In this episode of Motley Fool Money, Chris Hill chats with Motley Fool analysts Jason Moser and Ron Gross about the latest news from Wall Street, the few states that are reopening their economies, and weird market behavior. They also go through a couple of earning reports from the entertainment, telecom, restaurants, social media, and beverages industries. Finally, they share two stocks to put on your watch list and much more.
Also, Tim Beyers chats with Michael Shearn, founder of the Time Value of Money Fund, about leadership and what he looks for in a business and his investing approach.
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 April 24, 2020.
Chris Hill: We've got the latest headlines from Wall Street. Fund manager, Michael Shearn is our guest. And as always, we've got some stocks on our radar, but we begin, once again, with the big macro. Another 4.5 million Americans filed for unemployment this week. That brings the total over the last five weeks to 26 million unemployed. And yet, Ron, when you look at the market rebounding off the lows in late-March, and it feels weird to say this, but technically, we are in a new bull market.
Ron Gross: Yeah, really weird, only down 13% for the year at this point, only down 17% from an all-time high. And I will remind everyone that the market was up 30% in 2019. So, is there a disconnect, is the market looking forward? Do we see a light at the end of the tunnel with some states starting to think about opening up -- which, actually, gets me a little bit nervous because I think that's premature, but I am not a scientist so we'll wait and see how this plays out. What I did like to see is that Congress passed the $484 billion second stage of the small business bailout package, which I think is essential as a bridge to get us to the point of where one day we do actually somewhat open up our economy, whether it's staggered or in stages or state by state, that was essential. I hope the market is like that.
I don't know if that's going to be it, we still may have to go back to the well a little bit for more stimulus, which is fascinating to say, because we're approaching about $3 trillion in total stimulus right now, which one day we're going to have to pay the piper, but for now, we need to do this until our economy gets back up and running.
Hill: Jason?
Jason Moser: Yeah, I mean, you're right, at some point it feels like we'll have to pay the piper, but also we've been saying that [laughs] since the last great financial crisis from 2007, '08 and '09, you know, maybe part of it is due to the fact that we've got our politicians in DC who are basically going to pull out every tool in the toolbox here to try to help us handle this. And maybe it's because we're all, kind of, in the same boat, right? I mean, we're all facing the same challenge together, so it's not really isolated to one particular market or one particular section of business and so maybe that's where some of the optimism comes from. But you do feel like, at some point, we are going to have to clean up the mess that we've created from all of this liquidity.
That being said, I fully agree, this is the response. I mean, this is when we need our government most to be able to step in here and utilize every tool in the toolbox to help make it through this time. And, yeah, I mean, there is certainty in the sense that at some point or another we will get past this, right? We will have treatments, we will have vaccines. It's going to take time, it's going to be awhile till we get there, but perhaps that there is a finish line somewhere in the near future is leading the market to think, you know what? Hey, this is going to be a bit of a lost year for everyone to a certain degree and if we can look past that -- these businesses were fundamentally in great shape before this started, it's not like these were impaired businesses, this is just one of those black swan type of events, I mean, just like a hurricane hit the entire world all at once and so, we're all going to have to try to recover together.
Gross: And as we've said that it's not going to be a flip of a switch, everything is not going to go back online all at once quickly. And even when things do ultimately get back online, I just don't think there's going to be as many retailers out there, I don't think there's going to be as many restaurants out there, which doesn't bode well for employment, I don't think. I don't think we get back down to the lows of what we saw before this started. And, unless those workers find work elsewhere, maybe the restaurants that survive or the retailers that survive end up opening up more locations or have more online robust businesses and hire people. But I think for a while here, unemployment is going to be a little bit messy.
Moser: To that point, there are going to be businesses that actually flourish in this time. I mean, they're going to be businesses clearly that don't make it, but as we move more and more toward this digital economy, there are going to be companies that not only are keeping their heads above water, but they're actually flourishing in this time. So, we do have to keep that in mind, there are going to be a lot of businesses that go into this and they come out on the other side a lot stronger.
Hill: Alright, let's get to some of the earnings from the week, and we'll start with Netflix (NFLX +14.03%). Netflix added 16 million global subscribers in the first quarter. Jason, the stock is basically flat over the past week, but that might be because it's already close to an all-time high.
Moser: [laughs] Yeah, well, I mean, yeah, this is a business that just continues to perform very well. This was, I think, a bit of a tale of two earnings reports, in that, as you mentioned, user growth was tremendous. I mean, that was more than double, I think, what they internally forecast. Now, with that said, financials were a little bit less impressive. And I think most of that is due to the fact that this is really a global business now, there are some currency effects to consider, but you know, we view those currency effects through the long-term lens here at The Fool as a net neutral, right? We're not going to hold it against them that they're a successful global business, I mean, we're actually very happy to see that. But with that said, they definitely pulled some of that future growth forward. So, it does paint a picture, I think, of a company that's likely going to see more modest user growth in the coming quarters.
And maybe that cash flow number that looked pretty good this quarter, or at least better than normal, most of that was because the spending on content has more or less been halted, and so they're going to get back to spending that money, which means those cash flow numbers aren't going to look as good in the coming quarters and years, it's going to take a while for them to get to that sustainable free cash flow status that they're looking for.
But I do think you got a business here that's set up for a lot of success. They are global, they have more subscribers outside of the United States than inside. I thought it was really interesting on the call, management was really clear, this is not the time to be talking about price increases, so that's not something I expect to hear coming out from them for the rest of the year. And that's something to at least keep in mind, because they do still have close to $20 billion in streaming obligations. But as long as they can keep the focus more on that subscriber growth and less on the obligations in content, I think the market will continue to receive this stock fairly well, it's still a growth story and I think it's a main staple at this point for the consumers' household. I mean, this is really one of the primary entertainment services that consumers are relying on, and I don't see that changing.
Hill: Verizon (VZ +2.56%) lost nearly 70,000 phone subscribers in the first quarter and the company withdrew guidance for the full year. Although, Ron, Verizon has a lot of companies when it comes to withdrawing guidance for the full year.
Gross: Yeah, this actually wasn't too bad. And they've held up pretty well, stock is only down about 7% or 8% from its all-time high. So, that's pretty impressive. It's too hard to look out, so they withdrew their revenue guidance and they reduced their earnings guidance, and now see between a 2% reduction to potentially 2% growth, so relatively anemic no matter where they end up in that range. But not that surprising when they have 70% of their stores closed. The equipment sales were significantly impacted as a result. And you see the Consumer business revenue down 1.7%. Business and Wireless revenue held up a little bit better, down fractionally at only 0.5% for both of those segments. And you actually saw adjusted earnings actually increase at about 5%.
So, overall, this could be way worse and they're holding up pretty well. They said their 5G rollout will continue, their CapEx program will continue. They're actually on-track to achieve their $10 billion in cost savings by the end of 2021. They've racked up about $6 billion in savings so far. And, hey, 4.3% yield for Verizon, that's a nice yield.
Hill: It absolutely is. They're a huge company, they got a lot of cash. I am wondering, though, I mean, this is a business that has made a number of acquisitions over the past decade, some of them questionable, and I'm wondering if you think, they're going to be, sort of, scaling back on acquisitions at least over the next couple of years?
Gross: Well, their pure CapEx program they're saying is intact for now, but they should be, I think, and probably will be more conservative on the acquisition front. This 5G thing [laughs] whatever you want to call it, is going to really be interesting to watch, because is it more hype than reality? And a lot of money is going into it, a lot of people are relying on it changing things in the world of connectivity. So, it'll be a really interesting part of their business to watch.
Hill: Shares of Chipotle (CMG 2.29%) up this week, thanks to digital sales in the first quarter rising more than 80%. Jason, the investments that Chipotle has been making in mobile ordering and the second kitchen concept, they really showed up in this report.
Moser: Well, I mean, I would like to say that my family and I, we've certainly contributed to that digital sales growth this quarter. I think that Chipotle is one of the handful of restaurant businesses that is actually set up to thrive as the consumer adapts to this new COVID-19 paradigm, and I think that's due to its casual nature and those early investments in technology, like you noted there. I mean, as a consumer it's a breeze to order on the app, drop by there and pick it up or, they've partnered with Uber Eats, you can have it delivered.
And when you look at the numbers. Their digital sales up 81%, that accounted for 26.3% of sales for the quarter, but interestingly, in the month of March alone, digital sales grew 102.6% and represented 37.6% of sales. So, clearly, the investments in technology have paid off. And I think that is only going to continue to be the case now. They've got 11.5 million loyalty members, and I think being a part of that loyalty program is important because you do actually get bonuses and free food from doing that. And it's well-integrated into the app there.
When you look at their footprint, around 2,600 stores, only about 100 restaurants are actually temporarily closed and most of those are in malls. And then management laid out very clearly in the call that they have more than enough liquidity to be able to handle what's going on right now for the foreseeable future. I mean, you're looking at a business between 12 and 18 months out, there are zero liquidity concerns. And even if they get past that 18 months, they have more levers they can pull. And so, they're not going to be buying back any shares. They're going to continue to invest in that digital presence. And I think they've done a really good job, since that health scare of a few years ago, they've done a good job of not only bringing in former loyal Chipotle customers, but also bringing in new Chipotle customers that had never tried it before. And remember, that was something we were really focused on during the time of those bad headlines, right?
New customers who might consider going to Chipotle probably would have put it off because of that health scare. Well, they're doing a good job of bringing those consumers in now, and they've been able to grow that customer base. So, I suspect we'll continue to see the market receiving this stock as it is today.
Gross: Jason, that's all well and good, but do you have firsthand knowledge of whether they got the queso blanco right or not?
Moser: I do not yet. I was really close to ordering the queso blanco, but you know what, Ron? Every time I prepare to do that, that guacamole is just staring me in the face and I can't turn it down.
Hill: DraftKings made its public market debut on Friday. The sports betting company went public through a reverse merger with another public company called Diamond Eagle Acquisition. Ron Gross, what is this?
Gross: Alright. Follow me here. Last May, Diamond Eagle went public as a Special Purpose Acquisition Company typically known as a SPAC. And they raised $400 million with no business. The idea was that they were going to go out and acquire a business or merge with a business, and lo-and-behold, here we have it. DraftKings merges with that public shell, that public SPAC, and becomes, as a result, a public company in its own right. Diamond does have $400 million, DraftKings had another about $100 million. So, now you have a company with $500 million of cash.
A company called SBTech is also part of this; they are a backend technology provider. You also have investments from Capital Research, Wellington, Franklin Templeton wanting to get in on the sports betting trend. Company has greater than $3 billion value now, I believe. Stock is actually up on its first day of trading. And there you have it, a brand-new public company.
Hill: But there's no sports, Ron. How is there sports betting? Why would I invest in a business of sports betting when there's no sports?
Gross: As you might imagine, the CEO has addressed this as a temporary problem, and one day we will be back and hopefully sports will be here in full and business will resume. And right now, quite frankly, this was the only way to get a company public right now, you're not doing a regular IPO, so backing into a shell or a SPAC is a pretty good idea actually.
Hill: Shares of Snap (SNAP 1.05%) up more than 20% this week after a first quarter report that showed a lot of growth, Jason. Daily active users, revenue per user, I mean, Snap delivered.
Moser: Yeah, given the state of things, I thought this was really an encouraging quarter for them. You remember last quarter, it seemed like a pretty encouraging quarter as well, and yet the market did not receive it very well, right? The stock tanked from around $19 per share at the time. So, they still have a lot of ground to make up there, but to your point about user growth, I think that was really encouraging. And it makes sense at this point in time, I think, we're going to see this out of these social network platforms, a strong user engagement, which is a good thing. But unfortunately, they are not immune to the falloff in spend. March was a tough month for them. And to put that into context, in January and February, that growth was 58%. In March, it fell to 25%. So, it's still growing, no question there.
And I think, interestingly, because it's not as big of a network, it doesn't have that same exposure to a lot of the small businesses that are going to be found on Facebook or Instagram. And so, those small businesses are, obviously, being impacted a little bit more so than others at this point in time. So, they have a little bit of an immunity there to that.
But the two questions I really have for this business longer-term is, are users going to age out of this platform? Because it does seem to skew to a very young demographic. And then also, will the next generation of prospective users be using Snapchat or will they be using another platform, something like a TikTok or something that hasn't even really been developed yet? And so, I think what we need to see for Snap to become a compelling investment idea is to become something more than just Snapchat. I have to believe that management is at least thinking about that.
And then finally, stock-based compensation is still just absurdly high, I mean, it's 38% of trailing revenue, they've got to get that taken care of. You remember, we held Twitter's feet to the fire on that for a while. And I think the market will continue to keep a good focus on that as well, until that number starts coming down.
Hill: Coca-Cola's (KO +1.27%) first quarter profits and revenue came in higher than expected, but shares down this week, Ron, because if you didn't realize just how important the away-from-home channel is for Coca-Cola, you do now.
Gross: Yeah. You know, the quarter was fine under the circumstances. Net revenue is down only about 1%. Strength in North America and Latin America. Weakness basically everywhere else. But operating margins were up; good cost controls there. And adjusted earnings were actually up 8%. So, the quarter was fine, but now looking forward to Q2 and beyond, and we've got a problem. The management came out and said there's been a 25% volume decline since the beginning of April, that's a big number. They say impact to Q2 will be material; that could be an understatement of the quarter, that seems like it's going to get pretty hairy there. They suspended guidance for 2020, no way they can see forward to any real extent. And so, we'll have to keep an eye on this.
You know, this will probably be a 2020, perhaps first-half of 2021 issue, it's not going to permanently impair this business. Stocks down 25% from its all-time high. So, the market is telling you that things are not good and that it hasn't rebound perhaps as much as some other companies. 3.6% yield though, so if you believe in the future of Coke, not a bad yield to scoop up.
Hill: Shares of Domino's Pizza (DPZ +0.77%) basically flat this week, despite a first quarter report where everything was up including same-store sales, Jason. That is not easy to do in this environment.
Moser: [laughs] No, not at all, but I've got two words for you guys. "Pizza pedestal." Have you heard of this pizza pedestal? Don't tell me that Domino's doesn't innovate, OK? This is an innovation they came up with for contactless delivery. I mean, the guy or a girl who's delivering you your pizza will actually set your pizza down on a pizza pedestal so they don't put it on the ground or your porch or something may not necessarily have been cleaned and it's environmentally sustainable, it's just a piece of cardboard, but the pizza pedestal, keep an eye on that.
We talk about businesses that should hold their own in a time like this, I think Domino's is another one of them. And to your point there, U.S. same-store sales and international same-store sales, both, grew in that 1.5% range. It marked the 105th consecutive quarter of international same-store sales growth, 36th consecutive quarter of U.S. same-store sales growth. And in the U.S. business, comps were up 7.1% during the first four weeks of quarter two.
And so, they did pull back on guidance, they yanked the guidance, as most companies are doing, but they still have lofty goals of $25 billion in retail sales by 2025. And I think they can get there as long as they keep doing what they're doing.
Hill: Earlier this week, Motley Fool analyst, Tim Beyers, talked with Michael Shearn, Founder of the Time Value of Money fund, a private investment firm based in Austin, Texas. They discussed what to look for in leadership, the most underrated quality of outstanding businesses. And Shearn kicked things off by talking about how he approaches investing.
Michael Shearn: We invest in, and what we now call, we stole the term from David Gardner, so it came from The Fool, "Mount Rushmore leaders," which are kind of these best-of-the-best leaders, these founder-types that stay at businesses forever, they're not serial entrepreneurs, they're not intending to move to another company. If it's a great business model without the leader, we pass and we just kind of wait for the market to give us the opportunity to buy into a business that we think we can earn a good return. So, super-concentrated. We generally have had a lot of cash in our fund for a while because of a lack of opportunities. And so, yeah, hopefully, that gives you a little bit of a background.
Tim Beyers: You have -- I am liberally calling this "a resiliency framework." This is not what you called it in your letter. But you cited three things, three things that you're looking for in investing: solve important customer problems, which makes them a must-have business; they help customers cut costs, which is essential in a recession; and they're poised to grow through the recession and come out stronger because they have strong balance sheets, which allow them to be opportunistic. That was your, I'm sort of defining that as your definition of resilient in the era we're in right now. That does not sound like a lot of businesses, Michael, I think that's a small minority of businesses. [laughs] In your research right now, are you finding more of those businesses?
Shearn: Yeah, like you said, there's not many, there's a reason we only have maybe five holdings [laughs] right now. So, if you think about it, like, one of our holdings is Brookfield Asset Management. You know, not only they've been preparing for this type of scenario for many years now, even buying Oaktree early 2019. So, they're set up to actually succeed in a recessionary type environment. Some of their existing assets are going to get hit, but not as much as people think. And so, you know, that's a good example of one.
You've got companies like Shopify, which are growing, will grow, more people will go online through this recession and, you know, they'll be forced in that direction. Arista Networks, of course. As we're on the Zoom call, we're taking up lots of data and they're definitely going to be with positive industry tailwinds behind them. And so, you know, there's not many, but there are some and that we'll be able to grow through this actually or come out stronger at least.
Beyers: Well, and I was going to ask you, what you thought the most underrated quality is of an outstanding business?
Shearn: Yeah, the biggest wakeup call for me has been that remarkable things, remarkable companies come from unremarkable places. When I meet with a lot of these Rushmore CEOs of private companies and public companies, a lot of times I ask them, "How do you do it?" and it's just, "Well, we just hired good people and treat our customers right." And that's kind of like, "Oh, OK, but what more do you have to say about that?" And it's like, "That's about it." And that's pretty hard to pull-off. You know, ask a great chef, "I consistently cook good meals," "OK, but, yeah, what else do you do?" And it's like, "that's it." It's kind of hard to be consistent but, you know.
And so, what happens is that the stories get rewritten about successes of companies. And so, for example, you'll get a Harvard Business Review case and they'll point to the success of a company, such as Google [Alphabet] that it was their strategic vision. Well, quite frankly, at the time the CEO did not have a strategic vision, it had nothing to do with the success. What happened is that they were focused very much on an algorithm that, you know, brought the best search results to the top, everybody else was not doing that, and that's pretty much it.
But everybody wants a story, everybody wants the shiny new thing. You know, people are drawn to charismatic leaders, they believe that there's this grand vision that companies have, but they actually stumble into things. But what happens is, the story gets rewritten even by the same CEOs.
I was listening to the Founder of a Trader Joe's talk about when he had two stores, that he saw this demographic change in the United States because people were traveling a lot. And I was listening to that going, if you open two stores, you're not thinking about the broader global implications of Pan Am opening up new markets, and so [laughs] what happens is the stories make it more remarkable later.
So, I look for the unremarkable. There's companies like Brookfield are quite boring, you know, they own boring assets. You attend or you can watch it online, their annual meeting day and they're just saying, you know, we've compounded at 15% and we just wait to buy assets at the right price and we hire people that can manage those assets. I mean, there's really nothing exciting about that. And so, what happens is everybody is drawn to the shiny new strategy, whether it was Jack Welch in the 80s, you know, the topgrading and get rid of your lower level employees and only focus on your No. 1 or No. 2 product. So, they focus on these things that really don't create the value. What creates value is just being consistent, serving your customers well, making sure your employees can serve your customers well, you know, making sure you don't create a bureaucracy for them, making sure you train them correctly.
But it's not very exciting, and so what happens is I'm now looking for very unexciting stories. Andy Bechtolsheim, a big holding of mine is Arista Networks, is very un-exciting. You know, he's got three lectures online. I think the most views he has is 20,000 people, and he's actually one of the best start-up investors out there. This is going to Andreessen Horowitz, he's got a way better record than they do, and yet, nobody is following Andy Bechtolsheim because he's saying things like, you know, "I wait for the right time to invest in technology." "Oh, well, it can't be that simple," and it's like, "Yeah, it kind of is," you know, certain things.
And so, I think people kind of gravitate, they like the story, they like the flash, they like the Peloton company, that, wow! They're growing like crazy, but it's like, why are you spending so much in sales and marketing if you have such a great product? Like, I know a lot of Peloton customers, they're happy, you know, why isn't word-of-mouth helping your company grow? I don't understand, you know, why you have to constantly sell it? And so, I'm cautious with those companies.
So, I would just go back to remarkable things come from unremarkable places. I mean, even Apple, everybody thinks Apple innovated the iPhone, it's not true, it is a company called General Magic; there's a documentary about it. It was a public company and it was decades before. But it was the iPhone, I mean, this is not like a conspiracy, you can watch the documentary, but the timing for the technology was wrong. And then Tony Fadell that worked at General Magic, the one who came up with the iPod, went to go work at Apple and said, "Hey, let's turn this into a phone, like we tried to do at General Magic."
So, I think people kind of start putting these, like, that Apple is this innovation machine that invented it, but really the innovation came from someone prior. And so, I think I'm very careful to stay away from those stories.
Beyers: Is there something that you're looking for from leaders? And maybe this is even a screener, like, as you're going out and looking for new companies, does this crisis, you know, reveal something that you want to see? And then you'll say, you know what, I want to add that leader, that company to our portfolio. What are you looking for in this crisis?
Shearn: Well, I think we've already identified a lot of good leaders, but we are watching how they act. So, a lot of quarterly conference calls having come out, so we'll be listening to those very carefully. And we want to see if the leader is very transparent about the current situation or if they are instead saying the first two months -- you know, they keep focusing on the past, like, 2019 was good. [laughs] So, the quarters aren't going to be awful, right? Because January and February weren't awful, March is. So, any leader that we see that starts saying that, you know, referring to the past, the good news, is someone that we're not going to be interested in.
We prefer somebody to say, yeah, it's bad or, you know, Eric Yuan -- did I get his name right -- from Zoom, they screwed up, and most companies -- he apologized -- most companies would have said something like, you know, this was a snafu or they would have PR'd it, but he just came out and said, yeah, we screwed up. I mean, there's nothing more to say than that, we're going to fix it.
And so, I'm going to be looking at what they emphasize in their communications and whether they're talking about the customer, on helping their own customers, you know, what are they doing to respond to this, how are they treating employees? If they fire employees, talk about, why did you fire them? You know, don't just say, well, we needed to save cost, talk about how they made that decision. I don't think a lot of our companies will be in that position, but others that maybe we're looking at, will.
So, I want them to be giving me the full picture, being transparent, right now is not the time to [...] you know, tell me the truth, what's going on, how are you reacting to it, how much did you lose, how much are you losing right now? But again, I think the tell, like the poker tell, will be if they, kind of, try to gloss over by saying, hey, you know the quarter was good, you know? It's like, yeah, but [laughs] it's not going to be good for the next three months.
Beyers: But I wonder if you think that there are businesses right now coming out of this pandemic, and maybe industries or businesses, either one, do you think are structurally impaired and are just going to be eliminated from your list of potential candidates at least for a while?
Shearn: I think it goes to balance sheet. So, the way I look at a balance sheet is that a balance sheet allows you to be opportunistic. So, one of my things right now, is buying companies that can survive and thrive. So, if you have a balance sheet with lots of debt, all you can do is focus on surviving. I mean, you can't thrive. [laughs] But if you have cash on your balance sheet, you're in a position where you can thrive. And so, I want the combination of survive and thrive, it's impossible to just be thriving in this environment. So, really, it comes down to balance sheet. The less debt you have, the more you have that ability to pay attention to customers, to help your employees. But if you're worried about your next interest payment, then you have a very narrow view of what you can do next.
I mean, you don't have many options. So, it's like, a lot of us are stuck at home right now, you know, some people got a month of food, right? So they don't have to go to the grocery store every week. And so, it's the same thing with a business, if you have lots of cash, you don't have to go out to the market to try to get financing and rely on the kindness of strangers. So, when you go do your grocery run, you may or may not find toilet paper that week. And so, the same thing with bankers. When you go run to the banker, you may or may not find financing. And so, I think for me, I'm looking very much at balance sheet. And so, we did buy Hyatt in March, but we ended up selling it because it went up in price quite a bit to our fair value.
But in that situation, we ask the question. If they have a 20% occupancy averaged out over the next two years, could they survive on their balance sheet? And can they just make it the next two years? That's all I need them to do, is make it for two years. And so, we've run that scenario as well with all of our companies. We took their 2019 total cost structure, their SG&A, their general, administrative, operating expenses, all the expenses, and we just asked a simple question -- how long can they survive based on the cash on their balance sheet? And most of the companies I'm invested in, except for Brookfield, don't have debt.
So, Shopify was two-and-a-half years. Oh! And then, we ran the scenario, if they lost half of their sales. Like, permanently lost half of their sales, how long can they last? Shopify -- two-and-a-half years. We ended up owning Slack, and also selling it, but they were a year. Appian is a year, but I think they're a little bit, you know, most of their expenses are not, they're very variable, they can cut them pretty quickly and they're more like an investment in that case then they are expenses. And so, they can survive a year just running it off the scenario, just without having knowledge about Appian. But the strongest company, for example, Arista. We had to decrease their sales 70%. So, we said, if they lost 70% of their sales permanently, permanently lost, just went away, poof! They can survive 10 years, using their existing cost structure from 2019, for 10 years.
And so, for me, it's like, I'd rather be on the thrive side, and in order to be there, I have to have a strong balance sheet. So, the companies that aren't going to make it are the ones that -- even if they have good intentions, it doesn't matter if you talked about culture and treating your employees right, when you don't have cash flow all that stuff goes out the door. And I'm seeing that with a lot of private business owners, they spend a lot of time coming up with values and mission and purpose and talking and training their employees, but none of that matters when you can't pay them. So, maybe they got too much debt, nobody foresaw this coming, but they don't have that option. So, they can't thrive. So, all that stuff they did in the past doesn't matter. So, I would avoid those companies in this time, at least for us, you know, I would avoid those.
Hill: Our email address is [email protected], question from Bill Davis who writes, "Individuals are often advised to establish and maintain at least six months of expenses as their emergency fund. Is there a similar guideline that companies should be trying to observe so they can meet emergencies like this one?"
It's a good question, Ron, because a lot of companies need cash.
Gross: Especially when things get tough, for sure. Companies are not dissimilar to individuals, it's recommended that companies have three to six months of operating expenses in cash, so if they need to, they can withstand a certain short-term storm. There's also a couple of ratios that companies and investors can look at. Current ratio is current assets to current liabilities, you want that to be greater than two. Quick ratio is liquid current assets divided by current liabilities, and you want that to be greater than one. And those are indications that companies can meet their short-term liabilities.
Hill: Boy! Nothing like a lot of ratios to some audio gold. Alright, let's get to the stocks on our radar, and our man, Dan Boyd, is going to hit you with a question. Jason, you're up first, what are you looking at this week?
Moser: Yeah, keeping an eye on Masimo (MASI +0.10%) , ticker is MASI. This is a medical device company focused on noninvasive monitoring technologies and hospital automation solutions. So, pulse oximetry, which is one of their fortes, measuring the oxygen levels in the blood, that's an example of what they do. The stock has had a tremendous year-to-date up 30%. And ultimately, I think that's because the hospitals need their equipment to do their job. They have a great razor-and-blade model, where they get these machines into the hospitals and then they have the consumables that they keep on selling. And so, I'm going to be very interested to hear their earnings come out next week on the 28th. I am going to be very interested to hear their take on hospitals demand during this crisis. Particularly, as we see the pressure relieved a little bit as COVID admissions start to fall down. Seeing some investments made in telemedicine and remote healthcare as well. They are calling for their first $1 billion revenue year this year in 2020, I want to see if they're still holding to that when they report earnings.
Hill: Dan, question about Masimo?
Dan Boyd: Yeah. So, when I was first told that we were going to be looking at Masimo, I thought we were looking at Mossimo, the Target-level fashion brand, of which I have a couple of pieces here at home. So, Jason, my question to you is, who you got for the future, these healthcare companies or mid-level retail fashion brands?
Moser: Well, you know, listen, I love me some mid-level fashion retail, Dan, but I'm going to healthcare all the way, Masimo is the stock I own and I might buy a little bit more.
Hill: Ron Gross, I shouldn't have made fun of you for the ratio thing you said, that was very helpful, so I appreciate you.
Gross: No, I'm as big a nerd as the next guy.
Hill: What are you looking at this week?
Gross: A stock I recently started to look at -- and it's basically because I've been watching a lot of TV, quite frankly, is Roku (ROKU +5.13%), ROKU, aggregator of streaming services. Active accounts recently up 37%, streaming hours up 49%. Now, the advertising side of this business is really important and that's what I need to understand more to determine if I want to make an investment here. They get a percentage of the advertising placed on their hosted channels, they get all of the advertising revenue on their own Roku Channel, but the CEO said, obviously, in this market there could be some marketing spend disruptions. So, I want to understand that a bit, off about 30% from its high, but it's been on fire since its 2017 IPO, where it went public at $14, now it stands at $124.
Hill: Dan, question about Roku?
Boyd: Ron, can I watch live sports, when they come back, of course, on a Roku without having to worry about blackout restrictions?
Gross: You would think I would know that, but I don't quite know that yet. I think there's always blackout restrictions in some areas and that's just the nature of the game, but that is one thing I will look into as I'm looking at the advertising, Dan.
Hill: What do you want to add to your watchlist, Dan?
Boyd: Well, I'm certainly not adding Roku, after Ron's complete lack of interest there, but as much as I like cheap t-shirts, I'm going with Masimo.
Moser: Well, that's back-to-back. Hey, now!
Hill: Alright. Jason Moser, Ron Gross, guys, thanks for being here.
Gross: Thanks, Chris.
Moser: Thank you.
Hill: That's going to do it for this week's edition of Motley Fool Money. I'm Chris Hill. Thanks for listening. We'll see you next week.
