In this edition of Industry Focus: Wildcard, host Jason Moser and Fool.com contributor Matt Frankel start by discussing recent stock price action in the banking industry, and why some banks, like M&T Bank (NYSE:MTB) and Ameris Bancorp (NASDAQ:ABCB), are underperforming peers. Then, the pair dives into StoneCo (NASDAQ:STNE) earnings and discusses some positive surprises in the real estate market. And finally, you'll hear why Matt has his eye on U.S. Bancorp (NYSE:USB) and why Jason is watching Ulta Beauty (NASDAQ:ULTA) closely.

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This video was recorded on May 27, 2020.

Jason Moser: It's Wednesday, May 27th. I'm your host Jason Moser, and I'm joined, as always, even though it's a Wednesday, by Certified Financial Planner, Matt Frankel.

Matt, it's a Wildcard Wednesday, but we weren't in the studio or even our virtual studio on Monday because of the holiday, so we decided to go ahead and take our financial show and bring that over to this Wildcard Wednesday, because we just always love doing the financial show, Matt. I mean, we got a good thing going here, and we want to do it every chance we can, right?

Matt Frankel: I agree. Hopefully, we'll be back in the actual studio before too, too long.

Moser: Yeah, I know. Well, it sounds, at least, like things are moving in the right direction. The state of Virginia was launched into phase one a couple of weeks ago, and the representatives from Northern Virginia felt like we weren't quite ready to make that leap. So, we were postponed for a little while, but it does sound like now, as of Friday, we will be in Northern Virginia also entering phase one. Which I think everybody is excited about. I know [laughs] my kids are excited just to see some progress.

I mean, they're doing a bang-up job, really, carrying their own weight, doing the school thing at home. But you know, kids, you get them separated from their friends, they just don't have that normal life, it's a challenge for everybody, I got to say.

Frankel: It is. I mean, I live in an area that's almost reopened right now. You know, we took the kids out to a restaurant the other night.

Moser: Oh, wow! man, I'm kind of jealous.

Frankel: And it was fine. [laughs] I mean, the servers were wearing masks, but other than that everything feels pretty normal here.

Moser: Yeah. I mean, it does feel like you can just take those normal precautions, you know, wear a mask where you can and just, sort of, keep a safe social distance. But if you can take those normal precautions, it does seem like things are starting to get better, so hopefully that trend will continue. But that's not what we're here to talk about today, folks.

We are here to talk about financials. So, on today's Financial show, we're going to dig into the latest quarterly results from StoneCo, we're going to talk a little about real estate. As always, we have a couple of stocks that we're watching this week.

But, Matt, let's start today by talking about what seems like the market's recent love fair with banks. The market was off on Monday, but Tuesday, and even into today -- I mean, on the whole the market has been performing quite nicely, but financials and banks, in particular, seem to be feeling a little extra boost there. Am I missing something?

Frankel: Yeah, well, you also have to remember that banks were pretty much the most beaten down part of the bad parts of the stock market this year. This morning the S&P was about 12% off of its all-time highs. The banking index was about 23% off of its all-time highs. And that's including this week's big rebound.

So, kind of, the reasons that the banks fell so bad were because no one knows how long this is going to last, no one knows when the government help will dry up, how bad loan defaults are going to get. No one knows how long the unemployment rate is going to stay over 15%. All those things that are really bad for banks, which is really what made them fall so badly in the beginning of the year, are now kind of serving as tailwinds as we start to reopen and, like, each day a new worst-case scenario seems like is being avoided.

Moser: Okay. So, basically, I guess, that my observation at the beginning of the show, if things are starting, maybe if we're turning a little bit of a corner, we're seeing more optimism in the headlines. If things could even be, just even if they're getting a little bit better, that probably is going to have a little bit more of an outsized impact or effect on the banks given what they've suffered going into this.

Frankel: Right. So, on bad days, when we have bad virus news, especially, you're going to see the banks move in the wrong direction. And conversely, when you see good news, like, you know, the vaccine news we saw the other day, you see news that economics are starting to reopen a little faster; I think, New York just mentioned that they're planning to move into phase one next month. And they were ground zero for this in America. So, you're really starting to see a wave of good news for the first time since early March, which is what's fueling the optimism.

And banks are really the beneficiaries of it. I mean, I own a few bank stocks and that's been, by far, the best performing part of my portfolio. And you're seeing the work-from-home stocks get, kind of, annihilated this week.

Moser: Yeah, I did notice that. I mean, you are starting to see some of that buying flowing out of those stay-at-home stocks where companies like Zoom and Teladoc, and I guess maybe even DocuSign, those companies really, it did seem like there was a flood of buying going in there, probably seeing a little bit of a purging, yeah, they're little bit of profit-taking, I guess. You know, that's not business-related, that seems a bit more market-related. But, yeah, as you said, that sentiment is flowing from one side of the market to the other it seems.

Frankel: Right. And you got to remember, a worst-case scenario for the economy is kind of a best-case scenario for Zoom or a company like that. You know, if people are stuck in their houses for another year and have no choice but to use Zoom Meetings that whole time, that's a good tailwind.

And for banks, it's kind of the opposite, where you're seeing the reopening is the best-case scenario for banks, because not only are people still going to be able to pay their bills, but you're going to see more loan demand, consumer confidence was higher than expected, so you're going to see more people willing to spend money and take on debt, things like that. So, it's a good environment. It's slowly looking like we're going to have a good environment for banks on the tail-end of this year.

Moser: Yeah. And we'll talk a little bit more about that loan demand in the housing market a little bit later in the show. I wanted to roll in a question we got here from a listener last week. Brian Long on Twitter, @bdark09, asked us, he said, "Guys, I was wondering if you could share your thoughts on why the regional banks like M&T Bank and Ameris Bancorp are getting hit harder than the rest of the financials? Is it because they support small business? Thanks for all the help."

And I will say, Matt, this question came in, again, I think, it was maybe a week or so, so it was at a point where the banks were feeling a little bit of a pinch. I think on the other side of this news when the uncertainty was a little bit higher.

And as an Ameris Bancorp shareholder myself and as one who's followed that company for a while, to me, it does strike me that those are banks that are going to be a little bit more susceptible to these sort of challenging times for banks simply because they're smaller. In banking, having that scale is a big advantage, isn't it?

Frankel: Well, it is. But the reason for those two in particular, it's not what you think it is. So, here's some numbers. I mentioned the overall financial sector is down by 23% year-to-date. Ameris and M&T Bank are down 40% and 35%. On the other hand, Bank of America is down 27%. Goldman Sachs and Morgan Stanley are each day only 10% year-to-date.

So, the big x-factor there is that banks like Ameris and M&T Bank don't have investment banking, which is kind of what's helping banks like Bank of America and JPMorgan Chase, kind of, weather the storm a little bit better, because a lot of parts of investment banking actually do better when the market is going crazy.

Moser: And that's a good point there. We saw that in those calls with those bigger banks. Their investment banking operations were shoring up some of the weakness in the other segments.

Frankel: Right. Look, at even the big banks that don't have investment banking operations, like Wells Fargo and U.S. Bancorp, those are getting crushed. I mean, Wells Fargo is down almost 50% year-to-date, so it's not just the size issue. U.S. Bank is down 37%, more than M&T, so.

And that's just because they're primarily commercial banks, they make their money, at the end of the day, by loaning out money and making a profit on it. Whereas banks like Goldman Sachs and Morgan Stanley are pretty much exclusively investment banks, which is why they're outperforming the sector so much right now, because investment banking is actually a pretty good business during times like this. I think '09 was, like, the best environment for trading revenue that we've ever seen. So, not that anyone wants an '09 to happen again.

But to answer your question, it's not because they have small business focus, a lot of these banks are small business focused. I mean, Bank of America is a pretty big small business lender. But the problem is that they don't have that investment banking division to offset the risk that's associated with a prolonged recession, bad unemployment, you know, high loan losses, because say your Investment Banking revenue goes up by $2 billion and you have $2 billion of loan losses from your Consumer division, it's kind of a wash, but if you only have the losses from your Consumer division then it's bad. So, that's kind of what you're seeing priced into these stocks. That's why you're also seeing stocks like M&T and Ameris really rebound faster in the past few days than some of the bigger ones that didn't underperform. So, it's more of an investment banking versus not, question.

Moser: Yeah. And to your point on small business, Live Oak Bank, another bank that we follow and that we've spoken with management there before, that's a business focused specifically on small business lending. And it doesn't have that investment banking angle as well. I guess you could extrapolate this to a greater investing lesson, in that, these bigger banks that have more diverse revenue streams are going to be a little bit better off because they have other areas where they can, sort of, make up for weakness.

And just as in investing, we think maintaining a portfolio of diversified holdings, you're going to have some that maybe don't perform as well as others in certain times, but that's kind of the idea behind diversification, it is being able to spread some of that risk around so that you can weather difficult storms. And it seems like the big banks with those robust investment banking operations, that seems like they have, sort of, that nice diversified investment portfolio, so to speak.

Frankel: Yeah. And investment banking is not just trading, that's things like -- it's IPOs and debt offerings, especially are doing really well right now. A lot of companies are raising capital through debt.

Moser: Debt is, and it seems like the IPOs have, sort of, fallen off a cliff. We haven't really seen many of those lately for understandable reasons. But, yeah, that's another really good source.

Frankel: Yeah. And in most of the investment banks, IPO writing is actually smaller than the debt underwriting revenue that they bring in. So, you know, for example, a hotel operator needs to raise $2 billion, they go to an investment bank to make a debt offering, and the investment bank gets a nice hefty fee for that. So, you're seeing a lot of that, kind of, serve as -- you know, offsetting the problems with the business for these banks that have both.

Moser: Yep, that makes a lot of sense. Well, let's move on to StoneCo. StoneCo is the Latin American payment processor in that fintech market that we love to talk so much about. And if you're a shareholder at StoneCo today, you're feeling pretty good. Share is up around 27%, 28% on what looks like pretty good quarterly results. Now, it's been a difficult year before coming into today's release. The stock was down 33%; it's made up a lot of that ground today, Matt.

But you and I have spoken before, we've talked about StoneCo. We had a show where we talked about StoneCo and [...] in that space and I think we also talked a little bit about MercadoLibre at that time.

You know, looking through the release there, I think the one thing that, kind of, stood out to me, the one thing that stands out to me with StoneCo -- but they're not the only ones here -- is really this is a Brazil story. So, it's actually -- I mean, it looked like it was a good quarter. I'm not surprised, really, at the market's reaction. But it does seem for a business that is so levered to Brazil, and knowing where we are right now with Brazil in this COVID-19 crisis, I mean, things are getting worse there it seems like. And management certainly made that point, they feel like, this current quarter, the second quarter they're in now, it's going to be their most difficult one. But what did you think of those results, did anything stand out to you?

Frankel: [laughs] The first thing I think is, I wish I would have bought StoneCo about a month-and-a-half ago when it was at, like, $17. And that's especially true today. I had been kicking myself a couple of times in the past few weeks for hesitating on -- there's a few stocks, StoneCo and MeLi is another one, MercadoLibre, that I wanted, I almost bought in the $400s, and I said, "Uh! let me give it a minute and now it's $800 or something like that."

But anyway, [laughs] so what my big takeaway is from the quarter; I mean, the numbers look great through the 15th of March, this is just before the pandemic began. Not only did their total payment volume increased by 52% year-over-year, but that was actually better than the year-over-year increase in the same period in 2019. So, not only are they growing, but they are accelerating. Accelerating growth when you're at that level is really impressive. In May, up until their earnings release, so far in May their payment volume is up 23% year-over-year. So, that's a slowdown, but people are still spending money and their platform is still pretty healthy, so.

And they're also still very profitable. They had a 22% net margin this quarter. And the thing that really, kind of, reassured me as, unfortunately not a stone-cold investor, but as someone who might invest in the company at some point; one thing that really reassured me was the discussion of their lending operation.

Like, think of them as, kind of, like a Square capital and they provide credit to businesses like that. They are specifically avoiding the riskier businesses. They mentioned, for example, they don't loan any money to airlines, they don't loan any money to seasonal businesses, things like that. So, they're taking, kind of, a smart approach to it, unlike a lot of these fintechs that just kind of make business loans.

So far, the management of StoneCo has not let me down once. And it's kind of the best way I should put it. I need to repeat that to myself next time that the stock price really takes a dive for no great reason, but --

Moser: -- well, it's not. I mean, it's easier said than done, right, the hindsight is 20/20, of course.

Frankel: Yeah. And I'm just seeing a comment right now that someone is in Brazil and StoneCo is huge in Brazil, they said. It's seriously, like, the Square of Brazil.

Moser: Yeah, I mean, this is a pure Brazil story.

Frankel: But even, like, Square Capital, they base their loans on just the payment volume that a merchant gets, not how risky they perceive the business to be. So, it's kind of like, when I see something like that, I get why Berkshire Hathaway owns a lot of StoneCo, like, when I see that kind of smart risk management.

So, for me, it's not about the numbers themselves, it's the steps they're taking, the kind of, you know, make risk OK, so they come out on the other side. And their growth isn't going anywhere. So, with a company like this, they just need to make it to the other side and pretty unscathed. And they'll do just fine long-term, and I think that's what the market is taking away from this earnings release.

Moser: Yeah. And to your point there, the one thing I noticed in reading through that release, they were, at the beginning of the year -- I mean, they're obviously a growth company, they're in growth mode, they're making those investments, and part of those investments they've been hiring a lot. They really had been hiring a lot going into this pandemic. And unfortunately, it's been a tough time for a lot of people on the employment front. And I know it was a difficult decision for management, but I mean, I did notice, they were, sort of, cutting 20% of their workforce.

And while that's obviously a hard pill to swallow for folks in need of a job, what it does also, it really right-sizes the business, it right-sizes that cost structure so that they're able to keep that expense line under control.

So, they're not only managing the risk side of the business and they're not only managing that total payments volume side of the business, but they're also managing that cost structure of the business, the actual overhead there in the form of jobs. I mean, when you start getting bloated, that can be really difficult.

We saw a little bit of different business, but earlier in the year or maybe it was last year, late last year, but remember Wayfair, they basically had to do the same thing. I mean, it was less a problem with the business, it was just bloated and they had to cut somewhere in the neighborhood of 600 jobs. And while you hate to see people losing jobs, from a business perspective, it's hard to argue against it, right? You got to keep that business right-sized in order to make the cost structure work. And it seems like in StoneCo's case they're keeping a focus on that.

Frankel: They are. Like I said, the tone of the whole earnings reports really screams responsible management to me --

Moser: -- man, good word there is "responsible."

Frankel: You know, being able to make tough decisions is important in business. And it just seems like they, even before this, they really set themselves up to -- I mean, no one set themselves up to be able to really thrive in a situation like this, except maybe, like, a Zoom or something like that. But they set themselves up and, you know, they survived a black swan event like this pretty well.

Moser: Yep. Absolutely. So, to all you StoneCo shareholders out there, congratulations on a good day and it does look like there are still plenty of good days to come. So, you know, keep focused on the forest and not the trees there.

Matt, let's jump into real estate a little bit. You are a part of a real estate team here at The Motley Fool with Millionacres in our service Mogul. We were looking through some of this data here, new home sales rose in April versus the expectations of, really -- I think, there were a lot of expectations out there for, I mean, a massive drop in home sales.

And then we also saw news here today that mortgage applications are also up 9% from a year ago and from the previous week. So, you know, it does seem like for a market that was set up to get hit pretty hard -- and housing, it's not necessarily been hit as hard as people thought it might have been.

Frankel: Well, no, and a lot of that has to do with, kind of, the overall theme of this crisis that the government is just printing trillions and trillions [laughs] of dollars and pumping it into the system. No, I mean, if people who are unemployed or making, in a lot of cases, more money being unemployed than when they were working, it's pretty easy to pay your mortgage.

And so, you're not seeing home prices fall like a lot of people thought they were, you're not seeing mortgage demand drop as a lot of people thought it was. And first of all, just to clarify, we said, home sales rose in April they rose?

Moser: Yeah.

Frankel: They rose compared to March, and they are still way down year-over-year, it's worth pointing out. But it was expected to be down 22% from March, so that's still a big surprise.

The big thing to know about that is it's really a shift in the type of homes that are selling. In other words, specifically, the lower end of the market is selling a lot better, the median home price out of those new homes was down over 8% this year. Homes under $300,000 are selling really well. Homes above $500,000 are not selling very well at all. So, you're seeing a lot of -- you know, this could be a lot of first-time homebuyers coming into the market, it could be a lot of people trying to downsize a little bit given the economy, so there's a lot of potential explanations.

And in the mortgage side of things it's not that surprising that people are viewing this as a good time to either refinance or buy a new home. I mean, the average mortgage rate is about 3.4% right now, which; I don't know what your mortgage is at, but it's not 3.4%.

Moser: [laughs] It's not quite the lowest low, but I'm looking at refinancing already. And, I mean, it's already as low as it is.

Frankel: Get in line, refinancing volume is up 176% year-over-year. So, you're not the only one who would think that. But purchase volumes up 9% year-over-year, which that's the thing that really stood out to me as a surprise that people were buying -- I'm sorry, up from a week ago, and up 54% since the beginning of April; which is really impressive. So, people are getting back and people were cautious and, kind of, pumped the brakes on their home searches, but it sounds like people are coming back into the economy. And this is just kind of the theme we're seeing with the overall economy. Like, credit card volumes are starting to pick up a little bit. We're seeing more people travel, slowly but surely, it seems like people are coming back into the economy and real estate is not an exception.

Moser: Well, let's hope that continues and let's hope everybody can stay healthy in the process. You know, we fell a long way in a short period of time. And to see things recovering regardless of how we're getting there, You know, I mean, you kind of say, you got to pull out all the stops and just help the recovery and then clean up the mess afterwards. And I feel like maybe we're on the right path, but certainly those numbers speak to that as well.

Okay, Matt, before we sign off today, we, as always, want to throw a couple stocks up on our radar, stocks that we're watching this week. You know, earning season has more or less come to a close, but there's still a few laggards out there that are reporting late. What's the stock that you're watching over the next few days?

Frankel: Well, mine reported earnings already and it's a bank stock that I recently bought, U.S. Bancorp, I mentioned them already. People who listen to our show for a while know that I'm always talking about Bank of America as my biggest bank stock investment. I think I've used that as "My one to watch" more than I'm legally allowed to, so.

But U.S Bancorp is one I've always really admired, but valuation has been a big obstacle. Up until this year, U.S. Bancorp consistently trades for well over double its book value.

Moser: And that's always been a big Berkshire holding too, hasn't it?

Frankel: Right, it's a big Berkshire holding, it was actually the only big bank, I'm pretty sure about this. They were the only big bank that never, their earnings never went negative during the financial crisis Which, they have very high asset quality, extremely high, which is why -- so, their valuation has been justified. I've just kind of thought that there have been better places to put my money in banking.

But now, U.S. Bancorp has been almost cut-in-half during this pandemic and I finally decided to pull the trigger. And I bet pretty big. I mean, normally when I buy-in a stock for the first time, I don't go all-in, but I pretty much bought a full position in U.S. Bancorp when this happened, so. And I'm watching to see how their earnings turn out for the second quarter, because I don't think it's going to be nearly as bad as expected.

Moser: Conviction buy, I like it. I love the conviction there.

Frankel: Hey, I put my money where my mouth is, man.

Moser: That's what you got to do in this line of work, Matt, you want people to take you seriously, bud. [laughs] Well, I am going to take a little bit of a different tack here. I'm actually watching Ulta Beauty. Their earnings come out tomorrow. And, to me, the reason why I'm focused on this business -- I mean, it's a good business, right? I mean, the cosmetics and makeup market, granted, I don't really have a whole heck of a lot of experience shopping for it, but I do have a house full of girls here and I see how they shop for it. And then how important it is in their day-to-day.

And so, it is a big market opportunity in a fairly resilient market. Obviously, with the pandemic and everything being closed down, one of Ulta's bigger advantages is having those onsite salons which, obviously, that traffic ceased to exist. But that's not the only part of the business, it's not the only dynamic of the business. I mean, they do have an e-commerce side of the business as well and a lot of relationships with folks out of the industry.

So, for me, I'm going to be really interested to see their take on the state of the consumer as they begin opening their stores back up. They are slowly but surely opening them back up. And, to me, they always just seem to be -- they give you a good sign as to how the consumer is feeling. And if they're starting to see folks willing to come back into the stores and go to the salons for appointments and whatnot, I mean, I think that'll just give us a better idea of maybe what we can look forward to here in the back-half of the year, assuming things keep progressing the way they do. So, I'll be keeping an eye on Ulta Beauty here earnings later this week.

But, Matt, I think that's going to do it for us this week. I appreciate you, as always, jumping in and talking shop with me.

Frankel: Of course. Hopefully, like I said, I get to see you soon; I know I say this every week, but hopefully, I get to see you guys in-person soon.

Moser: Sooner rather than later. We will work on it as hard as we can.

Remember folks, you can always reach out to us on Twitter @MFIndustryFocus, you can drop us an email at IndustryFocus@Fool.com, and let us know how things are going, let us know the stock you're buying, tell us the stocks that you're selling, or, hey, I mean, throw a show idea or two in there. If you've got a stock you want us to do a deep dive on. I can't promise to you we'll get to them all, but we certainly do appreciate the idea generation.

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

Thanks, as always, to our man, Austin Morgan, for making the magic happen behind the Zoom. For Matt Frankel, I'm Jason Moser, thanks for listening and we'll see you next week.