In this episode of Market Foolery, Chris Hill chats with Motley Fool analyst Jason Moser about the protests happening across America and what businesses and leaders can do to address the issues surrounding them. They also cover a new CEO announcement, a new report on M&A activity, some listener questions, and more.
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This video was recorded on June 1, 2020.
Chris Hill: It's Monday, June 1. Welcome to Market Foolery. I'm Chris Hill, with me today: Mr. Jason Moser. Good to see you, my friend.
Jason Moser: Good to see you too. Happy June.
Hill: [laughs] Happy June.
Moser: Year's just flying right by, isn't it?
Hill: Oh, yeah, yeah, this year is just flying by, that's exactly what this year's doing.
Moser: You know, it's like time flies when you're having fun, and it's no wonder it feels like this year just will never, ever end. Because I don't know about you, but this pandemic stuff, I don't find it all that fun.
Hill: No. We're going to dip into the Fool mailbag, we're going to talk about M&A activity; a new report out today, I want to get your thoughts on. I got to say, though, this is one of those days where it feels, and this happens every once in a great while, this is one of those days where it feels a little bit weird to be talking about the stock market and investing, because over the past few days, we've had protests in more than 140 cities across America. The National Guard has been activated in roughly half of the states.
But this morning I was watching CNBC, and one of the people they were talking to was Ken Frazier. Ken Frazier is the CEO of Merck. He is an African-American man. And one of the things he talked about was his upbringing in Philadelphia, when he was a boy and the opportunities that he was exposed to, and then he started talking about the role of business in this environment, not just -- you know, put aside the pandemic, because we've talked about the role of business with respect to the pandemic -- but he talked about how this is an opportunity for businesses to be more active and more proactive, particularly when dealing with the federal government, you know, the business roundtable and creating opportunities for people in the future. And, you know, it was just one of those things that gave me hope, and this was one of those Monday mornings, more than usual, when I needed a little bit of hope.
Moser: [laughs] Yeah. I mean, for as nice as the weather was for us here over the weekend, obviously, it was a bad weekend for a lot of folks. And, you know, I don't think that's anything that is going to clear up any time soon. But I did watch that clip, and the one thing I thought he made a really good point in that, you know, at some point after all of the riots die down, the looting dies down, and things get back somewhat to a peaceful state, you know, the biggest problem is, typically, when things like this happen, then everybody just, kind of, goes back to the status quo, they just go back to the way things were. They're like, OK, finally, that storm blew over. And that misses the point, right? I mean, he was exactly right, in that these are the types of occasions where people, businesses, governments need to be more proactive. I mean, clearly, we're in a different world today than we were 100 years ago, but there's still a lot of work to be done.
And just to see what's going on is really heartbreaking, because, you know, we could go on for an hour talking about this. I despise racism, I hate seeing this kind of stuff. And to know that we have a country that's still so polarized in that way, really, it's frustrating as hell, to be honest with you. And, you know, he's right: Once everything dies down and we get back to normal, that's not the time just to, kind of, get back to work and think, OK, finally, that's over.
Business really has the ability to get up there and create the conversation that the entire country can have, right? I can get out there and I could say something, but no one 's going to really hear it and probably most people don't care, but if you get companies and leaders, who have a national stage, to get out there and continue to keep this at the forefront of people's minds, in the forefront of the discussion here in this country, I think that's going to be the more powerful force for change. So, I really did enjoy hearing his perspective, because I think he was spot on.
Hill: We are a business show, so with that, let's get to some of the business of the day. And we'll start with Coty (COTY 0.70%). Shares of Coty are up nearly 20% today. The Chairman of the company, Peter Harf, is going to be the new CEO. This is the fourth CEO Coty has had in four years. What is going on at this cosmetics company that they can't keep a CEO?
Moser: Well, this is the Hertz of cosmetics, right? That's kind of what we were talking about before we started taping. This is exactly the same, sort of, situation we saw with Hertz. Now, I'm not saying that Coty is going to be filing for bankruptcy, but you know, they were definitely in a defensive position, and I think this is something that hopefully will get their company turned back in the right direction. You can see, with Coty's business model, there's a lot of moving parts. I mean, it's a cosmetics company, but it's beauty, cosmetics and hair products and all of that stuff -- fragrances. And so there are a lot of moving parts in regard to that portfolio of brands.
And I think they've had a tough time operating the business on any real consistent vision because of the point you just made. This is the fourth CEO in as many years. And if you don't have that consistent vision with leadership and the ability to see around corners and take businesses in two different directions or new directions when they need to be taken, they just don't make any progress.
And when you look at Coty's financials, it's abundantly clear that they've just not been making any progress. Top-line sales down. They are not cash flow positive. I mean, it's been quite a few years since they've been cash flow positive. You know, the stock has not been a good performer. And so, it's going to be interesting to see Peter Harf joining the CEO office.
Now, Peter Harf has an interesting history with the business. The Coty that we know today he founded back in 1990. So, I think from that perspective, it's encouraging to see him getting in there. He's also a founder and managing partner of JAB, which we've talked about JAB Holdings before, I mean, that's the firm that owns businesses like Panera and Krispy Kreme and Peet's. So, you could argue that Peter Harf is exactly the guy that needs to be taking over this role here.
And I think that along with the deal with KKR that's going to give them liquidity in a time they need it most and it's going to help clean their plate a little bit of some distractions, I think, primarily in the hairstyle business. Maybe it gives them a chance to get back to brass tacks and try to steer this company forward, because it is a challenging space. And we've seen with Ulta, what Mary Dillon has done over there since 2013. I mean, Ulta is a formidable competitor in the space, clearly a bigger company than Coty is today. So they have their work cut out for them, but I think they probably got the right person in the executive suite at least to try to get this turnaround started.
Hill: And if they don't, I guess we can expect a new CEO in about a year.
Moser: [laughs] Let's give him more than a year. Let's at least give him a chance to try to execute the vision. But, you know, this deal that they got with KKR, what was it, a $1 billion convertible preferred share offering, the coupon on that was 9%. And if you think about the interest rate environment that we're in today, that 9%, that reeks of, like, cruise liners, right? I mean, that's a business that is in a little bit of a desperate state. And so we are going to have to give him a little bit of room there to try to get this thing turned around.
But, yeah, I mean, the other thing about this business, when you look at the financials of businesses, you know, we always talk about adjusted EBITDA and one-time charges, and if you adjust for this or that, a lot of times you'll see companies when they're talking about restructuring and turning the business around. And Coty is certainly one of those businesses now where they're focusing on a turnaround, but if you go look at their financials, and you look at actually the one-time charges, the restructuring charges, that they've taken over the past five years, it's well over $1 billion, and it's every year. So it's like they're in this constant state of restructuring.
And you go back to that CEO issue, with four CEOs over that stretch, it starts to make more sense even. They've just had no consistency in vision or strategy, and that has played out in every facet of the business, and unfortunately, a bad way to this point.
Hill: Bain & Company issued a report today on merger and acquisition activity in the tech space. And not surprisingly, M&A activity is down more than 40% in the first quarter. The striking thing to me is that Bain & Company [laughs] basically said this is going to be a V-shaped recovery for M&A in the tech industry, that the second half of 2020 is going to see a serious bounceback. Do you think that's likely?
Moser: Likely? To me, that seems a bit optimistic. Maybe U-shaped is where we can, kind of, meet in the middle. I don't know, I kind of feel like "U" is the better letter that comes into play here. Maybe it'll be a little bit more gradual. But you also have to remember, there's a lot we still don't know. The pandemic is still a pandemic. It sounds like things are starting to improve, but we don't really know for sure until the winter months come back around, to really see how things are shaking out.
So for me, "V" is probably a little bit optimistic. But I do think they're right in that we have a lot of companies out there right now, a lot of big companies with a lot of dry powder, a lot of capital resources. And, I mean, we were talking about Berkshire Hathaway a month ago and how odd it was that they didn't really put any of that money to work. And I don't know necessarily exactly why that was, but my thinking was there's a couple of reasons. Maybe Buffett is being a little bit conservative given the exposure to insurance that Berkshire Hathaway bears. And also, maybe he thinks it's going to be a little bit more of a progressive-style recovery as opposed to a V-style.
You've got a lot of little businesses out there right now, start-ups and small businesses, that are in -- we've seen these publicly traded companies talking about cash conservation mode, right? They're figuring out every way they can to get as much capital in their savings account as they can, so they can try to weather the rest of this year. A lot of these little businesses, they don't necessarily have that same luxury.
And so it may be that you see Facebook and Microsoft and Apple, companies like that, jump out there and really start putting some of that money to work. To be sure, I mean, we've seen Facebook and Apple have definitely made a couple of little acquisitions here recently. Facebook just bought Giphy or "Jiffy." I mean, I would imagine you'd probably say Giphy, or you're just going to get confused with peanut butter. But they bought Giphy for $400 million. And Giphy was a business that didn't make any money.
And then Apple also did just confirm, they bought a virtual reality company called NextVR, which they specialize in recording live events, like, concerts and sports to be experienced in VR. And the terms of the deal, I thought it was around $100 million. And that'll be really interesting just given the lack of live events that we're going to have here, at least in the near term, to see how companies try to build out new immersive-type experiences.
So we've seen these businesses starting to test the waters a little bit. I think they'll continue to do that. Because when these businesses get this big and they have the resources that they have on their balance sheets, we start to judge them according to that, right? We want to see them as effective capital allocators. And if they're just leaving that money sitting there, I mean, that's generating really no return whatsoever. So it does behoove them to be testing the waters for sure. And my bet is they'll find some really good deals, because there are going to be some companies out there that are going to be in a little bit of a pinch until things start to improve, and we just don't know when that's going to be.
Hill: Yeah. I think that's going to be the interesting thing to see in terms of the push and pull of this, because, I don't remember who said it, but early in the pandemic, I remember -- it might have been David Faber on CNBC basically saying -- in fact, it was Faber, now that I think of it. Faber was talking about reaching out to his contacts in the M&A industry, and they were basically saying no deals are going to get done. And part of the reason was, if I'm going to buy your company, I want to sit down with you in person, I want to sit across from you at a conference table, or maybe we go out to dinner or something like that. And we're in this environment where that's not happening, so. You know, the larger point he was making was, it's harder to get these types of deals done when you can't sit in the same room with someone.
Having said that, you make a great point: There are a lot of [laughs] these smaller companies that are going to be so much more desperate in the next, say, three to six months then they were three to six months ago.
Moser: Oh, yeah, absolutely. And I do think that's a good point there in regard to face to face, I mean, that is something that no amount of technology can really satisfy, that same dynamic as getting in the same room with someone. I feel like we're, kind of, getting back to where we're going to be able to do that a little bit more. But, yeah, no doubt, it has been a trying time for everyone. It really goes to show you, we always talk about the strong are the ones that come out of stretches of time like this even stronger, and it's very understandable why that's the case.
And, you know, there could be companies out there that maybe they didn't have becoming acquired in their game plan, maybe that wasn't really a part of their exit strategy, but I'd be willing to bet they probably weren't counting on a pandemic either, right? I mean, going forward, I know I as an investor will definitely be acknowledging that risk. I mean, it's something that you have to acknowledge, because we're living through it right now, and we're seeing how dramatic an impact it's having. So, yeah, it's going to be a fascinating back half of the year for sure.
Hill: Well, and you just reminded me, one more data point we're going to get from all of these businesses that we're watching, that we'll be able to, sort of, file away, particularly, with respect to the management teams is, how quickly were they able to adjust? Not the ones, because we've talked about the businesses that made the investments in e-commerce ahead of time, you know, the Williams-Sonomas, you know, just to pick a recent example. Not talking about those, I'm talking about the ones, Brian Cornell at Target, you know, the folks at Walmart basically saying, OK, this is the new reality, how quickly can we get this up and running? And it's that speed of innovation that Nadella talked about and how much they've innovated in such a short amount of time.
Moser: Yeah.
Hill: Our email address is [email protected]. Question from Joe Franco, who writes, "My partner and I are trying to settle a slight difference of opinion. In general, we both subscribe to the maxim of time in the market versus timing the market, but she is a much better student of your Foolish principles, so I wonder if she might be right. Let's say I have realized a modest return on a stock I've held for less than a year. I believe in the stock long term, but I do still expect short-term headwinds and an overall market correction that will drive the share price down in the near term. Would it be an error to try and sell my stock now, actualizing some of those gains, and then buy back at an equal or greater position once that expected share price dip happens, or do I just hold fast, weather the storm, and maybe even increase my position when it's at an even better value? To be clear, my partner is advocating for the latter. If you're telling me not to take those gains for any reason other than 'You're not clairvoyant,' can you explain the rationale? Is it deferred tax liability or something else that I can't quite grasp? Thank you so much."
First of all, Joe, great question, great that you and your partner are doing this together and you can have these types of conversations, because a lot of people don't really talk about money and investing with their partner, so that's great that you're doing that.
Secondly, you're not clairvoyant, Joe. That's No. 1 on my list. Now, I have other reasons on my list, but No. 1 on my list, Joe, is you're not clairvoyant; you know that. If you were clairvoyant, you would've never written this email.
Moser: Precisely. That is a good question. I do appreciate it. It's one that I hear it more often than I really wish I did, because our job is to continue to espouse that long-term mentality. And in hindsight, what you're saying, Joe, in hindsight, it seems easy, right? I mean, you know, there's going to be something that makes the stock go down and then you can -- but, yeah, you know it and you said it, timing the market, it's not easy to do, typically it's just a coin flip. And the one thing you don't ever want to do is become overconfident in your ability, because as soon as you become overconfident in your ability, the market has a very, very quick way of correcting you. And then it makes you remember why you didn't do that in the first place.
So, yeah, beyond not being able to predict what the market is going to do, the machinations, you just can't predict that, you flip a coin. Might as well. To me, it's the tax obligations. Now, there is a short-term capital gains tax, there's a long-term capital gain tax. So, whenever you buy shares in a company, you're buying shares, and the idea is to see those shares go up in value, eventually you sell them and you realize those gains, and you do something with those gains.
But the thing is, with short-term capital gains, we're talking one year or less, if you buy a stock and then sell it within that one-year-or-less time frame, you're going to be subjected to short-term capital gains taxes, assuming that the stock went up and you made money on that. And so, short-term capital gains taxes, they're taxed at a higher rate than long-term capital gains taxes. Long-term capital gains tax is if you buy shares of a stock and then you hold on to them for more than one year. So, if you sell them after that one year, then it's a long-term capital gains tax event, assuming that you made money on that stock. And that's a considerably lower tax rate. And so, I think just from the taxes alone --
And, listen, I've seen how short-term capital gains taxes can eat into your tax bill. It can really have a profound effect if you do a lot of trading. And I think that's another reason why day trading is so difficult to do sustainably, because you're always going to be subjected to that frictional cost of the short-term capital gains tax. And so, for me, the tax situation alone is one for me, to just say no, I don't really want to get into that buy and sell within a year.
Now, if you buy a company and then that company plummets and you realize six months later you should have done that, you can sell that. And that loss is something you can use to help offset some gains. But, yeah, there's definitely some tax implications there that I think are worth considering. And those tax implications are enough for me to just focus on making sure I own my stocks for more than a year.
Hill: Wasn't it Warren Buffett who talked about capital gains taxes in, sort of, like a graded way? I think one time he suggested, you know, short-term capital gains taxes should actually be 100%. You know, just making this example of holding stocks for the long term. And then after the first year, it's lower. And then, I'm not going to get the numbers right, but it was something like, in less than a year you sell the stock, 100%, that's what you are taxed at. And then over time, it eventually gets down to 0%. Maybe it's like 10 years. So, you hold it for 10 years or more, your capital gains tax is 0%.
Moser: That would be awesome. I don't suspect that will ever happen, because it actually requires Congress to do some work and actually negotiate and be productive, and it's not very good at doing that.
Hill: And the day traders' lobby would be up in arms.
Moser: [laughs] Exactly. I mean, you're always pissing somebody off. And in this case, that's the group that you're frustrating there. So, yeah, I don't suspect that will ever happen, but I do think that would be a really, that would be such a great change to just say, if you hold this stock for five years or longer, then your capital gains tax is 0%. I mean, that just changes the calculus altogether for so many people. I mean, you know, your money managers and your big funds and whatnot that are buying and selling more frequently, they're going to be the ones that have to deal with those ramifications.
Individuals like us, well, that's one of our biggest advantages in investing is time. We can actually take as much time as we want, because we're really just looking out for our own self-interest when we're investing, right? I'm not managing money for a big group of people who bought into my fund, I'm managing money for myself. And so there is that self-interest there. And that means, I call the shots as far as how long I've got.
And, I think it just takes a couple of times trying to trade. If you just take a couple of times, just try to do it, and you'll probably get one right, but then you're going to get a couple of them wrong. And then you're going to start to figure, OK, this doesn't really make a lot of sense, and you just, kind of, give up on it. And I think that, for me, was the eyeopener, when I was a younger investor, just trying that a couple of times and just realizing, man, this just sucks. This is not easy. [laughs] This isn't any fun, I don't like doing this, you know.
I look at some of the stocks that I have now, I see these -- you know, when you get a 10-bagger, you know what you have to do to get a 10-bagger? You got to hang on to it, you know, you got to hang on to it. And so that's the only way to do it in my book. And certainly, that tax structure incentivizes longer-term holding periods. And so I would look at it that way.
Hill: Jason Moser, thanks for being here.
Moser: Thank you.
Hill: As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear.
That's going to do it for this edition of Market Foolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.
