The Big Macro

For the first time in forever, in this episode of MarketFoolery we're talking about The Big Macro (aka, the March jobs report) and the ripple effects for hiring across various industries. Also, GameStop (GME 7.58%) announced plans to sell millions of shares of its own stock, but what will it do with the money? Jason Moser analyzes those stories, discusses the big weekend box office numbers, and previews The Masters!

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This video was recorded on April 5, 2021.

Chris Hill: It's Monday, April 5th, welcome to MarketFoolery. I'm Chris Hill. With me today, Mr. Jason Moser. Good to see you.

Jason Moser: Good to see you. How's everything?

Hill: Things are good. We've got a new data point for the great reopening. We've got news from the stock of the year, but we're going to start in a place that we almost never start on this show. That is, we're going to start with the big macro, because last Friday's jobs report for the month of March was a stunner. Unemployment fell to 6%, there were 916,000 jobs added in the month of March. We also got revisions for January and February that added another 156,000 on top of that. Big gains in leisure, hospitality, construction. We can go into any number of directions. Where would you like to start?

Moser: Yeah. You're right. We could go in any number of directions and I think generally speaking, virtually all of this is really good news. You could sit there and parse the data and talk about U6 versus U3. The true unemployment rate is still in double-digits, and that's fine. There's a case to be made there, but really this is I think more about the trend. It does seem like things are moving all in the right direction. I think the good news is that this is yet another sign that things could be on a sustainable path forward. I think they are, given everything that we know about vaccines. At this point, vaccines are administered, obviously moving at a very quick pace. CDC published data showing that once you've been vaccinated, you're not passing this virus on. There is a lot of positive data out there that really should be leading to more good reopening news, I think just as April goes on into May. That's all great. I think the bad news that comes from this, and you could probably assume this was going to be the case regardless, this probably bolsters the likelihood that we'll see even more gridlock in DC if that's possible. I know it seems like [laughs] it's not possible, but perhaps it is. 

But I think given everything that we saw in the most recent stimulus offering, I think eking out any additional stimulus after this news, and given everything that we noted, I think it's going to be very difficult. It's going to be interesting to see how much they focus on that, particularly with all of these bold infrastructure, spending goals. I'm OK with that. I think gridlock in DC, that's the norm. That's not the exception. You just have to assume that's always going to be the case. Generally speaking though, I think that there are a lot of pockets here that show we're headed in the right direction, and I think that's sustainable.

Hill: I think it's sustainable as well, although I do not envy the people on the front lines of hiring, because for as great as this new is, we also got some reminders over the weekend that you can't just flip a switch. All of a sudden the people come back to the workforce. I don't know if you saw this, but Delta Air Lines (DAL -2.62%) had to cancel about 100 flights, not because of mechanical problems, but because of staff shortages.

Moser: Sure. 

Hill: We saw this a decade ago when we got the rebound in housing, but it really took years because the housing market got hit so hard. There were people, skilled labor in that workforce, who left that workforce all together. It's really hard to get skilled labor back at your place of employment, whether you're a homebuilder, whether you're an airline. This is going to be interesting to see which large companies are able to ramp backup, because we saw over the past year, Jason, companies scaling down very quickly, saying, look, we're putting people on furlough. We're laying people off by the thousands. You can't just hire by the thousands as quickly.

Moser: No, not at all. Having been [laughs] involved with helping to hire, I certainly have experience in knowing how difficult that is. It is a process and you really want to make sure you do the hard work on the front end so that you can keep those folks for longer periods of time. Much like the business is acquiring customers, you pay a lot to get them, and then once you get them, you really want to keep them. Same thing with hiring. You're going to pay a lot upfront really to get that individual under your organization. You want to do the hard work upfront to make sure you're bringing someone in that's going to stick around for a while. To me, I don't want to say astounding, but I'm a little bit surprised at some of these bigger companies still spinning their wheels on this versus some other big companies. Look at Alphabet/Google, Microsoft, both companies recently coming out and saying, hey, listen, we're accelerating bringing people back to work. We're going back now, we're doing it earlier because all the data is there. 

There are ways to do this, to do it safely, to do it in a way that gives people options, but you're seeing companies like Alphabet and Microsoft, not only are they bringing folks back, and they've been hiring all throughout this whole deal, of course, but they're bringing folks back in now. They know that they need to get that ball rolling now versus other companies that are either saying, well, we're going to wait till September or October, we're still going to play it by year. There are costs associated with that. At some point we're going to see where virtual work is going to become a bit of a way. I think certain companies, certain businesses, certain lines of work, it's really OK. I think it's probably fun. Others where your work is a bit more collaborative in nature, I think we're going to start seeing physically being together becoming a bit more of a competitive advantage. I think with companies like Microsoft, Alphabet, I think Netflix is another one. We've seen Reed Hastings very upfront with his feelings on this. These are businesses that rely on collaboration, teams working together. I think that one of the lessons we've learned over the past year is that while we have the tools for virtual work, in a lot of cases, virtual work isn't ideal. I think that the virtues of virtual work, more than anything are touted for their convenience, but as far as collaboration, as far as team building, that is a bigger challenge altogether. I think that's why you're seeing these businesses like Microsoft and Alphabet, they're accelerating because I think they know that. 

Now, you've got other companies like Facebook and Twitter that are basically saying, well, we'll just go virtual forever, and maybe that's fine for them. I would argue that those are businesses that are probably not nearly as dependent on innovation. That may seem a little odd to say, but Twitter is Twitter and Facebook ultimately is Facebook. When they find something that they want, they typically just buy it. I don't think social is as important as what companies like Alphabet and Microsoft are doing. It's very interesting to see that disparity there, but I would give the upper hand to the companies that are accelerating now because there is a right way to do it. I think these companies have figured that out and I think that they will benefit from that as the back half of the year starts rolling.

Hill: Shares of GameStop are down a bit this morning after the company announced it plans to sell upwards of $1 billion worth of stock. This isn't a surprise. We knew this was coming. Ryan Cowen and his team had indicated they were going to make this move. Now it makes it official. I don't know about you, Jason, but I looked at this story this morning and I thought to myself, not that Ryan Cowen and his colleagues in the C-suite of GameStop haven't been working hard, [laughs] but I feel like the real work starts now because they're going to have cash that they can put to use. We talk all the time about how important capital allocation is as a skill for company management, and now we're going to see what they do with the cash.

Moser: Yeah. I think you're right. I think that the hard work starts now. One of the benefits of being a publicly traded company is access to capital. There's just more ways you can raise that capital. Sometimes that's good and sometimes that's bad, but clearly, a company like GameStop, which is in the middle of a transition, it's good that they have that access. They burn through some cash over the past couple of years. If you look at their balance sheet, they had a bit better than $1.6 billion in cash as of February 2019. That's down to around $500 million now. Clearly, they're going to need some cash if they're going to be pivoting this business, which is what they plan to do. I don't know that the answer is so clear, they spout the e-commerce, the digital, all of those buzzwords that you want to hear, but it feels like it's a little bit of a daily dollar short too. This has been a fascinating [laughs] story to follow-up because even at today's price, it's up 835% year-to-date. Forget about the fact that it's up better than 6,000% over the last 12 months. That's obviously, something is not right here, Chris [laughs]. This is the one where you want to pay attention to the business fundamentals versus the staff performance because they don't always track, and this is I guess why they don't track. But I do like the fact that they are doing this. 

$1 billion is the number that gets bandied around, but I think it's worth noting they said they're not going to issue any more than 3.5 million shares. Actually, if they want to get $1 billion, they would need a share price closer to $300 if they were going to actually raise all of that cash. It's not going to be $1 billion, but it's going to be a good amount of money to give them at least an award chest to try to figure this out, to buy some time, and that right now I think that's going to be the most valuable thing they can have. That capital buys them time to really try to make this work. I reckon by the end of this year, the signs will certainly be more clear as to whether this is working out. I think the holiday season coming up here is going to be really important for a lot of businesses. GameStop is no exception there.

Hill: I wonder, well, I'm just curious to see how much of this cash is put to work closing more locations. But they still have closed to 5,000 locations, which seems like it's I don't know, at least 3,000 too many.

Moser: It feels like a lot, and for folks always wondering what they do with this kind of money. I mean, you can go to the filing and you could just search through the filing use of proceeds and that will take you to a section where it actually tells you they have to state what they're going to do with this money. In most cases, they are going to say it's for working capital and general corporate purposes. I mean, that's the same thing you've got here. It's something that further strengthens their balance sheet to give them time and give them the opportunity to transform this business. Thankfully, it's not something where they say, well, that use of proceeds is going to go to pay down debt, because then you'd be like that really what's the point. That's a bit more of a red flag. While the use of proceeds is a bit bigger picture in nature, it is one of those things that in this case at least, it's something that's meant for transformation. 

One thing and then we can move on. But just I thought this was funny because whenever you read through these filings, much like 10-K or a 10-Q, you're going to see a risks section. They talk about risks to the business. In most of them are just standard boilerplate risks that are involved with publicly traded companies. But at the very front, the very top of the risk section for GameStop, they actually referred to the short squeeze risk. I mean, that language was actually used. It's not surprising and I actually down for the CAFTA management for getting that in there because it really does seem like one of the bigger risks in this case is stock that is being very easily manipulated due to the Reddit situation, technology in general and just the ease of trading today versus 10 years ago. Just maybe a little bit of self awareness is a good thing, right?

Hill: Absolutely. The entertainment industry got some good news this morning. Godzilla versus Kong took in nearly $50 million at the box office over the weekend. Keep in mind, this is with limited capacity in the theaters, and this is also with the same movie available streaming on HBO Max. Probably not a surprise that shares of AMC (AMC -3.25%) Theatres, Cinemark (CNK -0.67%) and Cineworld group are all up today. This number surprised me. I thought it would do pretty well, but to me, pretty well was somewhere closer to $20 million. Yeah, that surprised me.

Moser: It didn't surprise me as much, and I think part of that really does go back to the state of affairs right now. I mean, we have seen really a phenomenal rollout here on the vaccine side. I think honestly, I mean, I really do think this is changing the perspective of a lot of folks. I think a lot of people are starting to feel better about going out and doing things, or be it in a bit of a different way. You're still being a little bit more careful about things. You're probably wearing a mask, you're probably adhering to social distancing measures. But clearly, we're in a much different position today than we were a year ago. I think that is becoming very clear, you read the news in places like Europe where it does seem like they're really battening down the hatches again. You can argue lockdown versus no lockdown 'till the cows come home, everyone's got an opinion there, but I think we're at the point now where we've done so well on the vaccine front, we've gotten this rollout such a good fashion, and it's only getting better. In much like investing is all about the future, I think in this case, do people are really, really eager to look toward the future and maybe pull the future a little bit forward and go ahead and go back out to that movie theater if they feel like they can do it in somewhat of a safer fashion than before. We've kicked around this idea of whether movie theaters are going the way of the dodo bird or not. I've always come to the conclusion that I don't think they are going away. The dodo bird, I think there are plenty of people that still love going to movies. Heck, I love going to a movie. I don't do that often, but if there's a great movie I want to see in a theater, that's a terrific experience. It's one that's very difficult to replicate. You can't replicate that in your home for the most part. 

I think a lot of people are really excited to be able to get back out and do things. I don't know that Kong versus Godzilla or whatever this is, that is not really the movie that's at the top of my watchlist. There will be one or two that come out, and we'll be excited to be able to get back out there and see them. I think that again, a company like AMC, we've talked a lot about AMC and GameStop in the same sentences. I think AMC, they've done a good job of securing financing, utilizing the capital markets to really put themselves in a position to be able to weather the storm. CEO Adam Hera and even note, I think he's done a good job of prioritizing things. First and foremost, you've got to survive, and that's what they've been focused on. When you issue those shares, I mean, of course the first thing we're going to criticize or shareholders are going to get deluded. He acknowledged that. Dilution is something they care about, but dilution doesn't matter if you don't exist. You got to exist first and so you get that capital, and then you get yourself on firmer footing, and then you start shaping that business for the future. Preparing for the way things might be a little bit different in the future. I think perhaps movie theaters, perhaps it will be a shrinking market opportunity, but I don't think it's a market opportunity that's going away and maybe that puts AMC in a good position here.

Hill: Last thing, and then I'll let you go. The Masters starts this week. What are you going to be watching? Who are you going to be watching? Does Jordan Spieth winning the Texas open do anything for Under Armour (UAA) shareholders?

Moser: [laughs] I don't know that it does anything for Under Armour shareholders. I know, speaking as an Under Armour shareholder, I wish. But I mean, it doesn't hurt. Let's put it that way, it doesn't hurt. Does it move the share price? Probably not. I am really excited to see the tournament back in action this week, it feels spoiled because we've gotten a couple of masters here over the last five months or so, and that's not normal. I think Jordan Spieth winning in Texas yesterday was a monumental step forward. Anybody who plays golf knows it's about momentum, it's about being in a good mindset. He has a good mindset right now. He knows that golf course very well. I suspect he's going to go into a lot of confidence, and I suspect he'll do well. I also think that given Dustin Johnson winning back in November, I mean, he is just strong on so many levels. Honestly, those would be the two guys at the top of my list, right. There'll be Dustin Johnson and Jordan Spieth. But hey, listen Jordan takes some of the masters. I mean, maybe that does give Under Armour a little bit more front and center in the conversation, and that can't be a bad thing.

Hill: Jason Moser, thanks for being here.

Moser: Thank you.

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 and 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.