In this episode of MarketFoolery, host Chris Hill chats with Motley Fool Asset Management's Bill Barker about the latest headlines and earnings reports from Wall Street. They discuss recent quarterly releases; news from real estate, hospitality, and retail sectors; and the latest SEC investigation into financial irregularities.
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This video was recorded on Aug. 10, 2020.
Chris Hill: It's Monday, Aug. 10th. Welcome to MarketFoolery. I'm Chris Hill, with me today, the one and only Bill Barker. Good to see you.
Bill Barker: Good to be here. Good to have you back.
Hill: Yeah, it's nice to be back. I had a little time off last week, but it's nice to be back. We got real estate we're going to talk about, we're going to talk retail. We've got investigations into financial shenanigans and we have the latest earnings from a little Midwest conglomerate by the name of Berkshire Hathaway, but we're going to start with Marriott (NASDAQ:MAR), because Marriott's second quarter featured the first loss for the company in almost nine years. And yet, shares of Marriott up about 2% this morning, is this optimism or is this, the stock's already been beaten down enough and we don't need a lot of optimism to bid it up just a bit?
Barker: I think it's the latter, I think it has been plenty beaten down, let's call 40% for the year or something like that. And maybe the worst is behind it. Hotel occupancy was off 90% in April and only 70% in July. So, that is, in one sense, a big improvement, and in another sense shows just how far things still have to go, particularly in this country. It has international operations; the largest operator of hotels and hotel rooms in the world. And China is a bright spot, but the U.S. is not. And continuing to be lagging is the expectation, although the company tried to put a good spin on what it could.
Hill: To what extent, if any, did the company on the conference call talk about, sort of, what they learned in China and the way that they can apply that to what's happening here in the U.S.? On Starbucks' most recent quarterly report that was something that Kevin Johnson, the CEO, had talked a little bit about; I'm wondering if the same applies to Marriott or are these businesses different enough that it doesn't really apply?
Barker: Well, I was in and out of the call, so I can't be sure that that was covered there, definitely was coverage that China, I think the terminology was that COVID was not yet a thing of the past, but, you know, it was almost in the category of "back to normal," and in certain segments of the China travel, normal or even better than pre-COVID. So, it's an entirely different story, and I'm not sure that Marriott addressed what it could do, what it had learned from China. I certainly got the feeling that it was hinting that the U.S. government could learn from China; and the lack of a strategy for how to deal with this was certainly impacting their business and they regretted that that was the case.
Hill: You and I were talking earlier today, I was surprised [laughs] to learn from you that one of the ways Marriott is trying to adapt to the complete plummeting of business travel is by working with colleges to set up, at least in the city of Boston, [laughs] to set up essentially dorm arrangements for incoming students.
Barker: Yeah, my son is going to be spending his first term at college in a Westin hotel. So that, I still think is not as good, as fun as being in a lousy dorm room on campus, but in terms of second-best it's better than I guess what I and he were expecting might be the case. So, yeah, there are empty rooms. I mean, it's a nice downtown Boston business conference-type hotel, and there aren't conferences to host, there aren't a lot of business travelers. And this is going to fill, I don't know exactly how many rooms, but plenty, and it'll fill them for September, October, November, into the beginning of December, assuming that the college maintains the on-campus program that it is planning on, that things are going to evolve and adapt. But, yeah, there are plenty of rooms available. And it's a happy opportunity for the university and the hotel to work together, so that students are getting more space than is traditional. They're not crowding four to a room the way I started out with college, and probably you, too.
Hill: Well, let's stick with the theme of figuring out creative ways to occupy empty space. Simon Property Group, which is the largest mall owner in America, is in talks with Amazon (NASDAQ:AMZN) about the possibility of turning some of Simon's anchor department stores into Amazon distribution hubs. So, instead of a Sears or a JCPenney anchoring that mall, it's going to be an Amazon Fulfillment Center essentially. And no deal done, but shares of Simon Property Group up more than 5% this morning on this report.
Barker: Yeah, doing a deal with Amazon sounds good. And I think they've got a lot of these -- well, specifically Sears and J.C. Penney are going to be, or already have evacuated a large amount of retail space, and you know, Amazon can make use of it. And I think that it's much easier, certainly for Amazon, to take up a lot of that space than the many, sort of, small mall-sized stores that are going to be going out of business in between each other. You know, these are on the corners, they have a separate entrance and loading center. So, that space can be used, as large as it is, that's a great opportunity for Amazon, a great opportunity for Simon Property.
You know, I worry about all the smaller store-size stores in between that'll be closing in between now, and especially, I think, after Christmas.
Hill: Yeah, it really is, you know, on the surface, this appears to make sense for Simon Property Group. I'm assuming they are smart enough to realize how fundamentally this would change the business model that has worked for them up until this point or certainly up until the last few years, which is to say, you have a huge anchor store that's going to bring people to the mall and then the ripple effect for those smaller occupants of the mall is a good one. You know, [laughs] who's going to go to an Amazon distribution hub other than the people who work there, so...
Barker: Roughly the same number of people who are going to Sears.
Hill: Fair point. [laughs]
Barker: Possibly more. Wouldn't you go to a mall to see, like, if there were glass and you could come out of Starbucks and then you're walking around, you go past the empty Payless Shoes, and then, you know, there's a big plate glass and you can watch, like, robots doing things for Amazon distribution. I would spend more time at the mall if that were the set up than the opportunity to go into Sears.
Hill: On a short-term basis, yes, I absolutely would. I would go check that out once. I don't know [laughs] that that's going to bring me back in the way that 20 years ago you actually would go spend time in a mall.
Barker: Well, it depends on just how entertaining these robots are. [laughs]
Hill: They're working, they're not there to sing and dance.
Barker: [laughs] We're going to find out. And unfortunately, my fear is that we're not going to get the show that we deserve from the Amazon robots, that, you know, these distribution centers will be closed, that we don't get to study the Amazon business plan up close.
Hill: Maybe it becomes one more benefit for Prime members, like, oh, you got Prime Video, Prime Music, oh, and you get a day pass to go to your [laughs] local mall to watch the robots work.
Barker: I think all of it, every one of these ideas sounds better than, "Well, or we could just keep running a Sears in that spot."
Hill: That's true.
Barker: And I say you're the one who has been kicking Sears more than anybody, or at least on this show.
Hill: That's true. But I didn't hear the word "unfairly" in that sentence of yours, so. Let's move on to Eastman Kodak, because shares are down more than 30% this morning, because that government loan of $765 million -- turns out that is now on hold due to, "recent allegations of wrongdoing." The SEC is investigating stock options that were granted to Kodak executives one day before the loan was announced. This stinks. This whole thing just reeks.
Barker: Yeah, unless this is completely different from what it really appears to be, my hot take would be, this is the end for Kodak. Like, I think that this is a potential scandal which is, if it is what it seems to be, enough to finish off the brand. And I don't know, that might be going too far. I would hate to promote that considering they are still employees in Rochester, New York, who have families to take care of, but you know, what little was left of Kodak could be highly imperiled by a scandal.
Hill: So, this is a story that played out over the past week when I was on vacation, every now and then I would look at news on my phone, and one day I was scrolling through and I saw some headline about Kodak's stock skyrocketing. And I didn't even click on the story to see what it was, I just looked at that and thought to myself, I don't know what that is, but I can't imagine that's going to last.
So, the loan they were going to get was -- and I probably should have explained, for those unfamiliar, [laughs] and if you're under, I don't know, if you're under the age of 40, you're completely forgiven for not knowing the name Eastman Kodak, for a very long time, [laughs] it was just a successful name brand in the film business. They made films for cameras.
Barker: This is in the nifty-50, going far enough back, sure. Great Dow component.
Hill: And just has steadily declined to the point where it has been a penny stock for years. The loan they were going to get was to do what exactly?
Barker: It was to develop drug components, I believe. And I think that that is, you know, the kind of operation that Kodak -- we did not need Kodak in there, it's already a populated space, so why this money was going to go to Kodak is something that is, obviously, going to be investigated, but it's the kind of thing that deserves investigation, it's going to receive it, it's all over the headlines and it just is a big problem for this company.
Hill: Well, and as you mentioned earlier today when we were chatting, the stock chart is probably going to end up being, as you said, the classic middle finger stock, where it's just, [laughs] it's a penny stock, it's flatlining for a very -- if you look at a one-year chart of Kodak's stock, it's just this flatline, it spikes, and now it's coming right back down again.
Barker: Yeah, I mean, the $750 million, $760 million loan to launch Kodak Pharmaceuticals, which would produce generic ingredients. So, you know, the best presentation of this was this was part of work to drop America's dependency on foreign drug makers and the producers of the active pharmaceutical ingredients, which are largely done abroad, launch that. Kodak is not the place that you would have expected that work to start, or the ongoing work that is being done in the U.S., to be grown. So, let's find out why is, I think, where we are. And in between now and when we really get the full story, I think that the interest in helping out Kodak is going to be outweighed by the interest in getting away from a scandal, and those government decision makers aren't going to be taking additional chances to help out Kodak, unless there is just -- just complete miscommunication that has gone on in a way that would be very surprising.
Hill: Berkshire Hathaway's second-quarter results came out late on Friday, as per tradition for Berkshire Hathaway. Q2 results were highlighted by the company buying back a record amount of its own stock: $5.1 billion worth of buybacks. And I get that when you're sitting on a pile of money that is $140 billion high, that's just a small fraction, that's still more than what Berkshire spent for all of 2019 in terms of buybacks.
Barker: Yeah, well, it's a very low bar to clear in terms of historic Berkshire buybacks, it's not been a company that has been interested in doing that. And people have asked, you can go back decades, the question of, what about a buyback? And that is not Buffett's preferred method of capital allocation. So, if this was a record, let's frame it first as, it's a $500 billion market cap company; $5 billion, that's 1% of the size of the company has now, within a quarter, been allocated to buying back its own shares. Do that all year round, you're buying back 4% of your shares. So, that's not, if this were maintained, it would still not be a particularly interesting amount, but as a direction, just as, you know, when Berkshire moves into making investments in Apple. And it's always interesting what Berkshire is doing with its money because of Buffett's historical record. The outcome, really, over the last 15 years has been basically market average stock, basically on par with the S&P.
Hill: Among other things, this quarter was a reminder that it's nice to have a bunch of shares of Apple in your portfolio, which Berkshire Hathaway does.
Barker: Yes, that is offsetting, both, some lesser investments in terms of publicly traded companies and how they've performed and, you know, the timing of getting in and out of the airline stocks, but also, more importantly, the underlying businesses, which are largely industrial. And, so those have been hit and continue to be hit, not to the tune, as we mentioned before, of Marriott, they didn't lose 80%, 90% of their business, but even, you know, great railroads, like it has, are shipping less things, were, especially earlier in the year. So, the things are on the way up, industrially, for Berkshire, but it's weighed down by a lot of, sort of, old-economy investments. And helped out to a good degree by Apple, but not enough to make it a particular well-performing stock this year.
Hill: Bill Barker, always good talking to you. Thanks for being here.
Barker: 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'll see you tomorrow.