've got to find the highest point in my house, as far away as I can get from my dogs, so that when I put them outside, I don't risk the listeners hearing them go off on, you know, whatever squirrel is taunting them in the backyard. So hopefully this will stay quiet enough.
But anyway, I digress. Let’s talk about what's going on here first and foremost in the markets today, Matt, because we got a new week, we've got what appears to be at least some progress with policy makers on coming up with a way to respond to this COVID-19 crisis from an economic stimulus perspective. I mean, I know last night, they were not able to come to an agreement with a vote. Clearly, they're working together to make something happen, and it sounds like, based on the latest headlines I'm seeing here, that they are very close. So I'd be surprised if by the end of the day we didn’t hear an announcement in regard to some type of stimulus.
But tell me a little bit about what you're feeling right now as to this stage of where we are throughout this whole ordeal, Matt.
Frankel: Yeah, well, there's two ways that we can kind of weather the economic storm: through monetary policy and fiscal policy. We saw the monetary policy end of it this morning, where I don't know if you saw, but the Fed is increasing its quantitative easing program from the previously announced $700 billion to an unlimited amount. So meaning that there will be liquidity in the market no matter what.
Moser: Yeah, I did see that.
Frankel: So having said that, the Fed's actions only help if Congress does its thing and gets money in people's hands. You know, all the liquidity in the world doesn't matter if 20% of the country is unemployed. So I think the market is kind of pricing in the fact that Congress doesn't get along and that there's a real chance that they won’t come to an agreement. [laughs] Having said that, I agree with you, I think they will come to some sort of agreement. I think it’ll be bigger than people are expecting. I think a lot of the delays are things being added to it. We'll see. So I think it'll be a pretty big stimulus.
I don't want to predict the market's movement, but if we do see a stimulus today, I wouldn't want to be short, I'll put it that way.
Moser: No, it definitely does feel like, given everything that's going on, this is just, obviously, this is one for the history books. I mean, none of us has been through anything really this dire -- we've been through the Great Recession, the housing crisis, one of them, that was similar, but this is clearly different, and this has been a very quick free fall. Hopefully that means that however deep the recession may go, maybe it won't be as long. I guess there's always a possibility that you avoid a recession, although I just don't see that being realistic. I would think, even if technically we avoided a recession, this still really is kind of what it feels like.
But yeah, to your point, that's a very good way to put it. They’re pricing in the fact that Congress doesn't get along. And it does feel that way more often than not. Hopefully, they're able to come together and become a little bit more unified in their approach here, because I do feel like -- I'm reading more and more -- we’re starting to see the narrative here shift a little bit towards the economic toll. I mean, we understand the health implications here, as well as we can, at least, but we can't just sit here in a holding pattern forever. And we're starting to see more and more conversations take place about that. You can't just put the entire country on hold indefinitely even if you come through with just a phenomenal economic stimulus package, right? At some point the wheels have to start turning again even just a little bit, I would think.
Frankel: Right. And that's kind of the million-dollar question right now. I don't think we're going to get back to normal in a week or two, but they're talking about July or August before the worst of this could be over, and no one is going to sit in their house till then. I mean, there's going to be riots if that happens. I would be very surprised if that happened.
But at some point, we'll have to kind of maybe shift our strategy a little bit. I don't want to really speculate on what we're going to do, but I mean, in China everything is open, people just have to wear masks when they go in certain businesses, for example. So it could be conceivable that they would, you know, Fool HQ but everyone has to wear a mask or something to that effect. I mean, not necessarily that, but like, with extra precautions is kind of the point.
Moser: Yeah, and that's a good point. You know, I was thinking about that. I mean, when you try to weigh all of the options and a way to solve this, I mean I don't think any one of us would sit here and tell you we have the solution, but you try to look at things from all angles and try to figure out, “Okay, what's the best solution here?” “What makes the most sense for the greatest number of people here?” Because, obviously, we have, I don't know, 325 million people in this country, and obviously, this is a global pandemic, but we can control, first and foremost, what is going on here on our home soil. And what is the most sensible solution? I mean, is the new normal going to work with masks and going to work with gloves or goggles. Is that a better solution than shutting things down completely?
I mean, shutting things down completely can help at least get an idea of what's going on and figure out a strategy, but shutting things down completely doesn’t work for very long.
Frankel: Well, no. And when I say, like, “Wearing masks to go into certain businesses,” I'm not talking about forever. Like, at some point this is going to go away. So the question is, what would be a more bearable temporary measure to get rid of it? The real reason the market freaked out is because we don't know a whole lot about how this virus works. We don't know, for example, how seasonal it is, how warm, humid weather affects it. We don't know how long it's going to take for that -- if we knew the date that it was going to peak, it would be really easy to plan for it. So we don't know, [and] we're learning more, but this is still a very new virus, and we don't really know how to react, and that’s what's spooking markets. Markets hate uncertainty more than they hate bad news.
Moser: Yeah. You're right. At least with bad news, you can price that in. Right now, the news is bad; we just have no idea how bad it really is. It's impossible to quantify. So I guess, it seems like every day limit-up, limit-down, that's the language that we’re living by, and so I guess we'll just have to tolerate it for now. But I mean, it really does go to -- I think times like these really do solidify our Foolish approach to investing, though, and taking a long-term approach and making sure that we’re well diversified. These are the times when that really shows the benefit.
Because I would imagine that if you're well diversified and you’ve got 20 to 30 stocks that you own, I don't think all 20 to 30 of them are in the red for you. I mean, there are pockets where you're seeing some performance. And you know, as we tell people, as the numbers show, the longer they hang on to these great companies, the more those gains compound, so that even when times like this hit -- my Amazon position, for example, that I've had for, I guess, close to a decade or something like that, it’s gotten shaved a little bit, but I don't know how much, it's still doing really well. So it's just one of those things that I can kind of look at and say, “Oh, well, things are okay.”
So you make sure to diversify your portfolio and throw some of the bigger, more stable names in there and take some of your Rule Breaker-style investments and put them all together. It kind of works out well.
But with that said, let's steer away from the market talk right now regarding COVID-19, and let's take a look at some of these questions that we got from our listeners over the last week. We had a few questions come in a little bit late last week, after we had taped our episode where we did the Q&A from Twitter, but we also had some email that came in recently, so we want to get to all of those for you today.
So the first question we have here is regarding Simon Property Group. It says, "Hi, Fools, thanks for all you do. It's been really great how you all have ramped up the content and access for us members during these tumultuous times. A question on Simon Property Group. Do you think their dividend is safe at these levels? I know chasing yield is bad, but this was a recommendation prior to COVID-19. And assuming things get back to normal, what could or should we anticipate happening to the yield? They had been on the path towards Dividend Aristocrat. Will this derail that? Thanks again. Mark C."
Matt, you know Simon Property Group really well. What's your take here?
Frankel: Well, the first thing I would say is that those are actually two different questions: whether or not the yield will continue and whether or not it's a good stock to buy at this point. So taking those one at a time.
Right now, if you look, based on the dividend yield, Simon yields about 17% right now based on the current share price. It’s lost about two-thirds of its value over the past month. And it's not hard to see why. I mean, this is a mall operator that's not operating malls. [laughs] So it’s a pretty easy way to see why it's getting hit. They've closed all their properties last week, if you didn't see.
They could keep paying the dividend if they wanted to. One thing they did since this downturn started, they expanded their credit facility. They now have $9.5 billion of borrowing capacity available. And because of the low-interest-rate environment, they actually got this credit facility at a lower interest rate than their previous one. So they have a lot of access to low-cost capital if they wanted to keep paying their dividend. That doesn't mean it's the best move.
What we're seeing in the real estate sector, especially, is a lot of companies choosing to suspend their dividend just to conserve capital as, kind of, abundance of caution. Kind of the same idea behind closing the properties. It's an abundance of caution keeping the capital where it should be. One of my others just announced they were suspending the dividend until the end of 2020, and at that point they would determine how much they can afford to pay for the year retroactively.
So I could see Simon doing something like that. I'd be surprised if the dividend kept being paid as is if this drags on for another month or two. But having said that, I do think Simon will be a long-term winner. I think demand is getting very, very built up right now. I think when we do get back to normal, you're going to see people going to the mall, people traveling, people going out to eat more than ever, once we get the all-clear.
So I think it's going to be a winner long-term. If you need steady income from your stocks, I wouldn't be too quick to count on it, but I think from a long-term perspective, it's a great stock.
Moser: Okay, well, that sounds good to me. Mark, I hope that's helpful for you. We have another question here, it looks like, from Vinh Tran. Vinh asks, "Can you do a market analysis for Axos Financial? Once revolutionary with online banking, with companies such as Jack Henry & Associates now democratizing the online banking platform, what is Axos Financial’s outlook?"
And then, Vinh also goes on to ask, "Can you also speak to how the low interest rates affect Axos’ outlook versus its industry peers?"
So let's just take that one at a time here. First and foremost, Matt, you know a little bit about Axos. This used to be Bank of Internet, right?
Frankel: Yeah, that's the one we followed for a while. Bank of Internet was one of the first online banks. And the question is right. They have lost some of their competitive advantages over the past few years as the online bank space continues to grow, especially since some of the big players are really getting involved in online banking, like Marcus by Goldman, for example.
Now having said that, there are some advantages to Axos’ business model. For example, remember they’re the only provider of the refund loans for H&R Block. If you get a tax refund and you want your money now, it comes through Axos. So that's a very valuable partnership that gives them a lot of cross-selling opportunities, things like that.
So as far as the low rate part of it, online banks generally pay higher than average interest rates on deposits. You know, if you walk into your neighborhood Bank of America or Wells Fargo, you’re probably going to get like 0.01% on a savings account, if that. But online banks pay in the neighborhood of 1% to 1.5% on deposits right now. So they have a lot more room to reduce what they're paying out in order to, kind of, prevent margins from getting compressed in low interest environments, if that makes sense.
So there are some advantages to the online model. Like I said, Axos has lost some of its competitive advantage, the growth is still impressive, especially after their H&R Block partnership, and the stock is down over 50% this year. I mean, their market cap is below $1 billion now despite all this growth. So they’re trading by far at their lowest price-to-book in a long time. I personally don't own the stock right now, but I like their business model. I could see them definitely rebounding nicely when this is all said and done.
Moser: We have talked a lot about consolidation in the banking sector over the past year. And it strikes me that there's certainly the potential for some consolidation here in the coming year, given that we've seen -- I mean, this bear market has obviously [laughs] left no stone unturned. Every company has suffered, and banks -- certainly it feels like -- they've suffered more than others given the low-interest-rate environment.
Do you think there is the opportunity of an acquisition there? Do you feel like there's a bigger partner out there that wouldn't mind rolling that model into their business?
Frankel: Sure. Well, I mean, I think as soon as we get a little more certainty on what's going on, you're going to see just, kind of, an uptick in M&A activity across the board. You've heard Buffett. The reason why they haven’t acquired anything is because valuations have been too high. I’m sure he's not the only one, this is not a Buffett problem, it's, you know, people don't want to overpay for anything.
So now that valuations have, kind of, crashed back down to earth, if you will, I could see some of the smaller players, especially the stronger, fast-growing ones like Axos having targets on their back.
Moser: So one more question here just regarding Axos, because it reminds me a little bit of another bank that we’ve talked about before, Live Oak. And I know that you know Live Oak really well also. And we had the president of Live Oak, Huntley Garriott, on the show not all that long ago.
And Live Oak was impressive to me for a couple of reasons. No. 1: It is that same no branch model. It’s all about the technology. And, really, they’re focused on lending in the small-business arena, which is what their forte is. That's what separates them from the others.
Given Live Oaks' focus on lending in small business, is there something that is Axos’ bread-and-butter that either we can look at and say, “Oh, that's a great opportunity,” or “that's something we need to be aware of”?
Frankel: Mortgages. Particularly, nonconforming mortgages. Jumbo loans are one of their big specialties, for example. So kind of an interesting area right now. We don't know how this is going to end up affecting the mortgage market or the housing market. It probably will affect the housing market. But as far as Axos’ loan portfolio, I mean, they have done a good job of diversifying their operations over the past few years. They're still very much a mortgage lender. And like I said, jumbo mortgages, meaning those that are too high for Fannie and Freddie to buy, are their kind of bread and butter.
Moser: All right, well, good information to have. And thanks for that, Vinh. Next question we have here. "Dear Motley Fool analysts, I first heard the idea of Adobe merging with DocuSign from The Motley Fool podcasts. Is this idea even more compelling after the arrival of the bear market? Thanks, Jerry from Florida."
Jerry, I understand the sentiment there certainly, and I definitely have floated that idea before given that Adobe does have a digital signature dynamic to the business, and I think that with DocuSign they really -- I think Adobe probably covets DocuSign’s presence in the small- and medium-sized business market there as well. DocuSign has obviously done a whole heck of a lot in not really that long of a time. And while I understand the sentiment, you know DocuSign is actually up around 10% this year, which is -- seeing stocks that are up this year right now, a few and far between, DocuSign certainly understandable in that, it's more or less, the whole reason for being is that you don't have to physically be there to get contracts signed and taken care of. So I can certainly understand why the market would be viewing a stock like DocuSign more positively in this environment.
Given that the stock is up 10% this year, that may stave off offers, I think. Any company that would want to acquire DocuSign knows going into that deal that they would have to offer up a very pretty penny given all of the metrics that DocuSign continues to ring up. Just going through their most recent earnings release, we could see tremendous growth in not only just the customer base but really the enterprise customers. I mean, they really continue to get it done, and the numbers they continue to record are really impressive. And if you’ve used the product, then you understand why.
I’ve always seen DocuSign as a really good business. It's not one that necessarily has some obvious competitive advantage or moat other than just being a really good business and building into a trend that's developing here in digital signatures and contract management. And that means maybe over time they’ll develop a competitive advantage. You see some network effects or some switching costs that come from the services and capabilities that they continue to build out. I would not be looking for Adobe to make an acquisition like that. Frankly, I think they'd have to offer up more than they probably want to pay at this point.
And given that Adobe's forte, their bread and butter, so to speak, is really in digital media, I just don't know that they view the contract management market as their biggest opportunity, perhaps an acquisition would be the way that they would want to gain that entry, and certainly DocuSign is the biggest player in the space. It’s anyone's guess as to whether that happens or not. As a shareholder of Adobe and DocuSign both, I think I'd like to see them both just continue going on their separate ways and doing their own things though. So I don't know that I'd be looking for the acquisition, but anything can happen. Thanks for the question, Jerry.
Next question we have here. “Thanks for the great Financials episode this week, Jason and Matt.” You're welcome. “The Q&A was really helpful. I know I'm late to the game, but what are your thoughts on Seritage? I opened a small position, it's my first REIT, a couple of weeks ago, after hearing about it on the podcast.”
So Matt, what do you say there? I know you follow Seritage, I know that you have some ideas as to what Seritage is all about. What do you think about that question there?
Frankel: Well, I wish I would've waited a couple of weeks to mention it, in retrospect. [laughs] No, I own the stock too. It's taken a massive hit. For those of you who don't know, it's the company that was created for the specific purpose of buying a bunch of Sears properties with the idea that over time, they're going to turn them into better shopping places than Sears and rent them out to new tenants and things like that.
One of the unique aspects of Seritage is that its only creditor is Berkshire Hathaway (BRK.A -0.70%) (BRK.B -0.81%). In that Berkshire Hathaway gave it $2 billion credit line a few years ago. And this is the less publicized part: Warren Buffett himself is Seritage’s biggest shareholder in his personal stock portfolio, not Berkshire. So the kind of uncertain part right now is that the $2 billion credit line was structured in two parts. There was $1.6 billion that Seritage got right away; and then, the other $400 million is kind of contingent on them meeting certain leasing goals. You know, leasing up a certain percentage of their converted properties, and then Berkshire will give them more money to make sure that they have enough cash coming in to cover the debt.
So long story short, they're not going to get that goal. Nobody is signing new leases on retail real estate right now. You know the places are shut down; nobody is going to expand at the moment. So the million-dollar question is, what is Berkshire going to do? Are they going to force Seritage into bankruptcy? Which I don't see happening. Are they going to modify the terms of the agreement? Are they going to offer them a little extra financing or some other kind of lifeline to get through this? And if they do, what would that mean for common shareholders, would it be like a dilutive action or something like that?
So in my book, to kind of answer your question, Seritage is kind of a wait-and-see. I’ve thought of buying more. I haven't yet. It looks very, very tempting at the current price. I mean, it's lost about 80% of its value, but there's a lot that could go wrong, and there's a lot that could go right over the next few weeks. So I'm waiting on a little bit more clarification on what Berkshire's going to do in terms of funding for the business before I make any decisions.
Moser: All right. Well, that's good information. A question came in from Ian Gray on Twitter, @IanTheGray. So, Ian, we hope that was helpful for Ian. And again, thanks for the question there.
And before we continue, as a reminder for those of you looking for more stock ideas -- because let's face it, if you're listening to the show then you're always looking for more stock ideas. I mean, Matt, you and I are always looking for stock ideas, right?
Frankel: I’m doing it right now. [laughs]
Moser: [laughs] Well, then, why not -- and maybe this is something we should do after we get done taping -- let's go check out the Stock Advisor service. Because you'll get stock recommendations from David and Tom Gardner every month. You get Best Buys Now and a whole lot more. So if you just go to IF.Fool.com, you can take advantage of a special 50% discount we have for our listeners, make sure to go check it out at IF.Fool.com.
Okay, we have another question here from Humble Twig, @humbletwig on Twitter. And Humble Twig says, “Hello, guys. Can you please share your thoughts on Upwork? It offers the ability to work from home, recent insider transactions, price-to-sale is 3.5, less than one-third of the price a year ago. Is this a value trap, or is it worth having on your radar? Thanks for the great show and the valuable insights.”
And, Humble Twig, thank you for the question, that's a really good one, and I think it's very appropriate for this time now as, I think, we’re in the middle of seeing a massive sea change in the way that we view how we do our work. As work starts to pick back up, as daily lives kind of get back to normal -- whenever that does start happening -- I do think we're going to see some changes in behavior, and you're seeing that in everything from telemedicine to document management, to employment, and certainly Upwork plays into that space there.
I mean, Matt, you and I, I think, both have some insight here. I'll just go ahead and throw a couple of points in. I don't know that I necessarily see Upwork as a value trap. I can see the market opportunity; I understand there are tailwinds there. For me, though, when I look at Upwork as a business, I don't know what makes it special, and I would be worried about its status as the middleman in this case.
Now, I say this because I go back to some personal experience I've had just in connecting with people in my work. And initially, those connections were made with a middleman, and then that middleman essentially got phased out as the lines of communication between me and the other party were a little bit more consistent and reliable. So I mean, for me, I can see where that middleman status could be a problem down the line. So it is a really small company right now, it is getting ready to enter a period of time that is going to test it in virtually every way possible. It's not profitable, it’s not cash flow positive. I don't consider its balance sheet a source of strength given its size and the current environment we’re in.
So then I try to identify the catalyst or the long-term trend that takes this company forward. And I do see the long-term trend there in the market as the freelance economy continues to develop. But, for me, I don't see any reason to invest in a business like this today given what we know. I'd rather buy something like this on the way up when we know it's winning and when there's a little bit more certainty in the economy.
You know, Matt, I was thinking about this the other day, I just fired out just one of those random thoughts on Twitter that, thankfully, it was one of those ones that didn’t get me in any trouble, [laughs] but it’s an easy time. In these times when the market is down so much so quickly, it's really easy to go looking through your portfolio for those stocks that are down big, companies that you want to cut your cost basis in half, you want to buy on the dip. That's fine, I understand that sentiment, and sometimes it can work. But more often than not, it doesn't really work. I think bad businesses just tend to be bad businesses. And I’m not saying Upwork is necessarily a bad business, but I'm not saying it's a good business either. I guess the jury is still out for me.
I think that this is a time where I'd rather be buying into some of these really, really good businesses out there that are on sale today, I think. They’re just really good-looking prices, and we’ll talk about some of those businesses later. I don't know. What are your thoughts on Upwork?
Frankel: Everything you said -- I just think their fee structure might not be maintainable. I could see them being disrupted -- like, for example, what's to stop a big player like Amazon from creating a freelance marketplace and competing with them on price. I mean, Upwork’s fee -- don't quote me directly on this, but I want to say it's about 10%, they charge freelancers 10% of withdrawals in most cases. Such a hefty haircut, if you're working full time as a freelancer.
So I could definitely see a bigger player coming in and kind of trying to compete with them on price and that really pushing down margins. I like the product, but as we've seen time and time again, a great product doesn't make a great business, necessarily. And that's kind of my opinion on Upwork at the moment.
Moser: Yeah, to your point on those fees: 88% of their revenue comes from those fees it collects as the middleman. You know, 90% of their money essentially comes from that status as the middleman, you have to kind of look. Anytime you see the position of the middleman -- I am not saying the middleman is bad, but you just have to ask yourself the questions: How do they maintain that position and potentially how do they widen their advantage in the space? It's just not clear to me today with Upwork. For me there are just a ton of really good businesses out there that are just way more attractive, so.
If you own Upwork, I don't know what to tell you. Maybe you hold onto it if you own it, I don't know. I don't know that I'd have it at the top of my list today to be adding to my portfolio. But, you know, there you go. We do hope that's helpful. And, Humble Twig, thanks again for the question.
And final question here, Matt, and this is, I think, kind of a doozy; that's why we saved it for last. Because it could stoke an interesting discussion here. We got a question on Twitter from @an_ island_bear. And this individual asks quite simply, “What should we look for in upcoming earnings?”
Matt, when I saw this question, I knew immediately we could probably do an entire show just on this one question. So we're not going to take the next 45 minutes of our listeners’ lives, but let's take five minutes and kick around some ideas. What are some of the things that you're looking for in this upcoming earnings season? Because Wells Fargo's next earnings date is April 14, and the big banks, they really are the ones that kind of kick off earnings season for us. So it's not that far down the road. We're going to see these companies start reporting. What do you have your eye on?
Frankel: Well, I can answer the question real quick; earnings are going to be bad. [laughs] There's very few parts of the market that are going to be spared by this, including some of the defensive sectors like real estate. I'd say balance sheets become more important than ever in an environment like this. Throw all, like, P/E multiples and stuff like that out the window.
In terms of the banks themselves, there's three things I'm looking at. This is going to hit the banks in one of three main ways; well, probably all three, but to which extent? One, there's going to be less demand for loans. So banks aren’t going to bring in as much new business. Nobody is going out to buy a new car. A very few people are going out to buy new cars right now. Few people are borrowing money to buy -- you know, the mortgages would come down, so that could be a silver lining, but I mean, personal loans, the market is kind of dried up for, right now.
If I wanted to run up my credit cards, there's nowhere for me to go shopping right now. So banks are going to see loan demand drop considerably. So that's one thing to look for. And any comments on where it could be going? Because remember, this is going to extend into the second quarter, and we had two really good months in the first quarter, so it's not all going to be reflected.
Two, interest margins are going to go down; they just are. The Fed slashed interest rates from 1.5% to 0%. So you're going to see bank margins start to contract a little bit. The question just is, how much? The banks aren’t going to make zero, they're still going to charge interest on auto loans, mortgages, things like that. So the question just becomes how bad is it going to be?
And three, if we’re heading into a recession and unemployment is going to spike, again, this stimulus coming up will have a few answers to offer here too, but what would that do to default rates? Will people the financial crisis, but in all kinds of loans, we saw a big uptick in defaults, like, on credit cards and auto lending and things like that. So that's another way banks could get hit really bad.
So there's three ways the banks can get hit really, really bad out of this, which is why you're seeing the financial sector underperform the overall market. So that's what I'm looking for with bank earnings. I'm not looking at their traditional metrics, you know, I don't care how much they made over the past 12 months, because that's really irrelevant at this point.
Moser: Yeah, it really is. You know, I was thinking about that earlier, just, you have to believe, Matt, if you think we live in an adjusted earnings world now, I mean, holy cow! This is getting ready to just go to a new level. That’s going to be for quarters and quarters to come, I think. The adjustments that are going to be made from this, to try to paint some sense of normalcy over it, to don't understand a little bit more about how these businesses are dealing.
You know, I’ve also thought, to me, it’s interesting, like, this is one of those sorts of "black swan" events, right?! I mean, this is just one of those things, we could never really foresee. Before this started, there was, I think, a pretty robust conversation going on about how tech was really wiping out a lot of jobs, right? We talked about that a lot, not only on this show but at work. I mean, on all work shows for a while, the theme is, technology has been killing a lot of jobs.
And what we're seeing here, unfortunately, is that tech isn't the only thing that can wipe out the employment sector. I mean, we've got something here that is just wiping out potentially 30% of our employment force here. That it's going to take jobs left and right. So it'll be interesting to me to see down the road where that discussion for tech killing jobs falls. I don't really know, I mean, it’s certainly all in the name of progress, but this has been, I think, just an unbelievable time in its impact on the workforce.
I mean, it's going to be very difficult to qualify in the near term. And I think trying to figure out how much the market is pricing in today is -- I don't want to say it’s an exercise in futility, but I don't think -- like, if we had companies coming out here in a month and really trying to lay out some numbers and quantify this for us, I think I'd be a little bit more skeptical of that. To me, I don't think there's been enough time to really have a full idea of how this is going to impact some of these businesses. For some, maybe it'll be a little bit easier than others, but I think that if I saw companies trying to give us granular data in firm numbers, I would be a little bit skeptical of that.
Frankel: Yeah. And thankfully, no one is doing that yet. What I'm seeing a lot, especially in the real estate sector, is, companies kind of giving updates every week or so, just kind of, here's how things are affecting us. One of my favorite companies, a hotel REIT, and they kind of have been issuing guidance every few weeks, like, okay, here's how many cancellations we've had, which is nice, they kind of let you know where things stand, but not how it's going to affect the earnings or how long it's going to last.
I mean, if anybody offers second-quarter guidance in their first-quarter earnings report, just skip over that section. I mean, there's no way they can predict -- even for the rest of the year, there's no way that anyone can issue guidance, except for maybe a Teladoc or something like that, with any level of accuracy. Just nobody -- it's been way too volatile, in banking, interest rates have just been so volatile, no one knows what's going to happen. It's not like you can really rely on the Fed stoplight at this point for where interest rates are going.
So any guidance you see, take it with a grain of salt. Like I said, with banking, look at those three areas: loan growth or declines, interest rate margins and defaults. Those are the clues that will tell you where we're going.
Moser: Yeah. And ultimately, you invest today based on the assumption that our country and that our economy will still exist in five years. For me, personally, that's a bet I'm willing to make every single time regardless of the scenario. And for me, with that in mind, I'm looking at just the best businesses out there and looking for ways to be a part of their recovery. The belief is that they will recover. And so I think you have a lot of wonderful businesses that have led our country to this point. We will get through this. And on the other side, I think you're going to see a lot of those great businesses continue to prosper.
But, yeah, I mean that's ultimately it is, this earnings season looking for a lot of uncertainty, probably a lot of cheerleading, a lot of people really coming together, a lot of unity, and hopefully, we'll see at least some type of optimism here for the remainder of the year, though I know right now it's a little bit difficult to see for some.
Matt, before we wrap it up here, real quick, let's just take a look at our Ones to Watch for the week. What's a stock that you're going to be watching for the coming week?
Frankel: Well, I think we're both doing kind of what we were talking about with great businesses that are on a discount that’ll bounce back nicely. The one that I'm finally thinking about buying is Disney (DIS -1.45%), ticker is DIS. I've wanted to have Disney in my portfolio for about two years now, and I was hesitant to pull the trigger on valuation reasons primarily, like a Buffett reason. And right now, their parks are shut down, the cruise line shut down. They say they're going to reopen the parks at the end of this month; that's not going to happen, let's be honest. That's going to extend well into April at the very least.
Also, ESPN. They own ESPN, and there's no sports to show right now. So Disney is just getting kicked on all sides. I don't even know what's on ESPN right now.
Moser: [laughs] I've seen some stuff on Twitter, I think it's all kind of revolving around The Ocho and some of the funny games that they have on The Ocho. There's one up there called Death Diving, which was kind of crazy-looking. I mean, folks leaping from, like, 30 feet up to do just the most insane belly flop-style dives they can come up with. So maybe it's not sports in the traditional sense, but it's entertaining for sure.
Frankel: And this is something you want to look for, a business that is going to have staying power. Disney World is still going to have annoyingly long lines when they reopen. [laughs]
Moser: [laughs] Even with the Fast Pass, Matt?
Frankel: Even with that. ESPN is still going to make a ton of money showing sports when they come back on. It’s going to be -- Disney is not going anywhere. They have so much brand power. I mean, they can't release their movies right now, all their franchises, they can't release any movies in theaters right now. So there's going to be so much built-up demand.
I mean, people who’ve had their Disney trips canceled, there’s going to be a lot of built-up demand, they might even get an uptick afterwards.
So Disney has lost about -- it's almost been cut in half since its peak. And I think it's looking very tempting right now. I might actually buy some in my kids’ accounts. And I know you have stock for your kids as well, and it's a great way to teach them about investing when they're a little older. So if I could buy Disney now and then in 10 years, say, “Hey, look what I paid for this and look what it's worth now?” Then it seems like a good move.
Moser: Yeah, I think you'd be happy with that. Well, in line with your Disney thoughts there, yeah, my stock, I’m keeping an eye on Starbucks (SBUX -1.45%). And I can actually talk about it now, you know, for a long time my daughters owned Starbucks, I never actually personally owned it though I drink an awful, awful lot of their product every single day. I mean, like, every day. And it just always struck me: Why did I not own that stock? And it was always kind of bugging me. A wonderful dividend payer that should be around, let's hope, indefinitely.
Talk about stock being cut in half, that stock had been basically cut in half when I finally opened a position in Starbucks last week. And so that’s a stock that I had on my radar to get it in my personal portfolio as a nice, sort of, protecting-your-wealth dividend play that I think is going to have a nice little option there for some capital gains given the pullback that we've seen.
And then I will say, also, we had always talked about Howard Schultz leaving and how would Kevin Johnson fill that void? I would encourage listeners, if you own Starbucks, if you are interested in owning Starbucks, google -- there's a message from Starbucks’ CEO, Kevin Johnson, if you just google “Kevin Johnson: A time for resilience,” you'll pull up this note, it's a letter to Starbucks customers and partners from Kevin Johnson, the CEO and the president of the company. And it's a good read, I think it's what leadership looks like, honestly. And I read this and I felt like, “You know what, I'm really glad I own shares in this company.” So we'd encourage listeners to check that out, and certainly we’ll tweet a link out to that on the Twitter feed for all to check out.
And speaking of Twitter, remember you can always reach out to us on Twitter @MFIndustryFocus or drop us an email at IndustryFocus@Fool.com. We're always interested in how you guys are investing through times like these, ideas that are popping up on your radar, or, hey, if you just have questions that you need answered, lob them our way and we'll see what we can do for you.
But, Matt, I think that's going to wrap it up for us this week. Appreciate you taking the time here to join, as we are all remote still. That'll change eventually too, but it seems like we’ve still got work, and that's a good thing.
Frankel: Yeah, I'm looking forward to seeing you guys in person as soon as it's practical to do so.
Moser: [laughs] Soon enough, my friend. Soon enough.
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.
Thanks to Austin Morgan for continuing to make all of this happen. We could not do it without you, bud. For Matt Frankel, I’m Jason Moser. Thanks for listening. We'll see you next week.