In this episode of MarketFoolery, Chris Hill chats with Motley Fool analyst Jim Gillies about the latest headlines from Wall Street. They talk about some stock offerings and there is news on the work-from-home front. They talk about Boeing, answer listeners' questions, 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 May 21, 2020.
Chris Hill: It's Thursday, May 21st. Welcome to MarketFoolery. I'm Chris Hill, joining me from the great white North, the one and only, Jim Gillies.
Jim Gillies: Good to be seen, Chris. Yeah, it's kind of nice, it's less white, more sunny today. So, that's a pleasant change. We had snow last weekend.
Hill: Did you really?
Gillies: We really did. Yeah. My kids learned a few words from their stepmom that I don't -- well, let's face it, they probably knew it beforehand, but she got up first and -- yeah, so there was that. [laughs] She's like, this is nonsense.
Hill: Well, you know what, I'm glad the sun is melting the snow. We've got some stock offerings we're going to talk about, we've got more news on the working-from-home front, we're going to dip into the Fool mailbag. One programming note, for the dozens of listeners out there, a reminder that Monday is Memorial Day, so there will not be an episode of MarketFoolery next Monday. We'll be back on Tuesday. So, hope everyone, to the extent that you can enjoy a day off in this pandemic, hope everyone gets a little time off on Memorial Day.
Let's start with shares of Boeing, that are up 7% this morning. Boeing got an upgrade from one Wall Street firm, RBC Capital Markets, says that Boeing's defense business is undervalued, you agree?
Gillies: I don't think I agree. Actually, I have the RBC report here, that would be, of course, Royal Bank of Canada. So, I'm disagreeing with my countrymen on this particular front, but I understand the imperative. I think everybody is really looking for -- I mean everyone is looking for a way to play the rebound of airlines, of airspace, of travel. And I think that's, at its base, where the Boeing upgrade comes from. You know, we all want to call bottoms or as close to bottoms as possible.
And so, I've got this report, I had a glance through it, and I'm underwhelmed by it, and I'll tell you why. First of all, its price target, its outperform price target is $164 or about 15% above where we are. But they also, of course, provide, as these reports often do, they knock the home run out of the park forecast.
They also have a downside scenario. And the downside scenario is about 40% from here. So, in their main cause for upgrading, it's a 15% upside; and in case their things continue to go off the rails or slag out a little bit, it's down 40%. That kind of risk/reward, I'm not really thrilled about; the downside target is $87, which $140 today is not great.
Then the other issues that they present there, because, of course, Boeing today, they've suspended their dividend, they've taken out their stock buyback plan; both of which had to happen to preserve cash. They've borrowed at least $25 billion, some of it going out 30 and 40 years, I believe, at reasonable rates, but still it's a much more levered company.
And one of the key points from this report is that the forecast, they actually flat out say, our forecast is predicated on the 737 MAX recertification in the third quarter of 2020. Well, the third quarter starts in six weeks. And OK, you might get a recertification. I've been someone for a while who has said, you have a branding problem, Boeing, you have a branding problem with the 737 MAX, because the current brand equity, from the one marketing course I did in business school, it was always, your brand is associated with everything positive and everything negative that people mentally put together.
When you hear 737 MAX, I'm going to infer that most people think unsafe and plane crashes. So, OK fine, let's say you recertify it, are you stepping on a 737 MAX anytime soon, Chris? They need to rename this plane, do they not?
Hill: They absolutely need to rename this plane and they absolutely have some work to do on the reputation front. And it can be, you know, I've heard ideas, like, the CEO of Boeing should literally fly around the world on a 737 MAX and they should turn that into a marketing video. And that's not a terrible idea, but you're absolutely right.
Gillies: It's not a terrible idea. But I mean, look, we are living through a time of what I will say, I'll call it, elevated fear, I think that's fair. You know, we are being snapped at in grocery stores by people who are five foot eleven inches away, because they're not six-foot social distancing away.
We are seeing instances of people, I'm trying to be nice, shaming other people for their wearing of masks or lack thereof, for allowing their children to congregate in places or perhaps not. And this is over a virus that, while serious, is -- it's a serious virus and people have died and more people will die, but you know, we've shut down large swathes of the economy over it and there is a very large move, and that seems to have migrated to, we flattened the curve to save the healthcare system, so, you know, yaddi-yadda. But now that seems to be morphing a little bit into, well, you know, when the vaccine is out then the world can really recover.
And all of that is preamble, and probably poorly stated preamble, all of that is preamble to say, OK fine, let's say Boeing, again, has a 737 MAX recertified next quarter. People's inherent fear, I think, will prevent them from -- you know, if I want to go from Toronto to Washington, say, to come to our closed office, if I have a choice between 737 MAX and an Airbus equivalent or what have you, I'm probably going to go with the Airbus equivalent just because, you know I don't like the -- and recognizing that that's probably an irrational fear, but still, it is a fear that I think looms a bit large. So, I think just because they're recertified, this is not a guarantee of any kind of uptick from the customers from acceptance by people looking to fly. And so, I'm not really -- I think there's a lot more work to do.
Now, that said, Boeing, one-third of their business is the defense business, that's going nowhere. If anywhere, it's going up, because states awarding defense business, this will be a sign of, we are preserving jobs. And that's a good thing. And so, they have that really good bedrock of one-third of their business, and of course, they are more than just a 737 MAX. But I think there's a lot of work to do, I don't like the risk/reward trade-off, as I said. And you know what, this is a weak sauce in my book.
Hill: Several stocks, including Ruth's Hospitality Group and Keurig Dr Pepper are falling today after announcing secondary stock offerings. Is this the time for secondary stock offerings, [laughs] particularly for, I'm sorry, I'm not trying to be mean, but Ruth's Hospitality Group? I mean, this is a restaurant business, is this --
Gillies: Yeah, a high-end restaurant business too, right, so. Like, you are at the Steak House, so you are more inclined or at least I am more inclined, I don't want to impose my eating habits on other people, I'm more inclined to view a Steak House visit as more of an occasion, maybe a celebration, take my father there for his birthday or my mother there for Mother's Day, whereas I can go by any number of casual restaurant chains any day of the week if I don't feel like cooking.
So, no, the time to have raised money, of course, Chris, was November. But you know their crystal ball probably works as well as yours or mine, so. But this is a stock, I'll pick on Ruth's, but it's more the overall phenomenon of secondary offerings.
And, look, I think overall this is healthy for the state of the crisis, even though I think this is pretty damning for some of these companies. And so, what I mean by that is if you look back to the '08-'09 crisis, The Global Financial Crisis, the companies that survived, a lot of them, raised capital after they had already fallen by 50%, 60%, 70%. And Ruth's Hospitality Group, their case, they are down about two-thirds from their high, which was hit just before Christmas, so late-November, I think. So, it's already down by two-thirds, so boy! It would have been nice to have dilated people back then, you know, get the same amount of money for one-third the dilution.
I think in Ruth's case, they are paying off some short-term financing, probably because the provider of that short-term financing said, yeah, this is not going to turn into long-term financing, so we kind of got you over a barrel. I believe it's a one-year plus a day credit facility provided by Morgan Stanley that they need to clear. And they said, OK, we'll sell some shares, because that's permanent equity. So, that's not great for Ruth's, it's not great for any of them, but it's not great for Ruth's in particular.
But again, I look back to the '08-'09 time, and, kind of, the worst of it was maybe the span from September of '08, which is when Lehman went down, it got really bad in November, got really bad in January, and then, of course, the bottom is March. But in the January to March quarters, when you started to see these companies, the companies that survived, started shoring up balance sheets with equity offerings. That was a good thing, a lot of these companies survived. A lot of these companies that did so became multibaggers from there. This may or may not be any of the fate of the four you mentioned who have been selling equity today, but ...
So, for the survivors, sometimes you have to do this, it makes you stronger in the long-term. But, boy, I'll go back to Shopify, about two weeks ago did their latest follow-on equity offering. Shopify, one of the largest companies, certainly in Canada, gaining lots of our credibility in the States, and it's a company that Fools are generally excited about, they've been raising capital all the way up and it's kind of the old thoughts, the best time to raise capital is when you don't need it. Ruth's needs it, Shopify doesn't, and that's why those stocks have done what they've done in diverging.
Hill: Yeah. I mentioned Ruth's, and Keurig Dr Pepper, Flexion Therapeutics, Boston Scientific also dropping today on this. So, I suppose on a certain level there are any number of ways for companies to get cash and they got to make their choices on how to do it, but it's certainly not boding well for these stocks today.
Let's move on to MasterCard (NYSE: MA), which became the latest big company to say that employees can work from home basically until they want. MasterCard is also reevaluating its office footprint, thinking about consolidating space. This is one more large company that is coming out and saying publicly, it's going to be a rough few years for commercial real estate.
Gillies: Yeah, there is a lot to unpack in this simple little announcement, I think. You've already hit on, OK, so when the big titans start to say, we're going to consolidate, we're going to reassess all of our offices and all of our real estate spots. Yeah, if you're in the commercial real estate business, particularly if you own REITs for commercial real estate, this is a lot of uncertainty that you did not anticipate and probably don't [laughs] want to participate in.
And look, there is no way for us to really forecast this, I mean, not with any sort of precision. Because if MasterCard and others of their ilk start dropping out or scaling back their commercial, what does that necessarily mean for prices for commercial real estate and other areas? So, if I'm a company that is not going to change, for example, am I now going to my landlord and saying, well, you know what, you got a lot of empty space here and we didn't abandon you, boy! We think our rent is about 20% too high, don't you agree Mr. Commercial REIT? So, I'm wondering if that could be one of the knock-on effects here. And I always love, you know, what are knock-on effects of decisions? And so, that's one I would be a little worried about in the commercial real estate space or perhaps more than a little worried about.
The other thing that struck me from the story was that this wasn't a play from -- you know, the way that it was phrased was, for people who have fear of COVID-19, you can work from home until you no longer have that fear. So, whether that's -- and fear sometimes is rational, quite often is not. You know, I mentioned earlier, in a rational fear, perhaps of mine, you know, am I going to fly in a 737 MAX?
People who are scared of catching COVID-19, MasterCard says, stay home as long as you want. This I think is a bit of a shift, and again, it supports my earlier, we're kind of living through a time of fear, but it supports a bit of a shift that we're now letting emotion, rather than perhaps a more scientific approach, inform our policy.
And that is, at least in one company, that's interesting to me. I'm not sure it's a good development, even as someone -- you know, I appreciate working from home, I'm kind of in a weird spot where I've done it for +15 years, so I'm very used to it and wouldn't know what to do in an office, frankly. But you know, I look at it and think, there are absolutely ramifications for commercial real estate.
There are ramifications for worker productivity as well, because I've done this for 15 years, I think I'm pretty decently productive, and I've been told by external -- I have external validation for that, I'm pretty productive. But I can tell you that people who I know, who have been forced to work out of their homes, [laughs] and I live with one of them, do not like this set up. They don't have a proper office set up like I have, and there's lot of distractions with kids running around or other things going on, and you're distracted by, oh, I can do this thing in the backyard, or I can do, you know, this household task, which I would not normally do until maybe the weekend, but I'll do it now.
And so, I wonder how productive some people are going to be in this environment, and then I also wonder about the potential for abuse for some of these companies. So, "Oh, yep, I'm too scared to come in, COVID, I'm going to stay at home for the next year," and mix that with a lack of productivity, you know, there's always the -- all companies have what we call the free-rider problem, and I wonder if that will be exacerbated a little bit.
And like I said, there's a lot to unpack, I think, in just a very simple announcement from MasterCard.
Hill: Our email address is MarketFoolery@Fool.com. A question from Mike in Ohio.
"Do we need to be worried about the news of Chinese ADRs being delisted by Nasdaq? Luckin' Coffee (yes, I still own it for some reason) recently was, and now I'm reading, Baidu might be delisted as well. What does this mean for U.S. holders of these stocks? Thanks, and stay safe."
You stay safe as well, Mike, and everybody out there. Great question. Luckin' Coffee having a rough day yesterday, I think our friend Bill Mann --
Gillies: Not better today.
Hill: Yeah. Were you the one or was it Bill Mann who [laughs] described what happened with the trading of Luckin' stock yesterday as being violent?
Gillies: Yeah, that's a Bill Mann-ism, absolutely, but it's a good one.
Hill: But to Mike's question, how concerned should people be about this?
Gillies: So, you'll know -- and you know, thank you for not embarrassing me, but I'm going to embarrass myself now Chris, just because that's fun -- you'll know that my initial take to this was, eh, it's a nothing burger. And then I did some reading and informed myself a little bit more, and I'm like, well, maybe it still is a nothing burger, but maybe it's not. And if it's not, depending on how events subsequently flow, it could range from slightly worse than a nothing burger to, there could be some real economic loss here.
And so let me explain, Luckin' Coffee, it's kind of -- put that over there, OK, that's a fraud, it's an unknown business, there's all kinds of people who are getting out because fraud, there are probably institutions that are getting out because they're not allowed to hold a company that is delisted. And this is the Nasdaq delisting itself, OK, and it just happens to be a Chinese company. Put that over there as kind of a special case.
When you get into things like Baidu or Alibaba or JD.Com or these types of a Chinese companies, that might be an issue, because there has been -- I mean, the U.S. Senate just passed a bill that could delist Chinese companies from U.S. stock exchanges, and it's an interesting possibility. Now, it would first, of course, have to be approved by Congress. I'm not an expert in U.S. civics, by the way, so forgive me if I'm going to miss this. But it has to be approved by both and then it would go through the President's desk and be signed or not.
I think in the present environment, it probably will have some difficulty getting through Congress and ever ending up on the President's desk. I also happen to think, even though there is some bi-party support here, I think, depending on which party controls the White House after November, there's a higher likelihood of it passing a presidential stamp with one party versus the other; and I'll avoid the rest of politics for now.
The issue is that, on a base, actually, I agree with the issue. And the issue is that Chinese-listed companies don't necessarily have to currently demonstrate compliance with U.S. investor protection laws, protection regulations. Regulations that I happen to think -- and I'm not a citizen of your country, as you know -- but I happen to think your country has the strongest investor protections in the world, your markets. Sure, there are holes and there are places I think they could do better, and there are companies that I think that they have not cracked down on what they should, but I still believe overall yours is the system to emulate, certainly above China and even above my fair country.
So, with that said, I actually think the sentiment behind this is good, because as an investor, we should want investors to be as informed as possible, we should want companies to have to be as transparent as possible. And right now, the U.S.-listed ADRs of Chinese companies don't necessarily have to do that. So, I'm a fan of that.
Where this could get ugly. So, let's say this does come to pass. And yep, nope, the U.S. government outlaws the listing of Chinese companies, Chinese ADRs on U.S. exchanges that do not meet the standard required by regulators. In a fairly benign situation, they would just go list on a different exchange, so the Toronto stock exchange would probably be on the phone about three seconds after this legislation became known, saying, gentlemen, please feel free to list on our exchange. And, you know, American citizens have trading privileges on Canadian exchanges. So, that kind of skews to the nothing burger side of things.
And the value of the business, in theory, should not be impacted depending on where it lists. The bigger issue could be what happens if -- because there's not a few Americans who own shares in these companies, I believe the number I saw, and I haven't been able to independently verify it, but as of, February it's something like, Chinese companies are worth about $1.2 trillion, are currently listed on U.S. exchanges.
What happens if this happens, they get delisted? And so, you would usually just go to another exchange, what happens if Chinese regulatory authorities, you know, to say, now, this is an aggressive move by a government that's hostile to our government, so we are not going to accommodate more trading, or not going to accommodate ADRs back here, you paid your money and you take your chances? That's the nuclear winter scenario where Americans have value stranded. But again, how likely is that?
So, this could range from anything between nothing, no impact, not even a risk, because it never comes to pass, it just dies in the Senate, to if China wants to play hardball because they perceive they've been slighted, your money in these companies could be stranded for an unknown period of time.
What's the probability of that? I would have to think it's exceedingly low, but is it a zero? Probably not.
Now look, if you own Baidu as part of a diversified portfolio and it's 1% of your portfolio, I probably wouldn't do anything today or tomorrow or ever. If you own Alibaba and it's 35% of your portfolio and you're a year-and-a-half from retirement, I'd probably think about paring it back a little bit.
Hill: I think I would too.
Gillies: So, I mean, like, my answer is so broad, it will be of use to practically no one, but it's what I offer.
Hill: I can't think of a better way to wrap up. Jim Gillies, always good talking to you, my friend.
Gillies: 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 MarketFoolery. The show is mixed by Dan Boyd, I'm Chris Hill, thanks for listening. We're off on Memorial Day, we will see you on Tuesday.