In this episode of Motley Fool Money, Chris Hill and Motley Fool senior analysts Jason Moser, Ron Gross, and Andy Cross go through the big headlines from the markets. The markets saw the biggest three-day rally since the 30s. The guys discuss the stimulus package, the effects of high-frequency trading, and how leaders are keeping employee morale high through these difficult times. They also have some suggestions for the Oracle of Omaha. They answer some listeners' questions, make some suggestions for stocks to keep on your watch list, and much more.
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This video was recorded on March 27, 2020.
Chris Hill: We're going to start with the big macro. The Senate passed a $2 trillion stimulus bill that the House of Representatives will now consider. 3.3 million people filed for unemployment. The Chairman of the Federal Reserve says there's no limit to the Fed's lending power. And, yes, guys, in the middle of the week, we had a three-day rally that was the biggest three-day rise since the 1930s.
Andy Cross, let me start with you. Take any of that, take anything else that's gone on this week. Where is your mind right now as an investor?
Andy Cross: It's a pretty incredible week, Chris. I mean, it started with Monday when the Federal Reserve opened the checkbook. They basically said, we are not limiting ourselves when we are buying these assets, specifically Treasuries, and thinking about what they're going to do to support the U.S. economy, really, the global economy, continuing to work with central banks around the world. But they just, basically, laid it all out on the table, and then, of course, the stocks just got walloped on Monday. And I think a lot of that was just out of fear of like, "Wow! Are things that bad?" And then still, at that point, no deal from the Federal side.
Now, since then, we've seen the Senate pass that massive support bill, the $2.2 trillion relief bill that's going to help so many people once the checks start flowing, supporting loans, supporting small businesses especially, and citizens around the country. So then the markets rallied, and we saw this massive three-day jump where the Dow, I believe, basically came out of its bear market and ticked into a little bit of a positive back into a bull market territory for a small little bit, when it rallied 20%. So a lot of volatility continually going to the markets, we're going to continue to see this, Chris, I think.
It was good news in the short term for investors, who had been investing through this, as so many of us have been, which is great. But continuing to see that volatility as we see the ultimate results through the spring and summer of what's happening with COVID-19.
Jason Moser: Yeah, I think this past week along with the past several weeks, I think it really just reinforced our approach, our philosophy, our Foolish style of investing. And it does, we've seen some really, really heavy market moves. It seems like a 1,000-point spike or a 1,000-point drop is almost just the new norm. Hopefully, that doesn't last forever, but there's no question, it feels more and more like we, as individual investors, are kind of along for the ride. I mean, when you look at the high-frequency trading data that's out there, you listen to some of the insight from the boots on the ground, so to speak, it's clear that high-frequency trading is having a moment here.
Thomas Peterffy, who's the CEO of Interactive Brokers, he mentioned that essentially their trading volume has more than doubled here recently as the markets have become a little bit more volatile. And the direction, at least of the information, is not so terribly clear. I think we can probably expect that to continue for the near future. I don't think that's really unreasonable to expect.
And looking at the stimulus package that ultimately, I think, the House will pass that by this weekend, and it'll be something that goes along and everybody is going to start to benefit from that. I mean, we can sit here and bicker politically back and forth on this bill probably till the cows come home, but the fact of the matter is it's a step forward, right? It's something we need, and we need it now. And it was really reassuring to hear that ultimately, our government is going to leave no stone unturned. I think you see this a lot on Twitter, that "Fed is out of bullets," and "They've got nothing left." And it's BS, we got everything left. We got a lot of leverage to pull, a lot of different ways to approach this.
And so I do think that's at least encouraging from the perspective not only of investors but really of citizens. Because we are going to feel the health and the economic impacts of this for a long, long time to come. There's not some finish line that we're looking to cross here, it's more about managing life going forward, with COVID-19 as a part of it.
Cross: As Jason mentioned, Chris, so much of it is tied to high-frequency trading, but just algorithms, ETFs, we've talked about this, as they're kind of going through, and matching what is into their, either algorithms or into their index funds and trying to figure out how those flows are changing. And I think that is driving so much of the market. As Jason said, I think appropriately, individual investors are along for the ride, but we are there, and we are actually the ones who are being, I think, the most reasonable and sane out there. So really, it's continuing, you stay the course with your allocation strategy, your investment decisions using the opportunity to make smart buying and then holding as long as you can through this situation. Because in the end, markets will recover at some point, and you want to be invested through this.
Moser: Yeah, it's just, you want to own businesses, don't worry about the stock, focus on the underlying business. When you can look through your portfolio and see a collection of businesses that you believe in, that you think will stand the test of time, that alone can help you really handle the emotions of a time like this where emotions are going to be really on edge, I think for most of us, we're all experiencing it to a degree.
Hill: Well let's get to the business side of this; and I want to talk about guidance for a second. And, Andy, we've seen some companies come out this week; Target (NYSE:TGT), Gap (NYSE:GPS), Mastercard (NYSE:MA), they've suspended their guidance. And I will point out that most of the companies in the S&P 500 have not done that yet. We're getting ready to go into earning season next month. Do you expect to see more companies suspending guidance altogether or just lowering it?
Cross: No, I think, even before earnings come out, for the official announcement, Chris, I think they'll start to get a little bit ahead of this. I don't think you're going to be surprised to hear that, like, it's just a really unusual situation as companies are trying to come to grips with what this means for their customers, what it means for their supply chains, what it means for their overall business economically, financially how stable they are, how much they can get funding. We saw a lot of companies start to tap their credit lines. And that would actually put a lot of financial pressure onto the financial plumbing, as we've talked about on the show over the past couple of weeks, so. And a lot of the Fed work has gone about to try to help alleviate that.
So I'm not surprised that we're seeing the companies suspend some of their guidance and just say, "You know what, at this point, we don't know." And I think, frankly, investors are going to give them a pass for that.
Moser: Yeah, I kind of wonder, maybe this is the "glass half full" of me, but how many CEOs do you think are out there right now debating whether or not this is a good opportunity to start incorporating less guidance into their financial reporting going forward? I mean, how many CEOs out there right now do you feel are envious of someone like a Warren Buffett, who can basically just file a 10-Q and then let the financial media write whatever they want to write, but he's not offering any guidance, really, any perspective, just, "Hey, here's the way things look now, and we'll tell you how things look next quarter again."
How many CEOs do you feel like, "Man, I'd love to be able to do that." Because I would wager there are a few, and I would wager there are a few out there right now deliberating whether this would be as good a time as any to start incorporating, maybe not eliminating guidance altogether, but at least not getting so granular with it, not getting so specific with it.
Cross: Well, Jason, it would be great if they did that. That's going to come from the investor base, right? So the institutional investors who are, as we just talked about, [laughs] are so tend to be short term focused, so that would be great. I mean, Buffett can do it, because he owns so much in Berkshire Hathaway. It would be great if companies start taking a little longer-term focus, but that's going to have to come from their investor base, and we encourage all institutional investors and individual investors out there to think much longer term than just one or two quarters out.
Hill: We also saw a guidance of a different version this week in the form of some CEOs that we follow pretty closely here at The Motley Fool, stepping up and providing the kind of reassurance and leadership that, I think, we like to see. Whether it's Kent Taylor of Texas Roadhouse or, Andy, someone like Kevin Johnson at Starbucks (NASDAQ:SBUX), who published a letter to employees. He refers to them as partners. So he published a letter to all the Starbucks' partners, talking about resilience, talking about giving them economic certainty for the next month. It was really pretty inspiring to see.
Cross: It was, Chris. And if you think about a company who's been on the near front lines of this over the last few months, because Starbucks dealt with this over in China. And they saw this early in January start to affect their business, and they made some moves very quickly. So they know. He's been following this for months; closer than probably most CEOs and most boards are. So I really applaud them. He came out there and announced that they'll continue to pay employees for 30 days whether they come or not. So they pivoted very quickly to drive-thrus. And he's been very communicative with the employees, with his partners, as he says. And they have a lot of them.
They closed down their stores, Starbucks, they've now opened, I think, about 95% of those. So this is really the leadership you want. And that's great from Kevin Johnson, because he does have such -- there was such a brand equity tied to Howard Schultz with Starbucks, and the fact that he can come out here and take these leadership positions. I really like him. I own Starbucks shares myself and continue to hold them. And that's what you really want to see from your companies in a situation like this.
Moser: Yeah, I'll piggyback on that. I think John Donahoe was another great example. John Donahoe, the new CEO with Nike (NYSE:NKE), this was his first earnings call with the company this week as the CEO. And he, much like Andy said with Kevin Johnson at Starbucks, Donahoe, very much the same thing. He displayed empathy, resilience, talked about the experiences that they've gone through in China and now on the other side of this crisis so to speak in China and starting to witness a little bit of the recovery in sort of this new world post-COVID-19, so to speak. Recognizing that at the core of the business, it really all boils down to people, continuing to maintain pay continuity even while facilities are closed or have altered schedules. Again, knowing that this really all boils down to people at the end of the day.
I read through that call, and you can't help but walk away feeling more optimistic. And I have a feeling that when earnings season starts in full force here in mid-April, I think we're going to see a lot of our favorite leaders step up and really, sort of, follow suit there.
Hill: Our email address is Radio@Fool.com. From Amar Sethi, who writes, "Markel (NYSE:MKL) has fallen about 50%, more than the market as a whole. Why is this, when it should be more stable? Are insurance businesses at higher risk due to the coronavirus?"
Markel, a Fool favorite, and not just because it's located about 100 miles south of us. What do you think of Amar's question?
Moser: I think it's a good question. I view Markel as a company that potentially would be a little bit less stable than perhaps some of the bigger more state insurance companies. But to make some sense of why Markel has been so volatile, why it has felt so much of this impact, there's still a lot that we don't know about its insurance book, about what types of policies have been written. It's not even very clear what exactly insurance claims are going to exist from a pandemic perspective. I just don't know.
But what I do know is Markel is not just an insurance business. Let's remember that they have a very large investment portfolio that has taken a pretty big wallop, as most of ours has. There's also the Markel Ventures side of the business, which ten years ago was a rounding error, right. You're talking of a part of the business that brought in $86 million in 2009.
In 2019, Markel Ventures revenues were over $2 billion. And this is a collection of small businesses, and so all of those small businesses are going to feel the impacts from this as well. And further, we just don't know how long that's going to last. And so when you look at it from the perspective of three of the drivers of the business in the insurance book, the portfolio, and Markel Ventures, all three of them, all three of those drivers are exposed here and feeling some pain from this, with a company where 2019 total revenue was about $9 billion to $9.5 billion, these are all very meaningful parts of the business, and they are feeling an impact as well. And so to me, it makes perfect sense that Markel is feeling perhaps a little bit more pain than others.
But with that said, as the dust settles, Markel is still going to be a business poised to continue to gain share, to continue to grow out that Markel Ventures. And that investment portfolio, like, all of ours, will eventually come back.
Cross: I think its interest rates are clearly driving some of this. So much of Markel's revenue is just from their investment portfolios. As Jason was saying, it's just going to be based on the rates of return. And interest rates are much lower. The insurance companies don't invest in tons of stocks, so they have the ventures business and some, but they have big bond portfolios, and that's going to impact their longer-term returns. So I think that is clearly impacting them.
Now, the stock is selling near book value. Typically, it's sold at 1.5 times, 2 times book value over the last couple years. So the stock has come down, and the valuation is much more reasonable now for a business that long term probably could recover from the COVID-19 situation.
Hill: Warren Buffett. I'm waiting for him, I'm waiting for Warren Buffett to come out and say something, publish another op-ed like he did in late 2008. But here's what I suspect, that I think we all suspect, is that he's probably doing some buying. And so let's offer up a suggestion or two for the Oracle of Omaha in terms of an acquisition or just a business to take a stake in. And Jason, I'll start with you.
Moser: Well, I'm not going to cop out and just go with McCormick, Chris. I promised myself this morning when we were talking about this, I am not going to go with McCormick this time. Although I do believe McCormick could be a good answer here, but that was it. I mean, there are a couple of big businesses out there. I wouldn't say he should acquire these businesses, I think he could take meaningful stakes in.
He already has Mastercard and Visa in the portfolio. I think throwing PayPal in there would make perfect sense. Clearly, Todd and Ted have a forward-thinking perspective when it comes to the payments industry as well. So I think PayPal would fit in nicely. Even more nicely than that though, honestly, I kind of feel like Starbucks would be an ideal holding for that portfolio. It's very much in line with the type of business that he would invest in. I mean, he loves Coca-Cola, he gets the beverage industry, of course. Starbucks, I think is an attractive-looking stock today. I think I told you guys, I started a position in Starbucks maybe a week or so ago. Tremendous dividend yield there that'll keep on growing, tremendous market opportunity in front with, you know, an addictive -- let's say, in the good way at least -- beverage that I don't think is going to run into too many headwinds for the rest of our lifetimes at least.
Hill: It's legally addictive.
Moser: Very well put, that's good. I like that.
Hill: Just remember that, it's legally addictive. Andy Cross, what do you think, what should Buffett buy?
Cross: Yeah, I've actually been thinking about what he's going to buy completely. He's talked about his elephant gun, not a metaphor I like to use, but he's mentioned that about, he has a lot of cash, north of $100 billion to spend. So he's talked about the lack of valuations to buy complete companies. So we talked about insurance and Markel. I think the insurance company that they might go after is something like maybe Progressive (NYSE:PGR), maybe Chubb. They're both $40 billion to $50 billion organizations, so that would be meaningful to them.
I've actually said Moody's. They own a bunch of Moody's already, and it's a $40 billion organization, one he knows very well. So if they went shopping completely to buy complete businesses, which is really what he wants to do with Berkshire Hathaway, something like Moody's might not be too far-fetched, Chris.
Hill: Now, one of the better-known brands in the Berkshire Hathaway umbrella is GEICO. I'm just wondering about how regulators would feel about Warren Buffett buying another insurance company.
Moser: I don't know. I mean, it's a very good point in how that might be viewed from an antitrust perspective. I mean, GEICO and Progressive certainly possess a lot of brand equity in the space, but their focus is on auto insurance and some homeowners' insurance and other things like boats, motorcycles, and whatnot. I mean, that is a very, very big and fragmented market at the end of the day, with a lot of competition out there.
So I actually think they could get away with combining those two and sliding right under that regulatory radar, but I don't know.
Cross: You know, Progressive is probably a little bit more expensive on the valuation front then some of the other insurers, like the Travelers, which is a little bit smaller than Progressive. So maybe not Progressive as much, Chris, but maybe another insurance company that doesn't run into the risk on the regulatory front.
Hill: All right, Andy Cross, we're going to have to let you go. Thanks for being here.
Cross: Thanks, Chris, so much.
Hill: Ron Gross now joins us from his home. Ron, thanks for being here.
Ron Gross: My pleasure.
Hill: Before we get to some other topics, I want to give you a chance to weigh in on the big macro and a suggestion for Warren Buffett. But let's talk about the market. When you think back on everything that happened this week, what stands out to you and where are you moving forward as an investor?
Gross: Well, for sure, I think the stimulus was essential. We both have monetary and fiscal policy in place now to help. My question is, is the package big enough to provide the bridge we need until we can get back to what's close to normal, where workers are back to work, companies are, for the most part, up and running again? And the problem with answering that question is that we actually don't know when the virus will be under control. So my hope is that the Congress stands ready to do this again, quite frankly, if needed. And my guess is it will be needed. I think this is going to linger longer, and perhaps $2 trillion isn't even enough, although I think it's a great start.
And I'm pleased that our politicians have come together for the good of the worker and the good of the nation. But as a long-term investor, I'm still very optimistic, and I'm seeing bargains in place that I haven't seen in quite some time. And so I'm doing my best to tune out the anxiety and the panic, and I'm thinking to the long term and I continue to pull out that long-term chart of the S&P 500 where I see the big downturn when the dot-com bubble burst and the big downturn in the '08-09 Great Recession. And to me, they look just like moments in time when I do it that way, and I'm hoping this will be the same thing.
Moser: Yeah, that makes a lot of sense, I do agree. I think we're going to end up seeing this stimulus cost more. I think $2 trillion is a great start. To put things in context, U.S. GDP in 2019 was $21.5 trillion. So you can see how that matches up. You know, like you, Ron, I'm optimistic. When I look further out, I think that things will be OK ultimately.
I play a little bit of devil's advocate from the investing perspective though. And I do wonder, because I think this is going to be a longer, more protracted battle with COVID-19 than probably a lot of people realize. I think we're going to be dealing with the impact of this for many, many quarters, potentially years to come. It makes me wonder, what should reasonable growth prospects over the course of the next five years start looking like?
Because for investors who are looking for us to just kind of get back to where we were and resume that torrid growth that we were on, that pace, I don't know that that's necessarily reasonable. I mean, I do feel like we're going to be entering a stretch here, maybe it's two years, maybe it's five years, where the growth expectations need to be ratcheted back considerably.
And that doesn't mean, by the way, that as investors we shouldn't be invested, it just means you got to alter your expectations a little bit. Maybe some of these prices that seem like bargains today, maybe they aren't such bargains if our growth prospects aren't quite as attractive as we hoped.
Gross: Yeah. Maybe the other side of that coin is, before this hit to our economic system and the downturn in the market, professional investors were warning that you should not necessarily expect the 9% or 10% annual returns that we've historically seen, and maybe something like 6% is more reasonable. And that's because, quite frankly, after an 11-year bull market, valuations were somewhat stretched, and they couldn't theoretically continue to go up at 9% or 10% unless cash flows really took off for some reason that wasn't readily [...]
Now, with the pullback, I'm wondering, maybe we can actually get back to somewhere higher than 6%, closer to the more historical 9% or 10%. And, of course, it's as a result of the pain we're feeling now with stocks coming down, but maybe the future does look bright.
Hill: Ron, Warren Buffett calls you on the phone, he says, "I'm looking at everything that's out there, there's a lot of stuff getting cheaper." What do you recommend?
Gross: Well, I am sure Mr. Buffett is putting some money to work in his own stock right now, which is trading at around or even at a discount to book value, so I'm sure he thinks it's quite attractive. We'll see him, definitely, purchase back some of his own stock. But I would love to see him take a position in Costco here, even though it's not one of the stocks that's pulled back that far, maybe it's down 13% to 15% from its high, but it's certainly a better valuation than it was.
Now, for him to acquire that entire company at $125 billion market cap, that might be a stretch. He would put almost every dollar of his available cash to work, so I'm not sure if that'll happen.
We know that he's been a fan of the airlines as of late. Southwest, probably the best-run airline, both from an operational perspective as well as cultural one, would be a great fit. I don't personally love the airlines, but he does. At $19 billion Southwest, $19 billion Delta, if I'm not mistaken, those are perfectly reasonable acquisition targets. I wouldn't expect him to do both. I think Southwest would probably be the bigger bet.
So can't wait to hear from him though, as you said at the top of the show, he has not been outspoken; in times of crisis, he usually is a common voice, so if he's out there, I would love to hear from him.
Hill: Let's move on to retail for a second, because Nike reported this week, they came out with their third quarter report, Jason, and the stock rose about 30% this week, in part because sales for Nike were higher than Wall Street was expecting, but it also seemed like -- look, we're all looking for not just signs of positivity, but we're looking for signs of assuredness, that there is a path forward through this unprecedented time. And I don't want to read too much into Nike's third-quarter report, but it looked like the kind of report that gave retailers maybe not an outright blueprint for how to get through this, but certainly some clues to the path.
Moser: Well, yeah. I mean, definitely some retailers, more than others. I mean, you could see brand names like Lululemon or an Under Armour, an Adidas or something like that, looking at what Nike did and saying, "Hey, man, this is ... " like you said " ... a blueprint." As far as the results, this is a quarter that ended Feb. 29, so let's remember March is not reflected in these results, but sales were up 7% on a currency-neutral basis. Digital sales grew 36% from a year ago.
And certainly, the story for the quarter for them was more about the headwinds that they've been experiencing in China along with the headwinds that they will be experiencing and are starting to experience now here domestically and in Europe. But there are silver linings there. They're showing that even if their physical presence is hindered or stifled and they had to close all their stores in China while this was going on; I mean, they really doubled down on the digital presence there. With all of their activity apps, they saw their digital business in China grow more than 30% for the quarter.
And they're talking about things like digital-only releases now or they might have a new shoe line or something where they would be utilizing their physical infrastructure of stores for that release. Well, that option was off the table; rather than postponing, they just moved it to the digital environment, which they've already made so many investments into up to this point.
So it just goes to show that there are certain businesses that have been more set up to deal with times like this than others. Nike is certainly one of them. Going back to companies pulling back on guidance or not offering guidance; I mean, they too did not offer any guidance as far as this upcoming quarter and how this next year is going to shake out for them. But with that said, I think overall, the earnings release, the call, absolutely a net win for the company, and definitely a blueprint with some ideas on how other retailers could navigate this crisis.
Gross: Yes. Speaking to the blueprint, they discussed, kind of, four phases of how they see this playing out. And they're not necessarily brain surgery, but maybe they do provide a nice framework for how, as investors, we can think about how retailers are going to get through this.
The first phase being containment, which is a partial shutdown of a country; stores closing. Second phase, recovery, brick-and-mortar stores slowly begin to reopen. Third phase, return to normalcy. And finally, fourth, return to growth. Nike, specifically, thinks they're going to return to growth early next year. As Jason said, those that have the ability to either bolster their digital offerings or move more to digital are going to be the ones that recover more quickly. Nike had started this quite some time ago, so kudos to them for thinking ahead. Others might be a little bit behind the 8-ball.
Hill: You know, for all of the pressures that CEOs are under, and we look to the CEOs running the companies we own shares of to be good at, maybe not everything, but we want them to be good at capital allocation. And this seems like one of those times where that gets a little trickier, because if you haven't made the investments in digital sales that Nike has already made, and you're a different retailer, you're looking at a situation where you've probably got to shore up some cash just to get through this crisis. And so making those investment decisions, seems like it's tougher right now.
Moser: I absolutely think so, because I mean now you've got more moving parts, dividend policy, share repurchase policies. There're some companies that can deal with this without any problem. Nike can just keep on going status quo as far as dividends and share repurchase, and Starbucks the same. Is that something you should begrudge them? Well, we can debate that, but I think all of us would want to make sure that they're taking care of their partners and their employees first and foremost, but yeah, there's no question. We even saw recently, Home Depot and Mastercard reached out to the debt markets to raise a lot of capital at very attractive interest rates now. Do Home Depot and Mastercard need that money? No, they don't, but I tell you what, when all of the dust settles, they come out of this thing even stronger than before. And that goes back to what we've been talking about for investors building up a watch list, looking for ideas, and keeping a sharp focus on the market leaders in their respective spaces, because they typically emerge from these types of stretches much stronger.
Gross: On the other hand, keep a sharp focus on those that could actually get into deeper trouble here, those companies that have a lot of debt, where at the same time, their cash flows are decreasing, and that, as you said, Chris, in order to compete, perhaps their capital expenditures are increasing. Those three things combined are a disaster waiting to happen and could result in bankruptcies for some companies across industries.
Hill: From Steven Kraft, who writes, "Thank you so much for the consistency the Motley Fool podcasts have provided during these times. It brings some normalcy to my day, when most other aspects of my life had been disrupted. My question is this, are cruise lines a value trap right now? They're excluded from the bailout. Many people are losing jobs and will be traveling and vacationing less. Their customers are generally older. And they could face even more strict pollution regulation in the coming years. It seems like there are too many headwinds for the industry to be a viable investment currently. Thanks for your insight."
Ron Gross, let me go to you first. I mean, Steven certainly laid out a lot of headwinds there, and I agree with every single one of them.
Gross: Yes, I think that his insights were very insightful, and I think he kind of nailed it. You know, the cruise lines had the demographics going their way in the sense that an aging population very much likes to cruise. Now, obviously, the elderly population are the most at risk, and I think cruises have lost some of their customers permanently. There is no bailout and stimulus package for this industry. It's a very capital-intensive business. They're basically shut down right now, dividends are likely to be cut. Dome companies have high debt loads. I think dividends will be cut. And then, the way I think about it, in terms of deciding if it's a good investment or not is, can I figure out when these ships will sail once again? And if so, what will the occupancy rates be like? And I actually can't answer either of those questions. So I don't see how it's possible to invest in this yet.
Those that are more industry experts than I could maybe make some predictions there, and if they're right, make some good money here. I think the risk is way too high.
Moser: Yeah, I tend to agree, I mean, maybe it's a timing thing. I'm not really very interested in investing in cruise liners on a good day. I have a hard time believing that the industry itself just disappears. I don't think that's going to happen from this. I do think that as time goes on, people are going to want to get back out, I think there will continue to be a market, I think that we will see some of the stronger companies in the space bounce back, at least, to somewhat normal levels. And so then it becomes a timing thing. Maybe in the short run, it is a value trap. I mean, I can definitely see investors winning from this, as long as you feel like that industry is going to remain relevant for some time to come.
Hill: You know, it's interesting, because Steven is asking about the cruise lines, but, Ron, we're getting this question from listeners and from our members, as we increasingly do live video Q&A with our members. We're getting this question about oil stocks, we're getting this about Ford Motor, you know, established companies, well known, there is a business there, the stock is knocked down. And it's natural to ask, well, is this a value play now?
Gross: Yeah. Well, the first thing is to make sure, if you're considering a company that may be a value play or a value trap, that you focus on the balance sheet, because when times are tough like this, you need to make sure a company can last long enough to turn their business around. Value traps typically occur when a company is going through some type of problem and you think it is short term. When you get into trouble is when it turns out it's longer-term and the company can't break out of it and eventually continues to spiral down and in many cases goes out of business.
Now, for the most part, none of this is the fault of particular businesses. This is an exogenous attack to our economy that is affecting lots of different industries, but nonetheless, regardless of whose fault it is, there are industries and companies that are going to be affected more than others. Make sure you look at that balance sheet. If you think this is going to turn, make sure that they have the wherewithal to last out however long it takes.
Hill: If you're listening on the radio, thanks for tuning in to your local station; if you're listening to us on a podcast, just want to give you a heads up that we are redesigning the icons for our podcast. So sometime starting next week you're going to see a new look from The Motley Fool podcast, so. And the good news is that I wasn't the one who designed them. We actually put professionals on this, Jason.
Let's get to the stocks on our radar. Our man behind the glass, Steve Broido -- we call him "the man behind the glass," and now it's more important than ever, because of social distancing. But actually, Ron Gross, you're up first. What do you got this week, what are you looking at?
Gross: So many wonderful companies trading down 20% or 30%, it was not hard to really pick one, quite frankly, but I'm going to go with Disney (NYSE:DIS), DIS, off 36% from its high. As everyone knows, a tremendous grouping of assets, whether it's the parks, the Pixar, Marvel, ABC, ESPN, Fox acquisition in 2019, Disney+ launched late 2019 as well. A tremendous entertainment behemoth.
New CEO, Bob Chapek, formerly head of parks, which is probably someone good to have at the helm right now, being that Parks are going to be the main drag for quite some time, being that they're almost 40% of revenue, and they're not going to be generating any cash flow in the near term.
Bob Iger is still around, still as executive chairman focusing on creative issues. I'm sure he's actually intimately involved in day-to-day operations too during this difficult time. They've raised their dividend for 10 consecutive years. The risk here is the debt. There is a lot of debt, $52 billion of it. They're actually looking to raise a little bit more, but I think they should be able to weather the storm, pay debt, the interest that's about $1.5 billion annually; they should be fine.
Steve Broido: Well, none of us can predict why a stock did what it did. What is the biggest driver you think that brought that stock down 30%? Is it the parks?
Gross: Yeah, it's got to be the general sell-off in the market in general and the fact that parks, which are 35% operating income, I believe, just are not going to be generating any income for the time being.
Hill: Jason Moser, what are you looking at?
Moser: Yeah, I don't even know if we've ever talked about this one on Motley Fool Money ever before, but Sony (NYSE:SNE), ticker SNE, is one that I've been digging into a little bit more, primarily for our Augmented Reality service. But a very diversified business, both geographically and from a business segment perspective. About 35% of operating profit comes from its gaming division, with the PlayStation platform and whatnot, but they're making all sorts of investments in immersive technology now, from AR visors to VR gaming experiences. And they're helping customers build out solutions for industrial AR uses today. A strong presence in music, imaging, consumer electronics, and even, believe it or not, financial services. Outperformed the market really handily over the last five years. I wonder if this thing doesn't have better days ahead.
Broido: What's your favorite Sony product?
Moser: Oh, well, I mean, I guess I gotta go with PlayStation, right? I'm not the biggest gamer in the world, but I used to have one, and I really did love playing that PlayStation.
Hill: What do you want to add to your watch list, Steve?
Broido: I think I may go with Sony.
Hill: All right. Ron Gross, Jason Moser, thanks for being here.
Moser: Thank you.
Gross: Thanks, Chris.
Hill: That's going to do it for this week's show. I'm Chris Hill. Thanks for listening. We'll see you next week.