How Investors Should View the Stimulus

In this episode of Market Foolery, Chris Hill and Motley Fool analyst Jason Moser bring you the latest headlines from Wall Street:

• There was a sudden management shuffle at a prominent online marketplace company.
• The Senate approved a massive stimulus package.
• How a bold move by a major restaurant player might lead others to follow suit.

Also, from the mailbag: why airlines don't issue stocks in a downturn and much more.

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

This video was recorded on March 26, 2020.

Chris Hill: It's Thursday, March 26. Welcome to Market Foolery. I'm Chris Hill, and joining me today, Mr. Jason Moser. Thanks for being here.

Jason Moser: Hey, thanks for having me. Nice to be here.

Hill: We're going to dip into The Fool mailbag, we're going to talk airlines, we're going to talk restaurants. We have a sudden CEO departure that I want to get your take on, but we got to start with the big macro, and that is the news that, well, it's the one-two punch, right? We've got the Senate approving the massive $2 trillion stimulus package, and we also have 3.3 million people filing for unemployment. For context, this is not only an all-time record, this is 4 times the record that was set back in 1982. So this is a massive number and an indication that even with the stimulus package being approved by the Senate, things are going to get a lot worse.

Moser: Yeah. I agree there. I mean, a world of nothing but bad news lately. This certainly is good news; it's a step in the right direction. I think it's something that obviously needs to happen. I know that $2 trillion sounds like a lot of money, and it is. To put it in context, our GDP domestically here in 2019 was around $21.5 trillion, so that can give you an idea. I suspect we'll see that $2 trillion number go up over time as well.

But I think investors need to be encouraged by this. I know I certainly am. This is at least a little bit of certainty in what has been a world of uncertainty lately. And I think it starts to address some of the bigger problems out there right now, getting direct payments to the folks that need it the most right now, boosting unemployment insurance for folks who clearly needed the most right now, given the numbers we just saw this morning. It brings support to small and large businesses around the country that really will need it.

I do like the fact that they threw in there, "Hey, listen, the president's businesses, members of Congress' family members; your businesses can't benefit from this." They threw that provision in there. I mean, it's not just the president in there. It's the vice president, it's heads of executive departments, it's members of Congress.

Suspending Federal student loan payments through Sept. 30, with no accrual of interest on those loans. Another good thing being that it's just the end of March here, coming up on the end of March here, that's a significant amount of time.

And, again, going back to, I think this is a great first step. I would encourage investors to not look at this as just one step that solves the problem, because I think, personally, I mean, we're going to need to figure out a way to live in a world here where COVID-19 is kind of part of the deal for a while. This isn't something where as soon as summer hits, it's just over. I think this is going to be something that takes a little bit longer. Hopefully, not much longer, but it's a big response to a big problem.

Hill: And now it moves on to the House of Representatives, so hopefully by the end of this week, this will all be settled and we'll have some more certainty. The market reacting today, definitely, to the news out of the Senate. You look at the S&P 500 up about 5% so far today; the Dow Jones as well. So hopefully, we keep this going.

You know, before we get into the mailbag, let's talk about Groupon (GRPN 0.57%), because shares of Groupon are up 10% on the news that Rich Williams, who's the CEO, and Steve Krenzer, who's the chief operating officer, are leaving immediately. And we don't really have a lot of other details. Other than Groupon is saying, "Both remain employed by the company," there's no comment from Groupon at this point on the reason for the changes.

I've never been more interested in Groupon. I mean, the CEO and the COO are walking out the door, are leaving those jobs immediately, and the stock goes up 10%.

Moser: Well, I mean, you could certainly make the argument that they weren't really getting the job done. If you look at Groupon, if you look at just the fundamentals of the business -- I mean, we've talked about Groupon ever since they went public. And what was it, Alphabet offered, was it around $3 billion or was it $6 billion that they offered for Groupon back in the day? It was some ungodly number in the context of things.

I mean, when we look at the state of Groupon now, clearly in hindsight, they should have taken that deal. Because the revenue is winding down. The revenue growth is nonexistent. It's not a profitable company. I mean, this is a company that's facing a lot of challenges. And so you don't really know why management leaves. I'm sure this is probably a bit of a response just to the greater market reaction we've had over here over the past several days.

And, you know, we've seen this play out before with other companies. JCPenney, obviously, has gone through a lot of leadership changes. And we've seen when former leaders step down and new leaders step in, there is some enthusiasm, because maybe there's a light at the end of the tunnel there. I don't know, in Groupon's case, that's really something investors should expect. I do think it's really fascinating to look at.

So Aaron Cooper is going to step in as the interim CEO while the company ultimately looks for a permanent CEO. And it's possible that Mr. Cooper gets that job at the end of the day. And he's going to receive an award of 4 million restricted stock restricted share units for this; vests over time. You know, 4 million restricted share units sounds like a lot, but then [laughs] you look at where Groupon's stock is today at just under $1 and, well, maybe that doesn't look as great as it sounds on paper. And he's going to obviously get a salary and a bonus and an extremely challenging role in trying to figure out this company's place in our world.

Because before, there was maybe at least the argument that Groupon possesses some brand equity that maybe a bigger network out there could exploit and benefit from. I'm not so sure that's really even the case now. And market pop today notwithstanding, I'm not sure this really should make you feel any better about either owning shares or potentially owning shares. But, hey, listen, I could certainly be wrong. Mr. Cooper could have a plan in place and bring more value to the company.

Hill: And we've said all along, certainly back in the early days of the previous decade, that one thing Groupon had going for it in the daily deal space was they had the best name. I mean, "Groupon" is just the best name as opposed to LivingSocial or some of the others that were out there. But they turned down $6 billion from Google [Alphabet] in the fall of 2010, and at the time, they were on a run rate of $2 billion. And they said, "We think we're worth more than 3 times our run rate." And as it turns out, as of this moment, they're worth less than one-tenth [10%] of what Google offered them. I mean, the market cap, even with this pop today, is still about $550 million, so.

Moser: Yeah, a fraction of what it was worth. And for what it's worth, I do agree with you, I think for all of the challenges and just this market in general, I don't know what the daily deal space is all that attractive as a space to begin with, but I do agree, they possess the "no-brainer" name and brand in the space. LivingSocial sounds like a sitcom from the 1980s, and you're not even sure really what they're trying to do there. Is it a social network, are they trying to sell you a deal? You don't even know what they're doing. Groupon, it's very clear. And it's a shame to see a business with a branding like that fall on such hard times, because there was so much potential in the branding there.

But it just goes to show, I mean, that's one of the things we focus on as investors when we're looking for companies to recommend to our members, we're looking at the overall market opportunity. Because no matter how attractive one particular business could seem or an idea may seem, you need to look at that broader market opportunity, look at the economics of that market opportunity to really see how that could play out in the future. Because even back then, you could look at this particular market, and there were a lot of red flags, just kind of wondering, "All right, it's really all about saving people money and bringing the cost down for everybody, so then how does this company really end up making a meaningful amount of money, and then how does that trickle down to investors at the end of the day?" And clearly, to this point, it hasn't.

Hill: Our email address is [email protected]. A question from Michael Weisman, who writes, "There's been a lot of coverage so far on how much the airlines have spent on stock buybacks in the last several years, but why can't this work in reverse? I know no one wants to buy high and sell low, but we didn't neglect their balance sheet, and it seems like there are other levers to pull before they go to the public coffers to get some runway (yes, that pun was intentional). Why don't the airlines issue more stock?"

Moser: Well, it's a good question. Issuing shares is certainly an option, but there are plenty of ripple effects that come with that too. And in a perfect world, you want to issue shares when your stock is performing well, right, you're sort of using a more valuable form of currency there. As it stands right now -- and airlines aren't the only ones, but certainly their stocks are very depressed, and the options right now don't look all that great given what we know about the state of the travel industry today.

Now, it does ultimately come down to cost-benefit. Cost-benefit is the key there. And if the government is able to provide a solution that's more attractive. Well, as a management team, you have to look at that and think, "Well, is this worth taking?" And if we look at this legislation that cleared the Senate here and what the airlines are going to get, the airlines are going to get a significant amount of money, obviously, to keep their operations afloat. Part of the money that they're going to be getting, ultimately, is in the form of grants, which will then be connected, perhaps, to listing warrants or options or preferred stock or something like that.

And so that's all to say, ultimately that at the end of the day, this really is like they're issuing shares to raise capital, they're just essentially using the U.S. government to underwrite the offering. And at this point that probably is the best option, because if they go to the markets to try to issue shares, I mean, how attractive an offering is that right now? You really don't know. Particularly when you add the dynamic of the government having a role to play here.

So I'd imagine, if you're running an airline right now, you're looking at the cost-benefit analysis there, and you're figuring, "Well, you've probably got the most solid partner there in the U.S. government willing to take a stake and help you keep your operations running." That's probably the safest bet not only for the businesses to be able to keep running, but ultimately -- and we're thinking much longer term here, but -- for shareholders to still see some sort of light at the end of the tunnel there as well.

Hill: Let's wrap up with Cheesecake Factory (CAKE -0.51%), one of the great ticker symbols out there, which is just simply CAKE. Cheesecake Factory [is] in the headlines because they've told their landlords, "We're not going to be able to pay rent on April 1." And David Overton, the CEO there, is trying to work with landlords and asking for their assistance, asking for their patience, but it's a bold move by him and I don't blame him one bit, Jason.

Moser: No, not at all. As a matter of fact, just having been a landlord before, I mean, not to this level, but we rented our house out down in Georgia for about seven years after we moved up to Virginia when I took the job here at The Fool. And we did that just because we could. We just figured, "Hey, I'd try being a landlord, see how that worked out." And ultimately, seven years worked out very well, no litigation, we walked out of there without someone trying to completely ruin our lives. But I'll tell you, throughout that entire seven years, that thought hung over my head like, "Man, I hope we don't run into someone trying to pursue some frivolous litigation or something like that." But it is all just to say that being a landlord is very hard.

And one of the priorities I think is, you really want to make sure you keep that property occupied. I mean, there's a lot involved with turning a property over. And I just saw that on the level of one house. Imagine +300 restaurants, and furthermore, +300 restaurants that are really designed in a format to fit a specific vision. I mean, the Cheesecake Factory is a specific restaurant, a specific brand. They have a specific vision for the way they want those restaurants to look.

And so we're at a point now where if this were normal times and the Cheesecake Factory was just running up into a financial problem and they were the exception, then the landlord might have a little bit more to think about here, but everybody is basically in the same boat here right now. And so that makes it a little bit more difficult for a landlord to say, "Okay, well, you know what, if you're not going to pay your rent, we're just going to boot you out and we're going to re-lease this spot."

Because who, first and foremost, is going to come in there and lease that property from you? And then, assuming you find a tenant at that scale, you've got to think about all the costs involved with remodeling and bringing new tenants into the fold. There are just a lot of frictional costs involved there.

And so when you look at the Cheesecake Factory, they lease all of their restaurant locations, and they lease those restaurant locations with basically, generally speaking, initial terms of 10, 20 years, plus two 5-year renewal options. Now, if you look in their 10-K, their weighted average remaining lease term is 16.6 years, so that just goes to tell you that they've got a lot of deals out there in place that still have a lot of time left on them. A landlord is going to look at that and say, "You know what, given the situation today, the way things look for everybody, it probably doesn't behoove us to boot these tenants out, because things will get better, and we still have a lot of years left with them as tenants. We're going to be able to still recoup a lot of that lease obligation there if we keep these people."

So I would imagine this was really a shrewd move on the part of Cheesecake Factory's management. I applaud them for it. I think they're going to actually walk away from this in a pretty good position, and I would not be surprised at all to see other companies, whether it's restaurant or retail, I wouldn't be surprised to see other companies jump in there and take the same stance. Because the negotiating leverage here is definitely a little bit different than it would be in normal bonds.

Hill: Have you ever been to a Cheesecake Factory?

Moser: Oh, yeah. Have you ever?

Hill: I've never been.

Moser: Come on, really?

Hill: No. And I'm a fan of the namesake product; big fan of cheesecake. Just never actually been to the restaurant.

Moser: I'll tell you, man. So Cheesecake Factory has been around for a while. And I do remember going to them when I was younger. And generally speaking, it's a restaurant, they have pretty good food and what not, no bad, and massive portions. But, yeah, like you, I'm a big fan of cheesecake, and I don't eat it all that often, because clearly, it's not that good for you. And I kind of approach cheesecake the way I do Nutter Butters: If I just don't keep them in the house, then that prevents me from eating it.

But one year, and this was while we were up here in Virginia, one year my wife actually ordered a Snickers Cheesecake Factory cheesecake, a whole cheesecake for my birthday, and had it sent to our house. And so it came to our house packed in dry ice. It's this massive, you know, 20,000-calorie cheesecake. And so we were thankful that it freezes very well. We were able to freeze it and keep it for a while. And, you know, you take one of those slices, then you can cut it in half and share it with your spouse. I think that's more than plenty. But, yeah, the restaurant is OK, the cheesecake is sublime. I'd definitely recommend it.

Hill: Now I'm just hungry. All right, we have to wrap up. Thanks for being here.

Moser: Thank you.

Hill: As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear.

That's going to do it for this edition of Market Foolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening. We'll see you on Monday.