In this podcast, Motley Fool analyst Jason Moser discusses:
- Why right now is a gut check for every investor.
- What recent history says about the Nasdaq falling in the first four months of the year.
- The types of businesses he's looking to invest in right now.
Motley Fool contributor Matt Frankel spent the weekend in Omaha, Nebraska at "Woodstock for Capitalists." Motley Fool producer Ricky Mulvey talks with Matt about his biggest takeaways from the Berkshire Hathaway annual meeting.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
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This video was recorded on May 2, 2022.
Chris Hill: We've got highlights from the Berkshire Hathaway annual meeting and advice for any investor who's a little nervous from the last few months. Details next. Motley Fool Money starts now. I'm Chris Hill, and I am joined by Motley Fool Senior Analyst Jason Moser. Happy Monday.
Jason Moser: Happy Monday, happy May.
Chris Hill: Happy May.
Jason Moser: Wow.
Chris Hill: Thank goodness we're out of April. [laughs]
Jason Moser: That's flying right by.
Chris Hill: I speak for investors everywhere when I say thank goodness, we're out of April. [laughs] Matt Frankel is going to be on later in the show. He was at Berkshire Hathaway's annual meeting over the weekend in Omaha and he is going to be sharing some thoughts and takeaways from that. But just real quick, I know you weren't there but I know you saw some of the coverage. What's something that struck you coming out of the Berkshire Hathaway annual meeting?
Jason Moser: Yeah, I weren't there. I did think it was pretty interesting the whole Activision Blizzard angle, you just don't really think of Buffett as the arbitrage investor, but I just thought it was noteworthy that they've accumulated close to 10 percent stake and Activision Blizzard basically looking at the Microsoft deal. You would assume that building that position, they think it's a sure thing, but it was need to note all of the unknowns versus the one known, is we don't know what regulators are going to do, we don't know what Activision Blizzard is going to do, we don't know this, we don't do that but we do know one thing.
We know that Microsoft has the money. [laughs] I just thought it was need to hear his take on that and to see that he was taking a little bit of a, I mean, you'd call that a short-term approach, right? That's not really a buy-and-hold type of thesis, but he still got a little spring into step, which is pretty neat to see. But I think, really, what strikes me, and what we were talking about this morning, is just the discussion of the market today, how technology has changed everything, platforms like Robinhood, creating the gambling parlor type of environment, those sentiments they express there and Charlie Munger, I think particularly but the gambling parlors sentiments, clearly, [laughs] they rub somebody the wrong way in Robinhood because Robinhood felt so compelled to respond with what was a head-scratching response and I'm not sure how they don't allow day trading. It feels like that really is their clientele, and maybe there's some technical definition that they're referring to. They said they don't allow shorting either and perhaps they don't.
Maybe you just get around that by option strategies or whatever, but like it or not, technology has changed everything, and I think if you think that speculating and meme stocks and all of that stuff are just going to pass, I mean, I will take the other side of that bet because typically, you can't really put that toothpaste back in the tube. Those platforms are here to stay and they scratch a certain niche for a certain demographic of investors out there. I will say, of course, I don't agree with that gambling mentality when it comes to investing. I don't think it's going to go away, but I do think that it does offer some opportunities for investors taking a longer view. You hear that saying, sometimes, people say your volatility is your opportunity, I do think that there is something to that.
Chris Hill: Let's talk about the market because April was the worst month we've had in a while. Year-to-date, the Nasdaq is down 22 percent and saw an interesting stat on, really, a set of stats on Twitter that I wanted to get your thoughts on, and it was basically someone looking at, well, OK, over the last 30 years or so, what are some of the bad starts to the year for the Nasdaq? 2005, through this point, down 12 percent, 2002 down 13 percent, 2001 down 14 percent. The second set of stats was, and how did the rest of the year ago? Which I found pretty illuminating because 2005 through the end of April, the Nasdaq's down 12 percent, but ends the year in positive territory up about two percent. In 2001 and 2002, it just kept going down. 2001 ended down 21 percent, 2002 ended down 31 percent. I'm not asking you where you think we're going from here, but do you think this is, among other things, a gut-check time for investors?
Jason Moser: I do. I think that first and foremost, if you are an investor and you've made it to this point here, I mean, it's obviously been a very difficult year for a lot of us, and so if you've maintained your composure through this, if you've stayed invested, if you've not been scared away, well, hats off to you. Give yourself a pat on the back because that's really important and I'm not kidding at all when I say that.
These are the types of stretches that makes us as investors, they're difficult to go through at the time, but then you look back on them a year from now, two years now, five years from now, and you remember that vividly, they make you better, and so I think you need to keep that in mind because this too ultimately shall pass. Now, how long it takes to pass is anyone's guess. The statistics you mentioned there, I think, are in lightning. I think that they really speak to why I and I think a lot of us believe that instead of focusing on trying to predict the future, let's just prepare for the future, and there are a number of different ways that you can do that. You can remain invested, you can make sure that your portfolio is diversified.
If you have been focused on building that growth stock portfolio over the last several years, because really, that's been like shooting fish in a barrel, everything has just been going up. Well, now you're starting to realize that doesn't last forever and so maybe this is a good wake-up call for you to make sure that your portfolio is diversified with some of those sleepier ideas that maybe don't feel quite the same pinch during stretches like this, even though it seems no one really is immune. When you look at the situation today, there is a lot of uncertainty going on in the world. It's not just interest rates here domestically, you've got all the stuff going on in China with lockdowns, you've got Russia and Ukraine with seemingly no end in sight, and that's playing out on global supply chains as well. Then you top it all off with everything that's going on here domestically regarding inflation, regarding interest rates, and I think that one thing looks pretty certain and that is that at least here, it's reasonable, I think, to expect that we're going to continue to see the Fed tightening our monetary policy. It seems like that's a given.
Now the pace at which they go, it could be anyone's guess but it sure feels like they are really trying to get ahead of this because there are a lot of accusations of them being a little bit slow to the draw. So with all of that in mind, I do think it's worth looking at the types of businesses that you want to own. I was thinking about this over the weekend. When we look at a lot of these businesses, it seems like all of these businesses are on sale, but I divide this into two buckets. We've got all of these businesses that have been trading, they've been valued at this 20, 30 times sales multiple, but remember, we talked about this for a few years now, it seems like 20, 30 times sales just became the new normal. So even if you are a business that didn't make a lot of money or made no money at all, well, you are still being valued at 20-30 times sales because the future will so bright and money was so easy. Now, we've got a little bit of a different set of economic conditions. So now we're seeing that 20 times sales is normal. It never really was. But now it's starting to make more sense as to why. So we see a lot of these growth-type companies that maybe they are profitable yet they have a lot of potential and we've seen those valuations pulled back considerably.
So they've gone from 20 times sales to 10 times sales. In their objectives, much stronger businesses than they were two years ago. So you have this much stronger business, but you also have to remember that current economic conditions in future economic conditions are going to be a lot different than the previous economic conditions that these companies were being valued on. So what is the new normal if it's not 20 times sales, what is it? I don't know. We have to figure that out. That's going to be a little bit of a wait and see. But then I think on the other side you get this other bucket of companies out there. There are a lot of really fundamentally strong sound businesses that make a lot of money that if historically, but doing it for a long time, they are now being valued as if they're being valued on a very glass half-empty perspective.
The one that stands out is PayPal to me. Business, obviously we cover a lot here. Business that you could argue is fundamentally much stronger today than it was two years ago and even five years ago. Now, you've got this business that is valued at something like 28 times trailing earnings and around 22 times full-year earnings estimates. Now, historically speaking, that looks like a really opportunistic window to consider buying the shares in the sake of transparency. Chris, I will say that I recently added shares to my PayPal position. But again, you have to go back to that stock was being valued that way in a different time, different economic environment.
So how should we value those shares in this future economic environment? Maybe not quite as optimistically, but you still have a very established, proven business with a massive network in some really strong secular tailwinds in the way that money is being moved around. So it's all to say that it feels like the risk-reward scenario out there is really in the favor of a lot of these well-established, profitable cash flow-generating businesses. I think that while it's perfectly reasonable to keep your eye on some of those growth stories that have really pulled back, I think it's also really worth looking at a lot of those well-established businesses that are seemingly trading, it's a very attractive prices today.
Chris Hill: I want to come back to the well-established businesses in just a second, but let me just add one more stat and this goes to something that you touched on. I think a lot of us have been talking about particularly the last few months, which is the value of patients.
Jason Moser: Yeah.
Chris Hill: Because if you haven't packed your patients as an investor right now, go to the closet, get it out of the back, dust it off, unpack your patience. I mentioned those stats about the Nasdaq. You go back to the beginning of 2001 and where the Nasdaq was, and I mentioned fell 21 percent that year, fell 31 percent the following year. It took six years for the Nasdaq Composite to get back to the same level that it was at the beginning of 2001, from January 2001, it took till the end of 2006 to get back to that same level. So as you and others have said stocks can always fall further over the long term and the longer your long term is, the better off you're going to be. But over the long term, it's definitely the place to be. In terms of well-established businesses, I find myself increasingly looking toward companies that were established before this century.
Jason Moser: Yeah.
Chris Hill: It's not a knock on the PayPals of the world because I'm a PayPal shareholder as well and a firm believer in the future that business. But when I think about adding new money, the environment we're in right now, I find myself looking at businesses like Johnson & Johnson. Nobody's idea of a fast-growing company, [laughs] but about it stable as they come. The home improvement businesses as well. Home Depot and Lowe's.
Jason Moser: Yes, I agree. Again, I think it won't necessarily draw that line at 2000 and saying earlier or later. But I think your point is just it's right on with what I'm thinking as well and that's just that there are so many really good businesses out there that plays such an important role in our lives every day that have been around for so long. When you can find businesses with those well-established track records, use Johnson & Johnson is a good example there because, maybe it doesn't light the world on fire, but you know what, the older you get, the more your investing strategy needs to evolve. One thing I start to think about more and more as I grow older, I start looking toward some of those dividend-paying stocks. I'd like to build out a dividend dynasty corner of my portfolio so that when I'm 65-years-old, I've had the opportunity to accumulate a lot of these great dividend payers through the years, that's why I own companies like McCormick. I think that Johnson & Johnson, if something like there's 60th straight year of raising their dividend or something just executed.
Chris Hill: That's crazy.
Jason Moser: Look at those dividend aristocrats. They're all, Lowe's is a dividend aristocrat. Home Depot was not, but I have a feeling they will get there eventually. Home repair to me is just one of the most attractive markets out there because the only thing that really disrupts it, I think it's deliverability, we all wondered. Was Amazon going to stick to Home Depot and Lowe's? Well, they tried and you know what, didn't work out so well. So we've got a little bit of history to go on here that those are two very resilient businesses that play in very attractive markets, good weather, bad weather, inflationary times, non-inflationary times, and they pay you some healthy dividends to boot while you hanging on there. [MUSIC] No, they're not going to light the world on fire on the capital gains side, but you're going to realize some health capital gains along the way. The longer you own them, the more sense it makes.
Chris Hill: Jason Moser, appreciate the perspective. Thanks for being here.
Jason Moser: Thank you.
Chris Hill: Our man, Matt Frankel was just one of the tens of thousands of people who went to Omaha, Nebraska this past weekend for the annual event dubbed Woodstock for Capitalists. To get some of the highlights, here's Ricky Mulvey.
Ricky Mulvey: This weekend, Matt Frankel, went to the Berkshire Hathaway meeting down in Omaha, Nebraska. Matt, great to see you. Hope you had some fun down there as well.
Matt Frankel: Mulvey, it was a very busy weekend and I am now back on the east coast, but it was a great time.
Ricky Mulvey: Well, I think the biggest theme from the meeting is that Warren Buffett, Charlie Munger, they've famously been selling stocks for the past, I think it's been more than a year now. Now, they're back to buying. They're putting money to work. Was that the big headline from the meeting?
Matt Frankel: Yeah. I think that was the biggest takeaway is, the core Buffett mentality used to be greedy when others are fearful. We just heard Buffett's annual letter on February 26, I believe, and at the time he hadn't bought much in 2022 at all. In pretty much in March, Buffett put over $50 billion to work in the stock market. Some of it we knew about Occidental Petroleum. He boosted its stake in. HP, he initiated a pretty big position in, but allow we don't, and there's a lot of billions we won't know what he bought yet until regulatory filings come out later this month. But that's really the big takeaway. He's been a net seller of stocks starting when he sold the airlines investments in the early days of the pandemic. But continuing pretty much every quarter since then. He's been a net seller of stocks and now it looks like he's finally seeing some opportunities to put serious money to work.
Ricky Mulvey: Yeah. He mentioned at the meeting that there were a couple of German companies that he's been buying. I don't think he named drop them specifically, but the big companies he's been looking are, that he's been putting money into our Chevron Occidental Petroleum. Chevron ticker symbol, CVX, Occidental OXY, and HP. Let's focus a little bit on the energy companies though. Why do you think Berkshire is putting so much money to work there right now? There's a criticism that essentially why is Berkshire investing in fossil fuels, green energy is coming, and here at the Berkshire meeting, they're saying that they view this as an alternate to treasuries.
Matt Frankel: Until this quarter, at the end of 2021, Berkshire had about a $140 billion in cash, essentially sitting in treasuries earning next to zero returns. Chevron, just to name one of those two, Chevron pays a little over a three percent dividend yield. In that way, it's a definite treasury alternative and that it's actually producing some income for Berkshire. But Buffett and Charlie Munger, both said that fossil fuels will still be part of the energy landscape for say, 200 years. The reasoning essentially being that while things like solar and wind and alternative energy sources are certainly growing in popularity. World energy demand is growing even faster and is forecast to continue to do so. Fossil fuels will meet the need of the population, although alternative sources like solar are going to be taking a bigger piece of the pie, the pie itself continues to grow overtime and fossil fuels will still play a big part in it. They're not making any more oil. It's a finite resource and it's a supply demand play over the long term is how I see it.
Ricky Mulvey: Berkshire makes its bread and butter in the insurance business a bit of a rough time going for Geico, they're seeing a higher volume of claims and more severe claims. The first part of the question is, what does this mean for Berkshire and its insurance business? Then maybe we can move onto if there's trouble for Geico, what's that mean for the smaller insurance tech companies that rely on reinsurance?
Matt Frankel: The higher claims volume from Geico is to be expected. The reason I say that is that's compared to the first quarter of 2021. But what's going on during the first quarter of 2021? A whole lot of COVID lockdowns, but wasn't going on during those COVID lockdowns. People weren't driving. There are a lot fewer chances to get in car accidents and chances to create claims during the first quarter of 2021, which is why Berkshire's underwriting profit from Geico during that first quarter was just off the charts last year. It's really not a fair comparison to compare the underwriting profit and Geico to the first quarter of last year. But to the second part of that question, what does it mean for smaller insurance tech companies? A lot of those smaller insurance tech companies, I don't want to name any names, we talked about this on the morning show today. They haven't gotten underwriting correct yet. A lot of them are posting big, unsustainable losses and Geico has been doing a good job of technology disruption itself and has gotten underwriting correct. They didn't run a giant underwriting profit in the first quarter of 2022 like you mentioned, there were facing a lot more insurance losses, but their underwriting we're still profitable. A lot of the smaller insurtech companies can't say the same. With a high inflation period coming up, it's not an ideal environment if any of them need to raise more capital. This is a time I would advise people to trade carefully with the smaller insurance tech companies.
Ricky Mulvey: Especially insurance companies that like to see themselves as technology companies more than insurance companies.
Matt Frankel: Right. Because there absolutely is a need for insurance technology, especially on the claim side. There's a lot of things that the big insurance companies don't do well. I joke this morning differ for a lot of people, dealing with the insurance company is worse than being in the accident. That's only half of a joke because quite a people have real trouble getting their insurer to pay the claims. It's a really clunky process. I could definitely see a big opportunity there, but at the end of the day, these are insurance companies and you got to get underwriting correct for it to be a viable business model. Now, if you tell me, if one of these insurance tech companies wants to develop software that's going to be used by Geico, by Allstate, by Progressive, all these other big ones, great. That sounds like a fantastic business because it's really needed. But when they're developing the software and writing their own insurance products, that's when it becomes a little bit more of a toss up when it comes to the long-term thesis.
Ricky Mulvey: Well, when life's gives you lemons, we'll see what you can make. [laughs] Berkshire Vice Chairman Ajit Jain said, "There's no question that recently Progressive has done a much better job than Geico both in terms of margins and in terms of growth." What is Progressive doing differently than Geico and Berkshire right now?
Matt Frankel: This goes toward the last question of the need for technology disruption in insurance. Progressive was much earlier to the party than Geico when it came to embracing technology. Specifically like how a lot of auto insurers are tracking their customers driving behavior. I think one of them calls it the Safe Driver discount. If you could show you obey the speed limit, you have safe driving habits. Progressive was a lot earlier in embracing that technology and now it's really showing up in their numbers.
Ricky Mulvey: One big headlines coming out of the meeting too, is that the famous longest of long-term investors are seeing an arbitrage opportunity at Activision, Blizzard. What was the buzz around that and what's going on with Berkshire's purchase of 9.5 percent of Activision Blizzard stock?
Matt Frankel: Well, Buffett had been a notable arbitrage investor before Berkshire Hathaway. Back when he was like 40, or 50 years old, not 90. He was a bigger arbitrage investor. Essentially, he's trying to profit from the difference between the price Microsoft has already agreed to pay for Activision and the price that it's currently trading at. This definitely makes sense. This morning, Activision was trading in the pre-market for about $77 a share. Microsoft has agreed to pay $95 a share when the deal goes through. If that deal gets approved and Microsoft buys Activision, Buffett stands to make a spread of $18 per share and for 9.5 percent of the company, that's a lot.
The issue a lot of people are taking is that it seems like a gamble because what happens if the deal doesn't go through? The stock will almost certainly drop if the deal was called off. Another issue is that Buffett used the word bet when he was describing it. He said this is a bet that the deal goes through. Yes, but it's a bet where the chances are very much in his favor and where he has what I call a long-term out if it doesn't go through. Because if it doesn't go through, the day before they announced the Microsoft takeover of Activision, the shares were trading at about $67. If he sees a worst-case scenario. It will go back to somewhere around that level and he owns 9.5 percent of Activision, which is a great business. Yes, it's somewhat of a bet in terms of the short-term upside. But I think they see a lot of long-term upside even if the merger doesn't go through and owning almost 10 percent of a great company is great, whether it's being bought out or not. I think that's where Buffett's head is at with this move.
Ricky Mulvey: Heads, I win, tails it's a tie. Berkshire started buying Activision stock in the fourth quarter of 2021. Microsoft announced their bid to acquire Activision in January of 2022. Do you think that's raising any eyebrows?
Matt Frankel: Well, it did raise some eyebrows. As soon as the merger was announced, Buffett came out and we had no prior knowledge of the deal, and out of that, something like 80 percent of the Activision position has been bought since the deal was announced. That really took away any rumors of Buffett had prior knowledge because the stock really didn't pop to anything close to that $95 level and that raised eyebrows at Berkshire. Like why isn't this trading it more? Microsoft has to cash in its back pocket to buy this tomorrow. It's a good business, like I said. It did raise some eyebrows, but I think what he said this weekend at the meeting got rid of those.
Ricky Mulvey: We could spend some time on Bitcoin as well. But shockingly, Charlie Munger and Warren Buffett are not big fans of crypto currency. I think we move on and ask you what kind of fun you have outside of the meeting and were you able to make meet up with any Fools?
Matt Frankel: I did. One specific I remember, his handle on Fool Live is Indiana Chris, came and met up with some of us. I tweeted when Bill Murray was giving an interview. I tweeted from there and I think he figured out from the tweet where I was came and found me. He came and said hi to the rest of The Morning Show crew. As far as other fun in Omaha, Berkshire owns Brooks Running. I did the Berkshire Running 5K the next morning that they have every Sunday after the meeting every year. I did my first 5K without having to stop for a walking break. It's nice to win at almost 40 years old. I can still surprise myself like that. [MUSIC]
Ricky Mulvey: Congrats, man.
Matt Frankel: Thanks.
Ricky Mulvey: Well, good catching up with you and glad you have some fun in Omaha this weekend.
Matt Frankel: Great. Always fun to be here.
Chris Hill: If you want to start planning for next year's Berkshire Hathaway annual meeting, the date to save is May 6th, 2023. 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. I'm Chris Hill, thanks for listening. We'll see you tomorrow.