In this episode of MarketFoolery, host Chris Hill chats with analyst Jim Gillies about the latest headlines and earnings reports from Wall Street. They bring you a new development in COVID-19 testing and talk about two medical device companies. They also discuss two stocks at the high and low end of the retail spectrum, as well as some some banks.
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This video was recorded on Aug. 27, 2020.
Chris Hill: It's Thursday, Aug. 27th. Welcome to MarketFoolery. I'm Chris Hill, with me today from the Great White North, it's Jim Gillies. Good to see you my friend.
Jim Gillies: Good to be seen, Chris. Thank you.
Hill: We have got the high and the low end of retail, we're going to talk about that; we're going to talk banks. We're going to start today with Abbott Labs, because the FDA has approved Abbott Labs' rapid COVID-19 test. It is a portable test, it costs $5, you get the results in 15 minutes. This is not a home kit; this is one that does need to be administered by a medical professional. But the enthusiasm is apparent, shares of Abbott Labs up 7% and hitting a new all-time high.
Gillies: Well, yes, and the follow-on to that, Chris, is not only is Abbott up, but companies in the COVID testing space, one being, that I follow, Fulgent Genetics, they are getting taken behind the woodshed. I believe Fulgent, last I looked, was down about 30%, because apparently Abbott's test, as you mentioned here, again $5/person, you get your results in 15 minutes, there's a complementary mobile app that is being made available for iPhone and Android, of course, at no charge. It's going to let people who are tested negative, are going to display a temporary digital health pass, so they'll be able to, kind of, have a clean slate, if you will. This is certainly perceived as a game-changer by investors and other companies, because Fulgent does genetic testing and they've had a lot of success recently in their stock price, at least, because of COVID testing.
And, yeah, game-changer? Yes. I can tell you, my partner, for example, was sick about a month, a month and a half ago, went for a test and basically we had to go to a walk-in testing center, only took about 20 minutes, but she then got to spend three days in the master bedroom suite alone and isolated from everyone, the dog was there to keep her happy. But you know, because that's how long it took to get things. So, 15 minutes; yeah, if this works, it is being fast-tracked, but certainly, the initial numbers certainly look promising. And in the absence of the proverbial vaccine that will set all of life back to normal, which I am a little skeptical of, but in the absence of vaccines, these types of solutions, these types of rapid testing, you know, these are probably the best chance at returning to some semblance of a new normal. So, good on Abbott, and unfortunate, if you've been anywhere else in the space, I'm guessing.
Hill: Obviously, we're all hoping for a vaccine, but you're absolutely right that rapid testing is the first and most important step to, I don't want to say "getting back to normal," because I don't think we're ever going to get back [laughs] to normal, but getting closer, getting a lot closer. And I think that, as you said, the speed, Abbott's reputation. Am I wrong to be surprised by the drop in Fulgent Genetics' stock price, I guess I never -- in the same way that people much smarter than me have talked about the vaccine and have said things like, look, we're going to need a bunch of different companies producing the vaccine, so don't look for one -- you know, because everyone, from an investing standpoint, it's a natural ask, well, who's going to produce the vaccine, I want to invest in them. It's like, look, we're going to need a lot of companies to produce this vaccine. I just assumed it was the same case for testing as well, the pairs trade that is happening today with the rise in Abbott Labs hitting a new high and Fulgent Genetics shares falling through the floor seems to indicate that rapid testing is a zero-sum game. I never thought of it that way.
Gillies: Well, I mean, Fulgent, and it's not Fulgent, I'm using it as an example because I'm reasonably familiar with them, we recommended them in Canada in a couple of Canadian services closer to the $20 level, so we're still up, but today kind of hurts. The game-changer here is, I can have results from the Abbott test, in theory I can have it in 15 minutes. You know, I can have it on a coffee break. And with Fulgent, you'd still have to send it in and they were doing the test. We liked Fulgent as a business before COVID, we liked it before this -- we liked this for their genetic testing business, and then when COVID comes along and the stock skyrockets, I mean, this is a bonus. But you know, that was never the investing thesis, but for us in the high teens; for people coming to it, I'm guessing in the $40s, that was the investing thesis, and Abbott has come out with a better mousetrap. And so, you know, where you talk about the vaccine, yeah, you're exactly right, it's going to be -- there's all kinds of candidates out there currently under testing.
Some will work better than others, some will be...and I also think anybody who comes up with the successful vaccine, they're not going to make any money out of it, because you know, I mean, there's going to be a lot of pressure to get this out and get it for the good of humanity kind of thing. So, I'm not sure chasing who is going to provide you the vaccine is really a great investing play, even if you could identify it.
Hill: Let's move on to retail. And from a consumer standpoint, I think we have both ends of the spectrum, with the second-quarter reports from Dollar General and Tiffany. And you can see it in the -- look, there are always a lot of metrics to look at, but if you're just going to look at same-store sales, same-store sales for Tiffany, their second quarter, down close to 25%. Dollar General, I think was up in the neighborhood of 10%...
Gillies: 19%.
Hill: What's that?
Gillies: They were up 18.8%.
Hill: Oh, thank you for paying closer attention to these numbers than I did. And you know, and if all you were doing was just looking at, like, well, what is the stock is doing today? Tiffany is up a little bit; Dollar General is flat to down ever so slightly. That is not an indication of, [laughs] sort of, how these businesses have been doing in 2020 and over the past year.
Gillies: No, I mean, I found that these were two separate headlines this morning. And I found this diversion fascinating, before the market opened, and I find it equally fascinating now that Tiffany is up and Dollar General is kind of sliding sideways.
Yeah. So, Tiffany, the same-store sales there were -24%, but the key part was analysts had forecast that they would be negative. Analysts correctly said, you know, pandemic, bad economy, people losing their jobs, people scared about the future or people scared about money, probably not beating a path to Tiffany's door to buy the $500 stainless steel baby rattle. That's a real product, by the way.
Hill: I know that's a real product.
Gillies: Or teething ring or whatever. Yeah, so my ex-spouse may have bought one of those. But the expectations that analysts had for same-store sales were down 17%, and Tiffany managed to blow past that [laughs] by a third, down -24%. Their revenue missed analysts expected consensus. And again, it's important to note, analysts had already dropped their expectations a number of times, Tiffany missed that, earnings were, I think, flat roughly with what was expected.
At the other end, there is Dollar General, analysts expected 14%, 13%, they came in nearly 19%, as I said. They blew away the already raised expectations for earnings and for revenues. And again, people, during this difficult time, are flocking for, like, basics and necessities to places like Dollar General. They're ignoring Tiffany. One company blows the door off on already higher expectations, the other one misses badly on already lowered expectations. And I mean, if there's a better depiction of what's going on in the retail space, I'm not sure we could have had a better example today. And yet, we have this strange market reaction, which I'm like, huh...
I think, we talked earlier about the concept of the new normal or getting back to normal, I'm not sure that the surge in the results for Dollar General or places like Walmart or places like Home Depot, both of which as well, when they reported, did far better than expectations, and the stocks were, meh. I don't think we're going to abandon those names, the value names anytime soon, regardless of how the new normal looks. So, I think this is a really interesting case study, and I'm a little shocked to see how it's playing out.
Hill: So, the business epiphany of the week for me last week was coming to the realization that Target's market cap was less than $80 billion. I don't know what number I had in my head, but I know it was [laughs] triple digits. And looking at all of the moves that Target has made, I don't own shares of Target, but it is now absolutely on my watch list, just because I think, Brian Cornell and his team have done a great job. And just from a size standpoint, I think they have a lot of room to run.
To your point, Dollar General is only a $50 billion company. And Emily Flippen pointed this out the other day, [laughs] we're living in a world where Apple is over $2 trillion, we're going to have other companies go over $2 trillion; companies are going to get bigger, that's just how it's going to be. So, yeah, I look at the way Dollar General is performing, and to your point, maybe there is a point in the future, in 2021, 2022 or beyond, when Tiffany has some blowout quarter because people are celebrating, [laughs] you know, the return to the new normal, maybe that quarter is coming for them somewhere down the line. But until then, the move to good, basic value, when it comes to products and things you want in your home, I think that's going to continue for the Targets and the Dollar Generals of the world.
Gillies: Yeah, two votes, absolutely.
Hill: Quick programming note. This weekend on Motley Fool Money, Matt Argersinger is our guest. He's the lead advisor of Millionacres, which is The Motley Fool's real estate investing service. I had a great conversation with him the other day. A lot of [laughs] interesting things happening in commercial real estate right now, to say the least. So, check that out this weekend.
Before we go, I wanted to just chat briefly about the big banks in Canada. You and I were going back and forth a little bit this morning. They've all reported. How did they do as a group? Because in the past when you and I have talked about Scotiabank [Bank of Nova Scotia] and others, you've laid out a pretty good case for them, I think, particularly relative to the big banks in America, which have the whole investment side -- it just seems like the Canadian big banks are a little bit clearer in terms of being able to understand them.
Gillies: Right. And these are, kind of, your classic widows and orphan stocks, you know, that's how they're perceived here in Canada. They've all got their fingers in all of the standard pies. You know, there's the typical banking, what we think of as typical banking, and there is mortgage lending and there's the insurance operations and there are investment arms, you know, they've all got or most of them have, small investment bank exposure, nothing compared to what the U.S. has. But there's also a lot of investing arms in terms of, hey, we'll sell you our mutual funds kind of thing.
But what's interesting about the Canadian banks and we saw this in 2008, OK, where as the financial crisis spiraled around, there was this -- and of course, and all kinds of banks in the U.S., much smaller banks, of course, went insolvent. All kinds of banks in the U.S. cut their dividends, sometimes sharply. And the Canadian banks all got sold off on the same thesis that this is going to happen to us. And some of us, voices in the wilderness from time to time, we're saying, no, no, no, you don't understand how Canadian banks are treated here. They are classic widows and orphans; they tend to be very conservative with what they do.
And so, yes, the market value is down, you had some incredible yields on their dividend, but we're like, look, they're not going to cut their dividends, they'll raise capital to support their dividends, they'll be fine. And that thesis was borne out at a time that I think was worse than we have now.
But earlier this year, so flash-forward to 2020, we started seeing the same things we heard back in 2008-2009, which was, this is bad, they're going to cut their dividends, some of them are going to go insolvent, you could find a couple of well-known short-sellers out there who have a very negative view on the Canadian banks. And, again, I was kind of saying the exact same thing, even as we had a couple of days in March where these big widows-and-orphans style staid companies were down 10% and 11% and 12% in a day, which is, you know, a little bit rough if most of your kids' education plan is invested in them.
But it's the same deal. They're going to protect their dividends; they are going to get through this. And so, what we've seen now -- this was probably, it's the second, technically the second, earnings report we've seen during the COVID-era, but practically to a company, they've all said, yeah, this is as bad as it's going to get, our loan loss provisions, we've peaked, we're now on the way down. They all practically, except for Scotiabank, which perennially seems to be a little bit off-step, but they've all basically beat lowered expectations, but they still were strong. They've all said basically, we're kind of done with the elevated loan loss provisions. They all made up a lot of the lowered business on one side with capital markets activity, trading activity, some deal-making, and they're coming through pretty good. Now, they've recovered somewhat from their March lows, but even today, if you go with the standard big five, so it's Bank of Montreal, Bank of Nova Scotia, CIBC, Royal Bank, and Toronto-Dominion or TD, all of which, except for Bank of Nova Scotia, also have U.S. operations and they're all traded on the U.S. as well.
The average dividend yield today of these is 5.2%. There's a sixth bank called National Bank, which would like to be one of the big six, but meh, they're called big five...
Hill: ...they're not going to let him in the club. [laughs]
Gillies: They're still small, they tend to be fairly regional in Quebec. They're a good company, I own shares myself, but you know, they're kind of the pretender to the throne. But they'd like to be among the big six, but for now, we tend to call it the big five. The big five are averaging today a dividend yield of 5.2%. Importantly, none of them has cut their dividends, none of them has raised their dividends. I wouldn't be shocked to see a raise in the back half of 2021, say, they start raising their dividends again. But right now, average yield, 5.2%. The average price-to-book is about 1.3 for the big five, and the average forward earnings multiple is about 10.5.
So, these are all, traditionally these are good numbers to start positions in these banks. And as I've said, you're not going to get a multibagger on this unless you live a long time, but you're going to get a solid performer, dividend, plus 5% to 10% capital appreciation, probably, annually.
Hill: And I was just going to say, for anyone who owns a 10-year Treasury note, [laughs] can I interest you in a dividend of 5.2%? I mean, that alone is -- you know, as you said, look, these are not going to be multibaggers, but holy cow! For anyone who's like, I'm thinking about putting 5% into bonds. OK, you can do that, can I interest you in some Canadian banks?
Gillies: Well, and there's even vehicles out there, Chris. There are ETFs which hold a basket of these. So, if you don't want to replicate it yourself and buy all five, or all six, you can buy an ETF that already has this. And the dividends basically pass through. Now, you're going to pay a fee for an ETF, of course. So, maybe it's a good idea to buy a basket of these on your own. But I mean, the point is, yeah, in a world, if you have a portion of your portfolio that you're looking to use and gain yield, historically, these are a great place to start.
Hill: Jim Gillies, always good talking to you, thanks for being here.
Gillies: Thank you very much.
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 on Monday.
