Banks were forced to stop buying back shares when the pandemic started, but recent commentary from Treasury Secretary Janet Yellen and the Federal Reserve indicates there could be better times ahead. Thanks to fintechs SoFi and Robinhood, it could get easier to buy shares of the hottest IPOs. And we just learned that WeWork is finally going public by way of a special purpose acquisition company (SPAC). In this week's episode, Fool.com contributor Matt Frankel, CFP, and Industry Focus host Jason Moser take a closer look into these stories and what investors need to know.
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This video was recorded on March 29, 2021.
Jason Moser: It's Monday, March 29th. I am your host, Jason Moser. On today's financial show, we're going to take a look at the latest news regarding banks, dividends, and share buybacks. So far, Robinhood plans to bring IPOs to the investing masses. Speaking of IPOs, there's one on the horizon that investors should probably be aware of. We'll wrap up the show with the listener question, join me this week is back. You springtime fresh, [laughs] Certified Financial Planner, Mr. Matt Frankel. Matt, what's up?
Matt Frankel: How's it going? Hopefully it's a little less boring where you are.
Moser: No it's pretty policy here, man, I'd tell you, but I'm not complaining. Am a big fan of the change in seasons. I don't know that there's a season that I really like more than the other, I like the change in seasons. When spring comes to me, that is a lot of fun. I was sitting outside on my front porch drinking some coffee and we had a Japanese cherry blossom out in our front yard that is just in full bloom right now. It is just the most beautiful thing. The blooms are so short lived that should be criminal. But, I was also thinking, it's a nice little masters alarm clock, Matt masters, just around the corner.
Frankel: That is true. I know you've got South Carolina during probably its powdered season.
Moser: I grew up there.
Frankel: With all the yellow cars and all that going around the upward getting it up here.
Moser: May not be quite as bad down there. But yes, we definitely are dealing with it up here now too. But like I said, it's nice to see the change in seasons. Well, Matt, let's jump into this week's stories. We have one to start off with here. This is obviously very relevant to the greater world of financials. Treasury secretary, Janet Yellen, says that banks have improved their capital positions. It should be allowed to continue to buy back their own shares, as well as paying and growing those dividends. I mean, this is welcome news from someone who clearly plays an important role in what these banks are able to do and what they are able to not do. To me, this was a matter of when not really if, but to see the statement is encouraging particularly given the way 2020 really throws a curveball at it pretty much everyone.
Frankel: Banks for some of the hardest hit stocks when the pandemic started.
Frankel: For good reason, people thought that they wouldn't be able to pay their loans, which, for our business that low, it's somebody that's pretty devastating. Not just that, but interest rates collapsed to almost nothing. Not holding your people, are banks not at risk of not getting paid back for their loans. But the interest they are collecting on the loans that they are being paid on is a lot lower than it used to be. They got a one, two punch there. But as we go on, it really looks like banks aren't being affected as harshly as we thought they might be. One, there were government programs to pretty much suspend loan payments. The mortgage forbearance that was included in the CARES Act, for example, really helps people keep their heads above water financially. I know my aunt was having a truck when she lost her job because of COVID she was having trouble paying some bills. They didn't give her any hard time. She asked if you can postpone or auto loan for a few months and they spend it. Banks have been really great about working with customers, even where they didn't legally have to. Three rounds of stimulus money. That's unprecedented. The unemployment insurance boost, that was also unprecedented. People were generally able to pay their bills. Default rates weren't quite as low as they were pre pandemic, but not nearly as bad as we thought. Now interest rates are starting to tick up, which is pretty terrible for every technology stock in the market as we've seen. But for banks, that's actually pretty welcome news because we're getting interest rates back to somewhat normal levels. When banks loan money and customers pay it back, they are actually making some money as well. It's looking pretty good. I agree with Johnny Yellow and the bank should be able to get started with this. The Fed came out right afterwards. It said that banks on June 30th, provided that they passed the stress test. Remember that stress tests happened in June each year. If banks pass the stress test then they can start resuming buybacks and share dividends at normal levels. Banks have been able to pay dividends as whole time. Pretty much every bank stock that was paying dividend and still doing so.
Frankel: If you remember, Wells Fargo cut their dividend because they weren't allowed to pay the full one. Banks have been paying dividends, no banks have been buying back stock. That's really the big ex-factor there.
Moser: Yes. That's important too because I think for most people, for most investors, you would invest in banks, that would be really the crux of the thesis. These aren't your new fangled debt companies that are going to be growing by leaps and bounds. You really are part of the thesis is the dividends, the income, and the share repurchases are returning value over longer periods of time. I mean, to that point on Wells Fargo because of listeners will remember, Wells Fargo is the financial stuff that you pick for 2021. Remember, we had our show at the beginning of the year and Wells Fargo was your financial stock to watch for 2021. Partly because they had been coming from such a dark place, I guess the best way to put it. It's really been going through a lot of trouble there recently and it seemed like shares were reflective of that. It's been a decent year for Wells Fargo so far, shares up about 28%, outpacing the market nicely. It feels like there could be plenty of room for Wells to run here for the rest of the year, particularly given this news.
Frankel: Yeah. If you think it's been good so far, wait until they were approved to buyback, say 10% of our shares over the next year or to bring their dividend. Even their CEO said it's going to take a little while for the dividend to get back to normal levels or to prepare dermic levels. But there's no reason they won't be improved, spend a few billion on share buybacks.
Moser: I can imagine.
Frankel: The stock's still trading at a pretty big discount to book value. They're buying their assets back for very cheaply, whether usually share buybacks. I think there's a lot of room for value creation adjusted for the buybacks and dividends, not necessarily growth of the business. That's a bonus if Wells Fargo's eventually lap the growth. Remember that the Federal Reserve penalty since they can't grow is still in place.
Moser: Yes, that's right. It's not just the big banks too. Looking at just banking in general. We have been talking about this all the way into the end of 2020. Particularly as we look back and see financials were one of the very few underperformers for the year. That was very understandable. It was also playing to see there were some potential catalysts for banks in general to start coming back around. Particularly on the interest rate side, but also as the economy gets back up and running. Like I said, it's not just the big banks. Ameris Bancorp again, another bank that we follow here on the show, a stock die on, but a much smaller bank. I mean, it's just the small-cap when you look at it compared to something like a Wells Fargo. But they're going to absolutely see benefits from that rising interest rate environment. They were coming from a little bit of a dark place as well, just the general market malaise, right there pertaining to banks and they were just digesting that big Fidelity acquisition. To me that was another stock at the time that seemed really cheap. Then you look year-to-date and Ameris Bank core up 40% in looking at their most recent results. It does seem like they are poised for a strong year as well. Nice to see even smaller banks bouncing back as well.
Frankel: It's pretty much any bank that is primarily a lender which Americas has definitely in that category. Like for example, Bank of America isn't just a lender. They have an investment banking division. They have a trading desk, they have a wealth management division. Wells Fargo is primarily a lender. Ameris is primarily a lender. Most smaller banks, to your point, are primarily lenders. That's really the subset of the banking industry we saw really get crushed. Who has the most of the benefit from things normalizing. Jaddi Johan's comments are really the first step toward banks getting back to normal.
Moser: Well that's good to see. Matt so far and Robinhood recently just announced here that they're coming up with a platform that will offer investors the ability to invest in IPOs. For folks wondering what you mean exactly by that, I mean I can invest in an IPO as well. You can invest in a company when it goes public and it starts trading on the open market. But oftentimes, you're not going to get in on that IPO price. You're going to be an individual investor, you're going to get in there after the pop, and oftentimes that means a lot of money is left on the table. But it looks like SoFi and Robinhood are trying to crack that nut, so to speak, in giving individual investors more the opportunity to get in there on those IPOs and really benefit from these companies going public. Let's talk a little bit about this because it's traditionally an opportunity, it's only been available for, call it what it is, folks with a lot of money. It seems like a really neat idea. I can't really say that I see a whole heck of a lot of downside, but I'm a little conflicted. I feel like I trust SoFi more than I trust Robinhood at this point. Am I misguided there?
Frankel: We'll talk about the products in just for a second, but first to your point, let me tell you why this is so important.
Frankel: I guess arguably the biggest IPO to happen in the past year would be Airbnb. You could argue that, but I'd say that's one of the biggest.
Frankel: Airbnb went public, they set their IPO price at $68 a share. So that's what institutional investors, that's what Goldman Sachs sold shares for their clients for, as you put it, the rich, I certainly didn't get into the Airbnb IPO.
Moser: Nor did I.
Frankel: All the investment banking clients paid $68 a share. You know what the lowest price on the open-market Airbnb has traded for in the time since its IPO?
Moser: I feel like it's $90, I'm just spitballing $90.
Frankel: $120-$150. That's the cheapest anybody but like you and me would have been able to pay for, and that's if we timed it perfectly. Almost double. That's why this is so important. There's a real, let's call it an imbalance in the IPO market toward rich investors.
Frankel: I will talk more about SoFi's platform, because they gave more detail than Robinhood did.
Frankel: Again, I'd prefer SoFi to Robinhood, I'm a SoFi customer, this might get me to be a SoFi best customer.
Frankel: SoFi is going to actually become an underwriter of these IPOs, like Goldman Sachs is, like Fidelity is, like the big investment banks are.
Frankel: Now, a lot of investment banks are underwriters, like Bank of America is commonly an underwriter on a lot of these big IPOs. But that doesn't mean they sell their shares to anyone who wants them.
Frankel: They're usually out of the reach. SoFi wants to be an underwriter like these other investment banks are, but they want to sell them to anybody. They've already sent out an email to their clients about this. I got a SoFi email about the subject. They're offering this to any clients with over $3,000 in their investment accounts. Not necessarily that you want to put $3,000 into an IPO, $3,000 total in assets in your accounts.
Frankel: But they're opening this up pretty widely. The CEO, I don't know if you're familiar with this, CEO Anthony Noto of SoFi.
Moser: Yeah, absolutely.
Frankel: He was formerly head of Tech Media and Telecom at Goldman Sachs.
Frankel: He actually presided over the Twitter IPO.
Moser: Yeah. Well, to your point, I think he was also the CEO at Twitter, I believe but even more so he was the CFO, I think of the NFL, wouldn't he?
Frankel: Yeah. He has a big IPO background.
Frankel: Very impressive resume. We can spend the whole show talking about what he has done in the past and stuff like that.
Frankel: But at Goldman he supervised over 50 IPOs himself, so he gets this process. That's what makes me really confident because he wouldn't be promising this if he could deliver.
Frankel: Robinhood said they want to create a similar platform. They actually announced it first to be fair.
Frankel: Robinhood said they were going to bring IPOs to the masters first. It's unclear whether they actually want to become an underwriter or whether they want to work out some deal to get access to shares early, something like that. They did say they want to curve out a block of their own shares when they go public to sell to their own clients, not uncommon, Coinbase said something similar. Airbnb actually did give their hosts a way to get it on the IPO, so that's not too uncommon. But just opening up general IPOs to the masses because I use TD Ameritrade, I think you said you do too.
Frankel: They offer some IPOs. But if I'm being honest, it's never the ones that I really want to get into. It will be like some random small healthcare company that I've never heard of that they offer some shares. It's not Airbnb, it's not DoorDash, it's not even really the high profile stacks that I would want to get into that they offer to the public. Being able to really have by pick of IPOs, that could be a reason to move over to SoFi. But at the same time, like we saw on Robinhood started commission-free investing. Now, when's the last time you paid a commission to trade a stock?
Moser: Yeah. It feels like it's been forever. In reality, it's been a year I guess, but that was a nice move.
Frankel: There was a big ripple effect through the industry and I could see something similar happening here. If enough customers leave like TD Ameritrades and Merrill Edge and Schwabs and all those to go to SoFi because they're offering IPOs, how long before they figure out, hey, we shouldn't just sell these shares for the rich customers maybe we should sell them to whoever wants them.
Moser: Yeah. I think that was neat with banks, with companies like SoFi in these new tech driven financial services companies, whether they're their own banks or whether they're just partnering up with financial institutions. It's really great to see these companies focused on such an important issue in bringing financial tools to the masses, making it easier than ever to manage your financial life, whatever that may be, whether it's just managing a checking account, paying your bills, investing, saving, budgeting, whatever it may be, it's really neat to see all of the investments being made in the space. I think honestly, going back to SoFi and leadership there with Anthony Noto, to me, there's a lot of trust that I afford SoFi simply because of him. Because I've followed him along through his career and what he's done with Goldman, what he's done with Twitter, or what he's done at SoFi. Knowing his history in his job responsibilities for the NFL, this isn't he's first rodeo, so to speak, he has a lot of experience in this space and he also seems to be very customer focused, and that can really be the differentiator when you are so customer-focused. It's one thing to say it, but it's another thing to really do it and really execute on it. To me, at least at this point, Anthony Noto and SoFi are absolutely executing on that customer service front in bringing new tools and services and products to people that need them the most.
Frankel: Yeah. I like each of their special services and products. SoFi is a lot more than Robinhood when it comes to products and services.
Frankel: That's, I think, why I like them a lot more there. You get the vibe that they care about their users' finances. They started out as a lender, primarily student loans was what they started out, like consolidation loans and things like that, they've got it the personal loans, there's like a whole financial community. They take other credit information into account. They take the users' personal story into account. They had member meet ups to help with personal finance before COVID. There were member meet ups in pretty much every major city for SoFi members. It's just like a real community of finance. It's like the stock trading is just to complement everything. They try to emphasize long-term investment a lot more than Robinhood does I feel like. Robinhood is a trading platform, I think they've used that word.
Frankel: SoFi, it's called SoFi Invest, it's not called SoFi Trading.
Frankel: They're designed for long-term investors, and really that's what IPO investing should be for. TD Ameritrade, for example, penalizes you if you sell your IPO shares. If you're a rich client, you get your IPOs shares, and you churn your IPO as they call it, you get penalized and you'll get excluded from future deals, they're really long term. That's why SoFi really conveys like a long-term priority.
Moser: Yeah. I like that point a lot. Some folks have just consider it semantics and say, "Well, trade versus invest, big deal, they're really the same thing." Honestly, they're not though. I think the longer you've invested, the more you realize very clearly they are absolutely two very different things. To me, that's an excellent message that SoFi conveys. I wonder if TD Ameritrade will consider rebranding, TD Amerivest. Food for thought. Matt, just when you thought it was safe to forget about WeWork, it's back. Yes, the flexible office space specialist has decided it's time to go public again. Of course, Matt, it's going public via Spec. Is WeWork going to give Specs a bad name?
Frankel: It depends. It's not my portfolio, which is why I could talk about it right now. But so on one hand, it might look like you're getting a discount. WeWork first wanted to go public in 2019, if you remember. At the time, Goldman Sachs said their valuation should be about $65 billion.
Frankel: The Spec IPO that they're doing is at a valuation of $9 billion and that includes the new money being put in. [inaudible] Some discount or did it just like come back down to earth a little bit?
Moser: Still sleeves going to price honestly give them what we know today but go on.
Frankel: This factor called BowX Acquisition Corporation (NASDAQ: BOWX), ticker symbol is B-O-W-X, by a venture capital fund called Bow capital. It values WeWork at $9 billion, including debt and including the $1.3 billion in new capital that's being injected into the business. That includes almost half $1 billion from the stack and another $800 million from a pipe, if you remember, pipe is that investment round that takes place at the same time with private investors. It's kind of really a confidence booster if you see all these big institutions are willing to put their money in. After this is done, WeWork will have $1.9 billion of cash and another $550 million line of credit. That may sound like a lot. WeWork loss $3.2 billion in 2020 and $3.5 billion in 2019.
Moser: Well, no, that sounds like a lot.
Frankel: It does, doesn't it?
Frankel: To be fair, 2020 was not a normal year for offices.
Frankel: We can't really blame them for the 2020 losses. If you remember, after the IPO nonsense in 2019, WeWork, their CEO, they got rid of them. Softbank ended up taking a majority stake which they still own.
Frankel: The new CEO has done a good job of cost-cutting, things like that. Out of that $3.2 billion, more than a billion of it was things like impairment charges, writedowns, things like that. They got rid of them, some underperforming spaces, took a loss, things like that. It was not as bad as they made it sound. They improved their free cash flow, which was still negative. They improved their free cash flow by $1.6 billion over 2019. Impressive given that there was a pandemic going on. They ended 2020 with 47% of their space occupied. That's not great.
Frankel: In all these spec deals, they make projections for a few years. They're projecting it will be up to 90% occupancy by 2022. Their thesis is the reopening and the post-COVID world will actually be a net benefit to co-working and flexible office space. When you think of it this way, say you work for Twitter, it has already said that you could work remotely after the pandemic, whatever you want. You leave Silicon Valley, you go somewhere else. You get an apartment wherever, but then you still need a space to work. You don't necessarily want to work from home every day. We talked about it before, we both enjoy working at home sometimes, but we want the option not to have to work at home.
Frankel: People who are being told they can work from home permanently are going to take their companies up on that and leave the main office, but could work in these flexible or co-working spaces, which I can tell you firsthand, are pretty affordable. I mean, I go to one. They're thinking it could be a net positive for WeWork. The company still has a ton to prove, loss of $3.2 billion, even if you get rid of all the impairment charges, it was almost two billion last year. They have a lot to prove in terms of their path to profitability. I don't care if they have $1.6 billion in the bank if they're losing billions of [laughs] dollars every year.
Frankel: That doesn't really help.
Frankel: It just buys them a couple of months of wiggle room. I want to see them really have a path to profitability before I would ever consider putting my money in. I like co-working. I like more of the, mom-and-pops type co-working space like the one I go to with our real community feeling, it doesn't feel as, I guess, as sterile as it has one of the corporate office spaces. Same reason I like Fool HQ. It doesn't feel corporate.
Frankel: I mean, I don't know if it's going to make it long-term, but this definitely gives them new life. I'll tell you that much.
Moser: Indeed it does. Matt, before we wrap the show up, we have a question from a listener on Twitter. I thought we could tackle here real quickly. @Lee in Raleigh asks, "Hi Jason, long time Motley Fool subscriber podcast listener." Thank you, Lee, appreciate that. "I know you're big on McCormick," yes, I am, "and was wondering if you could explain on an upcoming show what's up with the statement of changes in beneficial ownership of securities that are currently pending. I saw it when I got the proxy statement." Thanks for the question, we really appreciate it. Matt, I think her question hits really in two ways. In one, she uses McCormick as a specific example, should have had a link to the Investor Relations page, and there were all these Form 4s there, these SEC filings that are required whenever insiders purchase or whenever they transact shares in the company. I think on one, she's asking in specific to McCormick is there something to be concerned with and then two, ultimately what to make of insider selling in general. I think it's a good question for a number of different reasons and I thought it'd be one we can talk about for a minute here because I think it's easy for folks to see insider selling and immediately, whoa, think something is up, that's a problem, that's a red flag. That's not really often the case though, is it?
Frankel: No. First of all, those statements of beneficial ownership changes, can be for or against a lot of other purchases. When you speak about McCormick's specifically, I know that's top of your watch list. [laughs] In the pandemic, I saw a lot of my favorite company's executives are buying hand over fist. Store Capital is an example where pretty much every executive bought shares when the pandemic started. Ryman Hospitality is another one where the CEO put millions of dollars of his own money into the stock at low prices. They work both ways. That's the first one. No. 2, there are a lot of reasons CEOs and other insiders, those are usually a company officer or a board member. When you see a change in ownership. A lot of them get compensated with stock options. That's a big part of their compensation or restricted shares that can't be sold for a certain amount of time. When those mature, a lot of times they will exercise then immediately sell them. Not necessarily because they don't believe in the company, because that's a part of their salary. Let's say I give Jason restricted stock options, in two years, he could sell them. That makes it in his best interest to make the company perform really, really well over those two years. Then at the end of those two years, though, he can exercise those options as part of his compensation. It doesn't mean he doesn't believe in the company. Usually, these people have other, each year this cycle repeats, they get more restricted stock and more options and incentivizes them to keep doing that. Jack Dorsey is one of the big one that you'll see from time-to-time like there'll be stock options expiring he'll need to sell them. Obviously still believes in his companies, where working pretty much for free, but it's a form of compensation. The Form 4s should tell you there's usually a code with the transaction that says if it was an open market sale, whether it was options are exercised, whether they actually disposed of shares from their own portfolio, things like that. I would say, to make a long story short, it depends on the circumstances surrounding the sale and whether or not the person is still incentivized to do their job well. Obviously, if an executive dumps 50% of their shares with no explanation, it should raise some eyebrows.
Frankel: But if they're exercising restricted shares and selling them and still own 2% or 3% of the company, then I wouldn't look too much into it.
Moser: I mean, either I think you really nailed most of that there. I don't think there's anything really different in play with McCormick here. A lot of these Form 4s are related to restricted stock units, it is a compensation thing. I will give a perfect example. I tell folks sometimes listening to me, this is The Motley Fool. The Motley Fool is not a publicly traded company, but we as employees do get shares in the company. I've sold shares in The Motley Fool before, and that's not to say that I don't believe in our company far from it. I absolutely don't believe in the company, but it's a part of compensation. It goes back to that old saw from Peter Lynch who said paraphrasing, but there are many reasons to sell and one reason to buy. Everybody is a little bit different. They've got things going on in their lives, this is compensation-related, people plan for projects at home or education, or expenses, whatever it may be. It's also worth noting too, oftentimes you'll see these sales oftentimes are related to a specific rule, rule 10b5-1, which ultimately its an ACC plan which allows the insiders, the publicly traded companies to set up a trading plan to make those sales without creating the impression that they're trying to time them. I think generally speaking, looking for companies where there is strong insider ownership is a great thing to find. It's not a reason to invest, it's a nice thing to find. The bigger the company, the more difficult it's going to be for insiders to hold a meaningful amount of those shares just because the company is bigger and McCormick has been around for a long time. But yeah, looking through the Form 4s and McCormick is certainly not the only company where you see this. It looks like in most cases these are restricted stock units where sales are happening and that's because their performance compensation. Then you can also see on those Form 4s, the number of shares held by that individual after the sale and I can give you an idea of what exposure they still have to the business but yeah. I don't see anything here in regard to McCormick's Form 4s they're creating concern for me but it's always something worth noting. It is, I think the knee-jerk reaction is insiders are selling, there must be something wrong. But it's something that requires a little bit more digging into and I think understanding that again, like Peter Lynch said, "There are a lot of different reasons to sell." You can't really hold them against people because in most cases it's compensation-related and we all have our plans. We all have budgeting for certain things, we have life events and things that come up. Good question, Lee and thank you for asking it. Hopefully, that was helpful and Matt, thank you for such a well-informed answer as usual. But Matt, I think that I think that's going to do it for us this week. I think we've wrapped it up here. I don't know that we have much else to get into, so listen I'm glad to see that you are back safe and sound and glad you had a great time there in Vegas, you're able to go enjoy it. Hopefully we'll be able to connect you sooner rather than later, but look forward to next week.
Frankel: Always glad to join you and it was nice to take a break, but always good to be back in now and finally starting to get caught up. [laughs]
Moser: Well, we'll let you get back to getting caught up. [laughs] That's going to do it for us this week folks. Remember you can always reach out to us on Twitter at @MFindustryfocus or you can drop us an email at [email protected]. As always, people on the program may have interest 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 Tim Sparks for putting the show together for us. For Matt Frankel, I'm Jason Moser. Thanks for listening, we will see you next week!