2 Stocks for the Reopening That You Might Be Missing

Topps (yes, the baseball card company) gets ready to go public through a SPAC. Credit Suisse (CS) deals with fallout from the Archegos Capital debacle. In this episode of MarketFoolery, Motley Fool analyst Asit Sharma analyzes those stories and shares why he believes a Mexican airport operator and an American homebuilder could benefit from The Great Reopening.

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This video was recorded on April 6, 2021.

Chris Hill: It's Tuesday, April 6th, welcome to MarketFoolery. I'm Chris Hill, with me today, Asit Sharma. Thanks for being here.

Asit Sharma: Thrilled to be here, Chris.

Hill: We have stocks for the great reopening. We've got fallout from the Archegos Capital debacle. I think it's safe to call it a debacle at this point. But we're going to start with Topps, the company best known for baseball cards and Bazooka gum is going public with Mudrick Capital Acquisition Corp (MUDS). Yes, people. We have another SPAC on our hands. Michael Eisner, who used to be the person running the Walt Disney Corporation is the Chairman of Topps. Eisner is going to remain in that position. You tell me Asit, can I interest you in a few shares of Topps?

Sharma: Yeah, I'm interested. Chris, I sometimes make fun of some of these SPAC that are coming out we all do. We talk about SPAC stocks. But to me, this was SPACulous because [laughs] it gives you an entry into the collectibles market. Now there are some publicly traded collectibles companies. Funko comes to mind, they make those great bobbleheads collectibles. You can purchase online or in stores. But the opportunity to invest in baseball card collectibles is really neat. Topps is not a small company anymore. It's been around for decades. Sales last year rose 23% year-over-year to $567 million. This is going to be, not an immaterial deal. The company will have about $571 million in cash from the merger. I really like that Topps is branching out into the most cutting-edge type of collectibles. They're into NFTs, non-fungible tokens, for those of you who are crypto enthusiasts. They have Digital Collectibles. I think last month they introduced a Godzilla [laughs] NFT collectible. This is not your father, your grandfather's Topps anymore. 

This is what I like about SPACs; as much as I make fun of them personally sometimes, they're giving you opportunities, us as investors, opportunities to take part in sectors of the economy that we might not be able to. SPACs have introduced a lot of us to new avenues into alternative investments. The collectibles market is an alternative investment and I've been interested for a long time. What about you, Chris? You're going to invest in this one or at least look at it?

Hill: I'm going to look at this one, but I think you raise an interesting and important point, which is we talk all the time about different businesses and different industries that have optionality. Some businesses are really able to capitalize on their optionality opportunities. Others, it's a theoretical optionality. In the case of Topps, I like that they're doing this because I think it's easy for people who are not collectible enthusiasts and I think a lot of people are not collectible enthusiasts. [laughs] I think it's easy to look at them, in the case of Topps, just say, oh, it's baseball cards, or in the case of Funko Holdings, which we talked about recently on Motley Fool Money. You look at it and say, it's those little bobbleheads that collect dust on the wall, who would want that? But if Funko is any indication of where Topps could go as a public company, I think it's worth looking at. I mean, Funko Holdings is up more than 500% in the past year, and the optionality in that business is essentially all of pop culture. In the case of Topps, you can look at baseball and just say, well, who cares about baseball cards? Well, first of all, a lot of people do, but secondly, the fact that they are expanding beyond that, I think that alone merits interest.

Sharma: All that and we shouldn't forget, I think something like 30% of the company's revenue comes from confectionery brands like Ring Pop, who could forget Ring Pop. Also Bazooka bubblegum, [laughs] so this is a company that's pretty diversified, although I will say that confectionery business is not going to grow at the rate that some of the other revenue streams are growing at.

Hill: No, that's true, although there's something. I mean, when we talk about disruption, like who's going to disrupt it? Like who's going to disrupt the Ring Pop, who is going to disrupt gum? I think gum is here to stay, I think Ring Pops are too. I know it's not the growth engine for this business, but maybe it's more of the steady, reliable part of the business.

Sharma: Yeah, core revenue.

Hill: Last week, Credit Suisse said it was expecting heavy losses in the wake of our Archegos Capital's hedge fund melting down. Today, we got some more color around those losses. Investment Bank CEO, Brian Chin, is stepping down effective immediately, and he should. Chief Risk Officer, Lara Warner is also stepping down immediately, and she should. This is a $4.7 billion charge that Credit Suisse is taking because of this debacle. They're expecting a loss in the quarter of close to $1 billion. I'm sorry, if you're the Chief Risk Officer, you have one job and it's to lower the risk profile for the bank's portfolio. I'm assuming Ms. Warner has invested well, and does not need employment immediately because I can't imagine how she's going to get another job with that title as Chief Risk Officer, with this on her resume.

Sharma: Chris, there's so many risk officers around Wall Street that would do well to listen to what you just said. You have one job. [laughs] I know it's easy for us on one hand to say, how hard can it be? But truly, this isn't that difficult. When you look at losses that are at the magnitude of what you said, $4.7 billion, when the dust settles over this whole debacle, you and Jason talked about this recently on the show. The focus is going to shift a little bit from the obscurity of a so-called family office, which isn't subject to as much disclosure as your typical hedge fund. The attention is going to shift over to the institutions that were buying securities on behalf of the family office. To repeat a phrase that you said, it should, the attention should shift. Just because one part of the investment world is a little bit opaque, doesn't mean that companies, which are institutions trading on behalf of clients, essentially giving credit to these clients that they don't have an obligation to assess their counterparty risks anymore, that they don't have an obligation to do their due diligence or to monitor their own exposure relative to the rest of their business. 

These are such big numbers. It makes you wonder, what were these people thinking? I do understand that it's difficult to see how big a book a family office is trading in when you are just supplying one part of that. At the same time, there's a point at which you say, we don't need all this exposure, we can make money elsewhere, you have to really reward the opportunity cost of getting just a little bit greedy on the trading fees and the interest that you can make off of an arrangement like this. I frankly was stunned to see some of the numbers that are slowly trickling out among the institutions. But it makes you wonder this is not the first go-round for companies like Credit Suisse. In fact, Credit Suisse was already under some heavy fire for bad risk management last year and the year before that I'm thinking of Luckin Coffee. We'll see how this finally plays out. I know there will be more regulation around this whole idea of the private family office, which has not had the disclosure rules that are as robust as hedge funds. But this seems to be just pattern behavior for these types of institutions. I wonder, will they ever learn?

Hill: Thomas Gottstein, who is the CEO at Credit Suisse, I think he is saying and doing all the right things, all of the things that you would want if you were a shareholder in terms of the people responsible are walking out the door, and the comments that he made in terms of how seriously they're taking this. I think you can take him at face value, that they're taking this very seriously. That said, the stock is down more than 20% over the past month with this loss. There's nothing in this business's history that makes me think this is a screaming buy opportunity for Credit Suisse. [laughs] You look at a chart of their stock over the last 20 years. It looks like a roller coaster. They're stretches of time when this was a good stock to buy and then sell later. But over the long term, this is a stock that's lost money for long-term shareholders, and I'm not wishing them ill, but I don't think there's anything going on right now that moves Credit Suisse onto someone's watch list.

Sharma: Yeah. I could see those people who are just extreme value players taking positions here. To be honest, I can also see lots of other types of investors taking positions. You don't have to be an extreme value investor to buy this company at this point in time. But for many of us, the question is; why should I roll the dice? Once they start making pretty decent profits again and work their way out of this, what's the payoff? Maybe in three to five years something else goes wrong or blows up. I do agree with you, Gottstein said that Credit Suisse remains a formidable institution with a rich history. He also said serious lessons will be learned, [laughs] which almost has the rig of mistakes made. We're going to learn these lessons, but serious lessons will be learned. I hate that passive voice in situations [laughs] like these.

Hill: You know what, let me amend what I said earlier. He's saying almost all the right things, you're right.

Sharma: Almost, I agree with you there.

Hill: The passive voice is not great.

Sharma: He's doing the right things as you pointed out. He's doing a lot of the right things.

Hill: Credit Suisse, I don't think it's a stock idea to go on someone's watchlist. But for anyone looking for more stock ideas, if you haven't already checked out Motley Fool Stock Advisor, it is our flagship service. You get recommendations from Tom and David Gardner, you get their Best Buys Now and a lot more. Just go to stockideas.fool.com, and you get 50% off just for being one of the dozens of listeners. Again, that's stockideas.fool.com. 

Our email address is [email protected]. Question from Shannon in New Hampshire who writes, "A lot of people are talking about airlines and cruise lines benefiting from the reopening. What is an under-the-radar company or industry that's not getting as much attention that you think will benefit?" I like this question because she's right. There is a lot of talk [laughs] about airlines and cruise lines, although as Jason and I talked about yesterday, you look at the trouble Delta Air Lines had over the weekend, and they're not the only airline that's having trouble scaling back up. Asit, when you think about the world opening back up again, what are one or two companies or industries that you think, "Not a lot of people are talking about this, and I think this is one that could benefit?"

Sharma: Well, airlines are hard, Chris, because they're so leveraged. But how about airlines or airports that have operators? How about Mexican airport operators? [laughs] Our listener did say she wanted to go under the radar, so let's just under the radar. I like a company called Grupo Aeroportuario del Pacífico (PAC -1.27%), easier found by its symbol, PAC. This is a Mexican airport operator, they manage 12 domestic Mexican airports, as well as two international ones in Jamaica. They make their money when there's a lot of traffic flowing through airports because on the tickets that we buy, there are passenger fees that are allotted to that ticket. They get a slice of every customer or traveler that's transiting through each of their airports. As you can expect, 2020 [laughs] was not a good year for Grupo Aeroportuario del Pacífico. Their volumes have been brutal. The last quarterly report I saw Chris, volume was down about 44% in this most recently reported quarter versus the prior year. But they have this built-in advantage in that the airport industry is regulated in Mexico, so they have just a few companies that basically have monopolies over several airports each. 

As life gets back to normal and traffic and volume through these airports increases, they'll make money on fees. They'll also make more of their ancillary income in the form of leasing airport space for retail and concessions, operating some long-term car rental lots and the like. I like this idea a lot, this is a company that's been a little volatile over the past three to four years but it's done very, very well. If you look back over a 10-year period, it's trading at around 27 times forward earnings because in good times it does tend to do very well. I think it's an interesting play, it is under the radar but not as leveraged as your typical airline or cruise ship operator, I like it a little better than those ideas.

Hill: I like that. There are a lot of businesses out there that if they are not built entirely on this, part of their revenue stream is we get a little slice [laughs] of everything. You could look at Apple with the App Store, although I would argue Apple gets a slightly bigger slice in terms of the App Store revenue. Anything else?

Sharma: Let's also think a little bit outside of the box here. How about the home building industry, residential home building? Maybe the connection isn't quite as clear here, but just to look at the big picture, after the Great Recession, most of the home builders in the U.S. pulled back and they were badly damaged by that. We have now a situation in which residential housing is chronically underbuilt. We went into last year with a supply shortage of about 2.5 million units across the country. What's happened now? First during COVID, people, again, fell in love with the concept of owning a home. Now we come into 2021 and find that there is a tremendous amount of demand for new houses, but not a lot of supply. I like the home builders industry. In particular, I like one of the biggest home builders, Lennar Corp (LEN -2.36%), symbol is LEN. This is a company that has a backlog in the billions, it is seeing deliveries up year-over-year about 19%, it's seeing its new orders of homes up about 26% if you look year-over-year for the most recent quarter that they reported. This is also a company that invests a lot in technology, they've been trying to go capital-light by owning less land than they used to. A lot of good stuff to like here. 

They also have a lending arm which will help them in terms of diversifying the revenue. As people now leave COVID behind and feel more emboldened to make long-term decisions, this is an industry where the demand and supply dynamics are just really favorable for a three to five-year purchase. Not a lot of good home builders out there, but I particularly like Lennar just because it's trying to go capital-light, has a little bit better of a technology stack. This is good, but you can look at the other big home builders. I think as a group they're going to do well. Last thing I'll say about this, it's trading at just 10 times forward one-year earnings. It's an ignored group, again if we're going under the radar, this deserves some attention from investors.

Hill: I think if I'm remembering correctly, Lennar is the one that when they reported earnings this most recent quarter, their management was really bullish on 2021. Now that you mentioned it, I'm wondering how many people are avoiding home builders because they vividly remember the Great Recession? They think, "Well, the housing market is really hot right now all over the country, and the last time it was hot it was a bubble that exploded." I don't know. That's one of those things where there's no way of knowing what the answer is. But I find that the conversations that I've had over the past couple of months around housing with people, just average conversations, the people I'm talking to connect the dots in that way. It's, "Boy, I know someone who's trying to buy a house in this part of the country. Oh my god, it's great." I'm not the one bringing it up there, and they're like, "The last time this happened, everything went to hell." It's like, I don't know that we're in the same situation that we were in last time. I think what's fueling the housing market right now is not a huge number of people who shouldn't be buying houses are buying houses.

Sharma: Very astute points, all of them. We had different factors last time that caused everything to overheat and then crash. But we should look at the risk factors this time around, so rising interest rates could be one. Because if market rates do keep rising, that could cool off the market a bit. I like your point also in general about this industry because people are a bit scared, that's part of what's driving this lower multiple versus other industries. Is the glass half empty or half full? If you think it's half-full, then you're OK maybe holding for a few years and letting the market come to this industry once it's rotated out of other sectors. If you think the glass is maybe that's half full, but if you think that this risk is a little too much to take, then you may be onto something that there is a cyclical element to the industry if that comes into play again, maybe the profits will go down, certainly rising interest rates could cause that. In that case, the multiples will stay pretty flat. This is one that you do have to have a balanced look at, I tend to be on the optimistic side just because of that equation of so much demand that's out there and so little supply. I think that will trump in the end a temporary rise in interest rates for sure, and it will trump some other cyclical factors as well. A fun industry to watch, Chris, over the next I would say three to five years.

Hill: Asit Sharma, thanks so much for being here.

Sharma: It is a pleasure, thanks.

Hill: 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. 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.