Are Investors Understanding What's Going on With Lordstown Motors?

Lordstown Motors (RIDE -4.44%) drops 20% as the CEO and CFO resign. Bank of America (BAC 0.44%) CEO Brian Moynihan says consumer spending has risen 20% over 2019 levels. In this episode of MarketFoolery, Motley Fool analyst Jason Moser, with host Chris Hill, analyzes those stories. Plus, we dip into the Fool mailbag to discuss whether selling Apple (AAPL -0.69%) in favor of smaller-growth stocks is a good idea.

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This video was recorded on June 14, 2021.

Chris Hill: It's Monday, June 14th. Welcome to MarketFoolery. I'm Chris Hill, with me today, Jason Moser. Good to see you.

Jason Moser: Hey, hey, good to see you.

Hill: We've got the long term future of Apple, we've got the near term future of consumer spending, but we're going to start with the present situation at Lordstown Motors. CEO Steve Burns has resigned. CFO Julio Rodriguez has resigned. Shares of Lordstown Motors are down nearly 20%. This is what? It was just last week, I think, that the electric truck maker warned that it had and I'm quoting here, "Substantial doubt about its ability to continue as a company." I guess my question is, shouldn't this stock be down more than 20%?

Moser: It should.

Hill: I don't remember the last time we had this combination of really bad factors. This is not Jeff Bezos announcing he's stepping down as CEO and sometime later this year, Andrew Jassy is going to take over. It's, I'm out, the CFO is out, we're not sure this business can continue.

Moser: Yeah. I mean, that's a lot to digest. That is obviously not a good look when you lose your CEO and CFO and there are questions of the business actually even being able to make it, given that the business literally just went public via SPAC here recently. You say what you will about Tesla, I mean, we had a lot of fun back then and went back and forth on the shows. I think that this to me, this is a perfect example of how tough it is going to be for so many of these new fangled automakers, to be able to compete in the new EV space. Not only compete, but really even to catch up. It does show you that for all of the criticism we can learn about Tesla and Elon Musk, there has been a method to that madness. He has had the benefit of time and trust and capital to build up a business where they're able to really handle such a monumental challenge. With Lordstown Motors, this is a one-year old company essentially. They revealed a pickup truck prototype last year or was it even last year? I mean, no. It literally is just getting started and going public via SPAC, pre-revenue. Really, there's nothing but the promise of growth in the EV market to make investors feel like maybe this is one way to be able to participate in that opportunity. But it just goes to show you, I think the monumental challenges that come with this space. I mean, making cars is really hard. 

Changing consumer behavior is really hard, and really, with EVs, you're trying to do both of those things. When it comes to Lordstown, did they over-promise? Maybe. We're investors a little bit too eager to get in on a Tesla-like story? Maybe. It just goes to show you, I think, there are risks that come with these SPACs. They are not always good for investors. It's typically good for the company because it gets them out there front and center much more quickly and gives them potential access to more capital. But, yeah, it really does go to show the risks involved with these SPACs, and regardless of the spin, there needs to be an underlying business for investors. In this case, it just doesn't look like there really is one and that obviously is a big problem.

Hill: I think I've made this comment before, that over the years, I've gotten the chance to talk with executives in the automotive industry. I'm not going to name names, but I have asked them, people from different companies about the idea that look, anytime there is a big recall in the automotive industry around safety, and look, there are recalls all the time and most of them are very minor, but the big ones usually that involve a vehicle on fire, and I've asked them like, "Hey, look when this happens, if it's not at your company, it's not great for the overall industry," and everyone has confirmed that. Where it's just like, yeah, there is a degree to which a lot of consumers are willing to paint everyone in a particular industry with the same brush, and fairly or unfairly, that just happens. I'm glad you mentioned the SPAC process because I feel like the pendulum is starting to swing the other way a little bit with SPACs in general, and I think this is one of those situations that definitely doesn't go in the plus column. That from this point forward, if they weren't already gone to do this, some amount of investors are going to look at companies that become newly public companies, via SPAC and some group of investors just going to say, "Is this another Lordstown Motors?

Moser: Yes. It's interesting to think about it, because Matt Frankel, my partner in crime on Industry Focus: Financials, and I talk about SPACs a lot, and I like his mindset in regard to SPACs. They really are a management story. From the very beginning, the shell company, the blank check company, you're counting on that management team to pick a good candidate, to actually bring into their business. You certainly are relying on good management on the other side of the equation with the company that is going to be brought public and because they come to the market so much sooner in their lives. Many of these companies are coming to the public markets just pre-revenue. I mean, think about that for a second. You've got a company that's $2-$3 billion market capitalization that generates $0 in sales. That requires a tremendous leap of faith, and many of these companies that come public these days are pre-revenue, and so I mean, we've had a lot of fun. 40 times sales is the new P/E. Price to sales is the new P/E. Now, pre-revenue is all the rage. Apparently, you've got to really be careful and you have to, I think, look at the greater market too, to get an idea of what this company is trying to do. Because some companies are really going up against monumental challenges. 

With the automobile industry, when you look at some of the numbers involved here, GM, General Motors, they have this goal to produce only EVs by 2035, and they're plowing money hand over fist into this idea, into this goal at $27+ billion, for basically the same story. They want 40% of their vehicles to be EVs by 2030. Obviously, they've created a lot of awareness just with the new F-150, but again, $22 billion, they're plowing into that initiative. You all of a sudden realize the numbers that are involved with these automakers that have been, these legacy automakers that have been around for a long time, they've already got all of this infrastructure in place. Now, they have to change things around a little bit and do things a little bit differently, but generally speaking, the heavy lifting for the most part has been done on the production side, and they can just put out millions of vehicles a year. It takes a lot to be able to do that. Then when you see a company like Lordstown go public, while the promise is exciting and you love what they stand for, in theory, at least, because it sounds like they may stand for fraud too. Who knows? But, generally speaking, you want to get behind a company like this, but as investors, it takes a lot of work to be able to balance the excitement and the enthusiasm with the reality of the situation on the ground. I think that for most of us, we could have looked at Lordstown and said, you know what? I'm rooting for a business like this, but there's no way on God's green earth that I'm investing in a business like this today because they just simply have no track record. They've proven to me nothing, and unfortunately, we're seeing the downside to that today.

Hill: Just before we move on. Not letting anyone think you were throwing words around. It is worth pointing out that Lordstown Motors has confirmed that the SEC is investigating the company, because they've been accused of fraud.

Moser: Yeah. That wasn't unsubstantiated.

Hill: Yeah. No, I know. I'm just saying there might have been a listener who was like, "Wow. That's him."

Moser: I appreciate that.

Hill: It's like, "No. That's coming from the company." Let's move on to Brian Moynihan, the CEO of Bank of America. He was on CNBC this morning. You tell me if you're surprised by these numbers. I was a little surprised because he was talking about consumer spending, not compared to last year. He was talking about consumer spending data that Bank of America is seeing so far year-to-date compared to 2019, and it's up 20%. I figured it would be up. I'm a little surprised that it's up that much. I'm also happy that it's up that much.

Moser: [laughs] I think we all are. It is another positive sign. I'm not that surprised and I'll tell you why. We follow Bank of America as analysts, at least I do, just to get a good idea of what the general economy is looking like because it's such a big bank obviously, because so much money is going through that entire network. One thing they talk about, we saw signs of this back in January and Bank of America now reported fourth quarter earnings. They talked about this confidence in the level of deposits and the quality of deposits. Thanks to the stimulus that was coming in, there was a reliability in those deposits. They could see consumers deposit accounts growing considerably, but then they tacked on this term that we hear from time to time, the velocity of money. We talk about the velocity of money. The velocity of money, ultimately, it's the rate at which consumers and businesses in the economy basically spend money. It's the rate that that money is moving through the economy. It's very reasonable to assume that in 2020, the velocity of money was not necessarily all that robust. If you look at the actual charts, they have charts for the St. Louis Fed there. You could see from the beginning of 2020, the velocity of money just fell off a cliff. People were getting into defensive mode. They were saving as much as they could. There was a lot of uncertainty people weren't spending, now we're correcting that. 

To me, it makes a lot of sense. I think that it's interesting to note that travel still hasn't recovered necessarily to where it was before. I think that in time it will correct itself as well. Right now, it's just more difficult. Physically, it's just more difficult to get out of the country because there's so much required. But travel within the United States, for example, is starting to bounce back as well. But I think it's just a matter of normalizing, getting back to where we were. There is that coiled spring from everything that was built up over 2020 and a lot of it goes back to that velocity of money. You could see signs that money wasn't moving around as much. That's a good metric to look at. If you google velocity of money in [...], I think it'll take you right to that chart, you can see historically that ratio. To me, I think it's also interesting to think about not just the bounce back in the economy, but all of these ancillary effects that we're seeing from this. One of them, I think, it's people feeling confident enough to actually quit their jobs. 

A year ago, everybody was more or less desperate for work and now the pendulum has swung all the way to the other side. People are actually at a higher rate than in a long, long time. People are feeling comfortable enough to go ahead and quit jobs and move elsewhere because perhaps there are more options, perhaps they realized there's something else that they really want to do. They've been able to build up a little bit of savings there, so it is interesting to see. Well, all the spending comes back. You're seeing people reconsider what they're doing for a living and maybe choosing a different path than they would have otherwise.

Hill: Our email address is [email protected]. Quick question from Niraj Kapoor in Foster City, California, "I've owned Apple for years, but now see a market cap in excess of $2 trillion. I wonder how much more can this monster keep growing?" Then adds parenthetically, "I know I'm probably wrong. I like the business a lot, but when I look at the potential for multibagger return, I'm not seeing it. I find companies like Square and Teladoc much more disruptive with massive growth ahead. I wanted to reach out and see what you think about this issue and what would be your strategy? I think Apple is almost like holding an index fund in my portfolio, which I really don't want to do, given how much I love investing in good companies and holding for the long term." One thought on this, and it's interesting, is the whole idea that Apple is an index fund. I don't own Apple, but I don't think of it that way, in part, because of the business. I think more along the lines of a Berkshire Hathaway, which is a diversified portfolio of companies and it's enormous. The massive growth opportunities for Berkshire Hathaway are probably behind it, not ahead of it. I look at a business like that as being akin to holding an index fund, but that's just me. I said before we started recording, Jason, I feel like there are a lot of Apple shareholders who may be thinking the same thing which is, "Do I sell some of this and just put it to work in other ways?" It's not, "Well, this company is dead, so I'm selling it all." But what do you think?

Moser: Well, I agree with you in regards to the index fund. I think I understand the perspective of Niraj as well. I think he's just essentially referring to the size, the reliability, the risk profile, but to your point, I wouldn't view Apple necessarily that same way. Primarily, the main reason why is because for all that the company has done so well through the years, this is still really a phone company at the end of the day. This is an iPhone story. They've done a good job over the past several years, diversifying that revenue stream a little bit. We talk about the services side of the business and how that's the direction in which they're trying to steer in the company. They're doing a good job with that, but what it really all does at the end of the day come back to that installed base of iPhones. As the iPhone goes, so will Apple for the foreseeable future. Now, yeah, it is a massive, massive company. Is it reasonable to expect multibagger returns from a holding like this? Probably not. No. Technically, you can hang on to shares and over the course of five or 10 years, maybe those shares double or triple, and then technically, you've got a multibagger. That's great. 

Let's not dismiss stock returning 15% annualized over the course of five years, that's a double essentially. I think when it comes to Apple in businesses like this, it is just a matter of understanding where you are in your investing life and what your investing goals really are. Let's also remember, there's the potential for innovation with a business like this. I fully expect them to continue to innovate and be one of the companies leading the way in developing new markets, particularly as technology just continues to dictate everything that we do in the world. When you have the resources at your disposal like this company does, you could pretty much try anything. If it fails, you can just sweep it under the rug. If it succeeds, it has the potential to really help impact the business. But when I look at businesses like Apple, I think there's a place for companies like these in everyone's portfolio. It just is a matter of where you are in your investing life and what your ultimate goals are, but I always like to look back to our Rule Your Retirement service headed up by Robert Brokamp. It is just such a wonderful resource for questions like these, because I look at model portfolios that they have there for our members. 

When we look at the model portfolio, therefore, folks who are more than a decade out from retirement, let's say maybe 25% of your portfolio should be dedicated toward large caps, companies like Apple. Within a decade of retirement, that number should go up to 35%. If you're in retirement, that number should go up to 40%. That makes perfect sense. You're looking for something a little bit less risky as you enter those retirement years. I think that's one area where you may want to look and say, "I may not feel this way right now if I'm of a certain age, if I'm 30 or 40 years old." But fast forward to 60, fast forward to 65 years old, and you're thinking, "Hey, now I'm in retirement or I'm thinking about retiring, what does my portfolio look like? What kind of stocks do I want to own?" Well, if you're saying at 65 that I want to own Apple, well, buying Apple when you're 65 probably ain't really the right move. The right move is to buy Apple when you're 35, just hang on to it because then by the time you're 65, you benefited from 30 years of compounding dividend share repurchases in a ton of potential innovation. That's the way I tend to look at a business like this, it's not an either or. You can own Teladoc, Square, and Apple. You can own all three. It just feels like today with social media and meme stocks and the weighted information moves, it does feel like there's that idea that if it's not a multibagger, I don't even want to consider it, and I would just caution investors against that mindset. I really do believe in the power of diversification. I think there's room for a business like Apple in everyone's portfolio. It's just a matter of keeping your expectations in check.

Hill: Jason Moser, great talking to you. 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 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.