Stitch Fix (SFIX) rises on better than expected third-quarter results. Chico's (CHS) gets involved in an activist investor battle. Berkshire Hathaway (BRK.A 1.66%) invests $500 million in Nubank, an online bank in Brazil. In this episode of MarketFoolery, Motley Fool analyst Jim Gillies analyzes those stories and shares why he believes we're living in a golden age of "The Greater Fool."

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This video was recorded on June 8, 2021.

Chris Hill: It's Tuesday, June 8th, welcome to MarketFoolery. I'm Chris Hill, with me today, Mr. Jim Gillies. Good to see you.

Jim Gillies: Good to be seeing you, Chris.

Hill: Warren Buffett and his colleagues went shopping, an apparel stock is hitting a two-year high, but we're going to begin in another corner of the apparel universe. The loss that Stitch Fix posted in the third quarter was smaller than expected. Revenue was higher-than-expected. Well, for Stitch Fix, the guidance was pretty rosy and shares are up more than 10% this morning. What do you think?

Gillies: Stitch Fix is an interesting one. It's a Foolish favorite, it's recommended in multiple services, including the one that I front, Hidden Gems Canada. It's one that I've always had, I want to say love-hate, because those are both too extraordinary. But I can see the bullish argument there, that's a data company and it's offering a better way to get people into clothes they love. For people who don't think like me, where black T-shirts is the height of fashion, it offers a better way, and it offered a better way pre-pandemic, and then of course during the epidemic when everybody buys everything all the time from the safety and comfort of their homes, you would think that Stitch Fix, after the initial crunch, about a year ago, you would think that they would have done well. But what's actually been the Stitch Fix story, I think, has been almost alternating quarters of outperformance, and exceptional performance, and beating expectations, like we just saw. Although I have some problems with this quarter, they absolutely smashed their own revenue guidance, as well as consensus estimates. 

They did come in better on the loss level, as you said, even though I'm old enough to remember when we felt losses per share with that thing. But they'll alternate those types of outperformance quarters with quarters where it's a dismal, the stocks. You almost get every other quarter the stock surges on beating expectations, followed by a quarter of the stock implodes because they didn't hit expectations. I'm wondering in a work-from-home world, or a hybrid world, that looks like where we're heading toward post-pandemic. I would think that this would be the time, because again, people who are going back to the office would be looking to upgrade their wardrobe, and so I would expect Stitch Fix to have had a good quarter, and they did. But I'm not sure how often they're going to be able to repeat it. As well, things like the cash flows, I'm not terribly enthralled by Stitch Fix, which has over a billion and a half revenue year-to-date, they just completed their third fiscal quarter. But their adjusted EBITDA margins, the highest of pseudo-profitability we can come up with. Their adjusted EBITDA margin is still under one%. Their full-year adjusted EBITDA margins are in the 1% to 2% range. They burned cash year-to-date to the tune of about $59 million, but really it's the first quarter where they actually produce cash, it's saving them there. They burned almost $51 million this quarter, they burned almost $60 million last quarter, now they've got $300 million on the balance sheet, and they have no debts, so they're not in any danger of going out of business or anything. Again, I'm of two minds at this company, and after this quarter where they beat on the headline numbers, revenue, and narrower loss per share. I'm still confused, to be honest with you, I'm like, "Wow." I like to say that certain stocks are waiting for Godot. You know the play "Waiting for Godot?"

Hill: Sure.

Gillies: Spoiler alert, Godot never comes. Stitch Fix, for me, is a "Waiting for Godot" company. I just keep on wanting to see that definitive quarter where they've turned the quarter, cash flow is on, it's onward and upward from here, if this thing can turn into a compounding machine. Yesterday's quarter was good, better-than-expected, but it's not what I've been waiting for, and so I'm still stuck waiting for Godot.

Hill: There are a lot of companies over the past five years that have gotten a lot bigger, their balance sheets have gotten a lot fatter. Is there enough going on at Stitch Fix that you would not be surprised if a larger company came in and said, "Look, this is a less than a $7 billion company, we're going to offer them a 30% premium and make them part of our operation."

Gillies: You're going to need to get CEO, soon to be former CEO, but chairwoman of the board and founder, you need to get Katrina Lake, onboard with any buyout, because she still has a substantial ownership offering.

Hill: By the way, that's why I think it's more likely. I'm not saying it's likely, I just think it's more likely over the last six months with Katrina Lake saying, "You know what, I'm not going to be the CEO anymore. Come August 1st, Elizabeth Spaulding is going to be running this company, I'll be executive chair." If she was staying in the corner office for the long run, I would think it was more unlikely that they would get acquired. The fact that she is moving upstairs, to me, bumps up the chance as this happens.

Gillies: For me, in hockey cliches, they say, once Gretzky got traded, anyone can get traded. For me, the acquisition, the company that got acquired, once Monsanto, which was a $100+ billion company, once Monsanto got acquired, I think anyone can get acquired. So yes, absolutely. Stitch Fix can get acquired, no problem. I think that there might be an argument for that. You'll often hear people say, "I don't want to deal with being a public company anymore, let's fix the problems, or fix the business, behind the closed doors of private equity or under someone else's banner, let's fix what's going on." You can always IPO again in five years, sorry. Because, again, I think this has been, like the X-Files tag line used to be, I want to believe in the story here. Every other quarter they give you a quarter that says, "Hey, you can believe in the story here." But I haven't seen them strong enough quarters together for me to be an unquestioned believer at this point. I appreciate what they did yesterday. 

Like I said, I like the revenue growth, which is great. They claimed it's their second-highest quarter-over-quarter client additions. They said their active clients are up 20%, which easily lapped the fact that the average client is now spending about 3% less, it still didn't matter on a net basis. I just want to see more. I'm happy, if they put the next three or four quarters and they prove me wrong, prove my hesitancy here wrong, I'd be delighted for all the Fools who own this thing. Because I want to see our members do well.

Hill: Shares of Chico's are up 5% this morning. Actually, a little bit more than 5%, they're hitting a two-year high. This is the women's apparel retailer. They came out with first-quarter results that seem to have taken a back seat to the battle that Chico's is having with an activist investor, Barrington Capital, which doesn't have a huge stake in Chico's. I'm always a little surprised when I see this saber-rattling from activist investors who don't have a 5% or greater stake in the company. Barrington Capital has got like a 2% stake. What do you think of what's happening, either with the results Chico's is putting up, or this activist fight?

Gillies: I'll just miss the results as net, but every quarter for these guys for most of the last decade has been net, so we can summarize Chico's there. Apologies to all the Chico's bulls out there, I don't think there are many. Look, I'm someone who likes special situations investing. I'm someone who loves a good activist fight. I've made a lot of money personally over the years. I've made money for Fools over the years by recommending that we go in on names that are being fought over by activists of various quality, names like GameStop, Bob Evans, Cracker Barrel, Steak 'n Shake -- although that guy turned out to be a bit of another type of fish -- eBay. The Starboard Value and Elliot, bought 5% of eBay and rattled cages a couple of years ago. I'm very comfortable playing in these waters, and so I'm also equally comfortable saying, Barrington Capital, and I'm hoping they're listening. I'm going to call them out, they are a nothing bagger, and they're being ignored by Chico's. They probably should be, because five years ago they tried the same play with Chico's, five years ago when the stock price was double today's two-year high. 

Look, you want a whopping 2% of a sub $700 million company, you're not going to get any. No one's going to rally to a 2% holder who's been standing on the sidelines sending a mild typing letter every five years. Chico's responded by, "We are taking all the appropriate steps to improve performance and increase shareholder value." Whoop-de-do. Barrington, if you want to be taken seriously, here's the playbook. This is consulting and it's free. You need to go out, you need to buy 10%, ideally 15% of the company. You could afford it, go out and seriously buy this company in bulk. Then run a proxy fight with complete, and this is a staggered board, so every year all nine directors get elected. You go out and pick your competing slate, and you run a proxy fight and you take over. Because the simple truth of the matter is, Chico's is down two-thirds from a tie of the past decade. Even at being a two-year high today, Chris, it is down nearly 90% from its all-time high set all the way back in 2006. If you want to do that, if you really want to put your money where your mouth is, Barrington, you might even get Chico's as a recommendation in Hidden Gems Canada because we do like a good activist fight. But right now, you are a nothing burger.

Hill: Nubank is an online bank in Brazil, that's N-U-B-A-N-K. Nubank has 40 million clients, just raising $750 million in financing. The reason we're talking about it is that 500 million of those dollars in financing came from Berkshire Hathaway. Look, this is a private bank in Brazil. It caught my eye in part because it's like, this seems like the antithesis of Wells Fargo. But I'm curious if -- where I want to go with this, Jim, and you watch Berkshire Hathaway more closely than I do -- when you and I were talking about this this morning, the first thing you said was like, "This isn't Warren Buffett." I said, "It's probably not." But we're not 100% positive. Yes, it's the way the bet that it was someone else on his investing team who made this investment. He wasn't the one who did this both because of what this bank is, where they are based, and the size of the money involved. But I'm curious if you think Berkshire Hathaway, the investment side of the business, is going to change when Warren Buffett and Charlie Munger are no longer there. If we as investors are going to get more insight because, today it's Nubank, but over the past five,10 years, there have been any number of investments that Berkshire Hathaway has made. You, and I, and everyone else who does this for a living, spends a little bit of time saying, who do we think maybe this? Was it Ted? Was it Todd? This was Warren and Charlie. Do you think we're going to get more insight, or do you think when Buffett and Munger are gone, the investing side of the business is going to be as opaque as it is today?

Gillies: I hope it is, to be honest with you. The one thing we will know for certain when Buffett and Munger are no longer on the stage that we'll be able to dispense was this Warren, was this not Warren. Look, $500 million investment, the reason I'm pretty confident in saying I don't think this is Warren, he probably had to rubber stamp it at the end, but they've said at various other meetings. Buffett has said, anything under $1 billion it's not me. We'll take him at this word. I'm reasonably certain he didn't wake up this morning learning for the first time that Berkshire now owns $500 million, but this whole thing with Ted and Todd, the two left tenants on the investing team. He's brought them along, giving them greater responsibility overtime, and greater exposure over time. He's given them training wheels, maybe they need it, maybe they don't, but he hasn't yet taken the training wheels off. But I mean, look, this is a $500 million investment. I'm using Buffett deliberately versus Berkshire. We know that Buffett likes Brazil. He's gone into multiple partnerships with the 3G guys in Brazil. StoneCo, which I think they had a steak or revealed a steak three-years ago, StoneCo is a Brazilian company. It's done well for him. 

We know he likes banks aside from perhaps Wells Fargo nowadays. We know that from history. I don't think this is inconsistent with how Buffett likes to do things for Berkshire. But again, with a $500 million investment, Berkshire Hathaway makes $7 or $8 billion in free cash flow per quarter. [laughs] This is couch cushion money for Berkshire. It's a small bet. The problem, and yeah, they raised Nubank that raised $750 million, $500 of which being Berkshire, but that gives the overall entity and valuation of about $30 billion. Berkshire here is not a giant player here, and they're probably going to come public within a year or two. Some of the things I read suggested. But this is still a tiny bet for Berkshire, and the problem is tiny bets don't really, if I have a 20-bagger in 0.1% position in my portfolio, that's nice, but it doesn't really move the needle. For Nubank to be a needle mover for Berkshire, I think they're going to have to add substantial capital here. I somehow doubt that this is going to go from $30 billion to $3 trillion anytime soon to actually move the needle and make it substantial for Berkshire. What would be more interesting to me is once you do get this thing going public. If Berkshire doubles down and adds, that to me will be more of the test of, is this Ted and Todd continuing, or if you see, I'm not too sure what they own percentage-wise of Bank of America now, but I think they might be approaching the 10% limit, which is where he tends to like to not own more. If we see Nubank ownership get up to 7%-10% range soon after an IPO, then I'm willing to concede this is Buffett.

Hill: Last thing before I let you go. As you watch all of the madness with the meme stocks, AMC Entertainment, GameStop, etc, play out, do you sit on the sidelines and just think, well, that's interesting to look at, but I'm not participating in that. Does it make your blood boil? What are you thinking as you're watching all of this?

Gillies: I think I coined the phrase or I've used the phrase a couple of times now. I think we're in the golden age of greater fool theory. Greater fool theory, of course, being the only value that I can ascribe to security is the value that I'll be able to unload it on a greater fool than I at some point in the future. Doesn't burn my blood, or boil my blood, or whatever. I'm mixing metaphors I'm sure. It does make me wonder why people want to play in areas where history suggests you're probably going to get hurt. People are acting as if they won't be the greatest fool, that at some point they'll always be able to sell, and so far they've been right. The meme stocks, he said, GameStop, AMC, Hyatt tried to put a filing out while in bankruptcy saying, you're going to get zero. There's also a lot of options. I'm at a point where, like none of this bothers me because I'm not playing in this pool. There is no shortage, I think, of great long-term three to five plus year investments we can make. I mean, I got a pretty steady ideal flow coming. Some of them are even good. Because of that, I just look sideways at some of the greater Fools, whether it be cryptocurrency where there is no intrinsic value, whether it'd be some of these stocks which are dubious quality, some of them, whether it'd be the meme stocks as we call them. You guys are playing a different game, man, and I've seen how that game tends to end, but while you're in it, I guess Alan Greenspan, the famous irrational exuberance comment was of course 1996, right?

Hill: Yeah, it was '96 or '97. It was several years before the dot-com bubble burst.

Gillies: The peak of the dot-com bubble was March 2000. Maybe meme stocks are here to stay for a little while, and God bless. I promise you, I won't make a penny off of a meme stock or I won't lose a penny off of the meme stock, and neither will any Fools who are following what I recommend.

Hill: Coming to the table with references to Wayne Gretzky, waiting for Goodell, and the X-Files. Jim Gillies, great talking to you.

Gillies: 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 or sell stocks based solely on what you hear. That's going to do it for this edition of MarketFoolery. This show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.