In this podcast, Motley Fool senior analyst Tim Beyers discusses:
- CEO Brian Cornell taking a head-on approach to dealing with Target's (TGT 1.73%) inventory problems.
- Prepping for getting the all-important back-to-school and holiday shopping seasons right.
- The unveiling of Apple's (AAPL 0.11%) newest features (including chips).
- Ripple effects from Apple Pay getting into the "buy now, pay later" space.
- Prospects for an Apple VR headset in 2023.
Additionally, host Alison Southwick and retirement expert Robert Brokamp discuss how you can "recession-prep" your investments and your mindset.
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.
This video was recorded on June 7, 2022.
Chris Hill: We've got some takeaways from Apple's big event and some thoughts on Target's latest announcement. Motley Fool Money starts now. I'm Chris Hill. I'm joined today by Motley Fool senior analyst Tim Beyers. Thanks for being here.
Tim Beyers: Thanks for having me, Chris. Fully caffeinated, ready to go.
Chris Hill: We're going to get to Apple in a second, but we got to start with Target. Those who might have missed it did not have a great earnings season. Target [laughs] came out in their most recent earnings report. Brian Cornell said, "We got the inventory wrong," and the stock took a big hit. Target came out today and basically said, "Here's how we're going to fix this. We're going to take a short-term hit and we're going to clear out our inventory." In related news, for anyone listening who is looking for patio furniture, or maybe a new flat-screen TV or some household appliances, you might want to check your local Target because it really seems [laughs] like there are a lot of things that are about to go on sale.
Tim Beyers: Everything must go, Chris. Everything must go.
Chris Hill: That's what it reminded me of, the old-school commercial. We made a mistake with our inventory and now we have to clear it out and we're passing the savings onto you, except this appears to be actually happening for real with Target.
Tim Beyers: Our loss is your gain. It does remind me of a 1970s Crazy Eddie ad. Go look those up if you don't know what I'm talking about. Let's hit some of the numbers. Target is estimating in the upcoming quarter an operating margin of around 2%. Not great, especially when the average operating margin is closer to 5%. By the end of the year, Target says closer to 6%, so they do feel like they're going to clear this out but boy is there a lot of inventory to clear out here Chris, $15.1 billion would a B, inventory as of April 30th. That was up 43% over the same year-ago period. So really not great. However, this is not just a Target problem, Chris.
What's interesting to me about this, is it's not a big macro, but it's big macro adjacent because this is not the only company that has been talking about inventory gluts. Walmart's been talking about inventory gluts. Lots of retail has been talking about inventory gluts. By the way, I think of the last time I was on the show, Chris, one of our lead stories was some guidance that had been updated within a month of the previous guidance and that was Snap and it was dramatic. We were talking about positive EBITDA and then all of a sudden we're talking about negative EBITDA, that was Snap.
Now Target, they said not a great quarter, but they had not taken the operating margins down. Now they've taken them down into territory we have not seen yet. The way I look at this Chris, Target is going to have to not just clear out inventory, they're going to have to rationalize and start replanning stores for what consumers really want. It is a signal that the consumer's buying patterns and desires have changed and Target is not ready for that yet and neither are a lot of other retailers here. It makes me wonder who's going to miss next.
Chris Hill: That is absolutely a thought I had earlier today when I was digesting this news because I think you're right, we're going to see this from other retailers. In terms of Target itself, I like this movie. I like that Cornell and his team are basically saying we're ripping the Band-Aid off right now, we're going to take this hit. By the way, the stock is only down about 2% or 3% which indicates to me that the sell-off that we saw in the stock, in the week of their earnings, I don't want to say it was overdone, but maybe it was almost completely done. Because absent that, the announcement this morning is something that could've sent the stock down 10%-15%. Again, I like they're ripping you off the Band-Aid now in part so that they can get ready for the two most important seasons of the year if you're a retailer, and that's back-to-school and then the holidays at the end of the year.
Tim Beyers: No doubt. I think this also reflects that Target delivered sweet and sour news. They just delivered the sour first, but here's the sweet news. On the back end of the year, they do say, Chris, that they're going to get to that 6% operating margin. I think that drawdown or at least the lack of drawdown is a reflection that there is some belief that they will be able to do that because they are ripping off the Band-Aid. Let's be clear if they do pull that off and they come up with an operating margin that is better than they historically do, if they do recover to that level, it's going to be an awfully good fourth quarter for Target. It's bad news but to your point, it could also be very good news if they do this well.
Chris Hill: The last thing I'll say before we move on to Apple, is I mentioned the sales of household items, patio furniture, etc. You look at shares of Target, the job Brian Cornell has done running this company for eight years now. This very much looks like a stock on sale for perfectly valid reasons. I don't look at what has happened to Target's stock as irrational. I view it as completely rational but if you think they're going to right the ship in the second half of this year leading into 2023, you could come up with worse entry points for the stock than this.
Tim Beyers: Hey, you know what, you can get paid to do it to a 2.24% dividend yield right now. The odds of them cutting that dividend, I think, are very low, Chris, so completely agree with you. This is a well-run business, it's a great brand. People are not going to stop shopping at Target, if they do rationalize the stores and fix the inventory problems, you're going to get paid for a pretty nice return.
Chris Hill: Apple held its Worldwide Developer Conference yesterday. What was your headline for the event? Because we can get into a couple of the nuts and bolts, but I really hope nobody went into this event hoping for some massive reveal because there wasn't one. I mean, maybe it's setting up for something big coming in 2023 but what was your headline for yesterday's event from Apple?
Tim Beyers: This is really interesting that you say that because I would say I disagree. I don't disagree, but I recognize that my geekish enthusiasm for this is because I have geekish enthusiasm for things like really fast chips and the M2 is here, which is my hemline and I think, my goodness, that looks like a crazy good chip. I'm recognizing now as we're talking about this, Chris, that the things I'm excited about are the things that nobody [laughs] except for people who really care about this stuff, really care about, but it does have practical implications. Let's get into what those things are.
The M2 chip does make the MacBook Air a highly attractive computer from my perspective here, it's going to start at $1,199. This is the new MacBook Air. It's also the 13-inch new MacBook Pro, and they will be based on the M2 chip. The M2 chip in my opinion here, Chris, I mean, it just looks amazing. It's a slightly larger chip, but it has a much better power profile. There's some really interesting stuff here. It's an 18% faster CPU, 35% more powerful GPU, 40% faster neural engine, 50% more memory bandwidth. Essentially what's happening here, is the M2 chip is designed basically on a smaller form factor, I should say, to deliver more compute power in a more efficient way, such that it is consuming less power and it can be very useful in a small form factor, like the MacBook Air.
I find this really interesting, it's also just geeky fascinating to me that this is a chip that's made at the 5-nanometer level, or I should say nanometer level and Apple has been ahead in this area where they are producing chips and the most advanced processes to deliver real, I would say, if not the best, one of the best combinations of performance and power and you're going to see it in the new machines. The only question for me, Chris, is, how is Apple going to manage some of the supply chain constraints such that we're going to see in stores, the new Airs, the new MacBook Pros, so they're going to be able to get enough equipment to actually be able to put this on the shelves but boy, does it look compelling.
Chris Hill: I don't disagree with anything you just said. I'm just saying if you're working in the marketing department of Apple...
Tim Beyers: Of course, right.
Chris Hill: You didn't get a ton to work with yesterday. Apple Pay is now going to be doing buy now, pay later.
Tim Beyers: Yeah.
Chris Hill: Affirm Holdings took a hit. I mean, this is the 800-pound gorilla stepping out of the room saying, this is a business we think we want to get into here. How threatened do you think those businesses are or do you think that look, this is just a given that any financial service, any payment option is going to have to buy now pay later.
Tim Beyers: Yes to what you just said. Any financial services are going to have to buy now, pay later here, but this is Apple going full Draymond Green. To use the [laughs] NBA analogy here, Draymond Green for the Golden State Warriors for those who don't know, when he makes a big play he does the flex on the sidelines here. This is Apple flexing its balance sheet here. Chris, for those who don't know, $51.5 billion is just in cash and short-term investments on Apple's balance sheet. They have tons and tons of money, they also have plenty of additional money beyond that.
Apple can do a lot with its balance sheet and so if they want to fund, buy now, pay later to put more iPhones, more MacBook Airs, more equipment into the hands of more people, they can do it easily. Incidentally, Chris, this has been something that enterprise hardware companies have done for years. I mean, we haven't talked about this company a lot, but IBM famously carried a lot of debt on its balance sheet but most of that debt Chris, was for equipment that was basically lent out to companies on installment enterprise plans. You're buying boatloads of IBM servers and other equipment, IBM is carrying debt, but essentially they're just giving you equipment so that they can generate cash flow from that and then it just happens to have a net debt effect on the balance sheet. This is absolutely nothing new. It just so happens that Apple is an extremely rich company and you're getting to see them flex the power of their balance sheet to just throw their weight around in this market.
Chris Hill: Last thing before I'll let you go. It seemed like Apple was dropping bread crumbs yesterday and pointing toward a VR headset coming in 2023. Was that your read on yesterday's event, and if not, when do you think we're going to see a VR headset from Apple? Because that really does seem like a device they should be and probably are working on.
Tim Beyers: Maybe I'm naive here, Chris. I thought the integration of the iPhone and the Mac, essentially the essential seamless integration where from your iPhone to your Mac, if you want to send a message or make a call or use your iPhone as the camera on your Mac, I thought just the seamless integration between those two took me to the place of your iPhone, is your window into the world? I don't know that they want to have a device that replaces the iPhone, especially since the iPhone is getting better and it's an interesting device for doing things like augmented reality. Because that's your central point of contact.
I mean, I will not disagree with you here, I certainly think there's something to be said for Apple getting involved here, and really because they are highlighting the work that they're doing around gaming, it makes a lot of sense that Apple would have a headset in this area. But making the iPhone more important and increasingly so especially with things like augmented reality, feels like a way to keep putting more iPhones and progressively more advanced iPhones in people's hands. I didn't have that same read, however, I wouldn't rule it out.
Chris Hill: Tim Beyers, always great talking to you. Thanks for being here.
Tim Beyers: Thanks, Chris.
Chris Hill: Tim referenced the big macro on one topic and the big macro that's been getting more airtime lately is the prospect of a recession. Alison Southwick and Robert Brokamp discuss how you can recession prep your investments and more importantly, your mindset.
Alison Southwick: Today we going to talk about growing fears of our recession and how to recession-proof your finances. Joining me is Dr. Awfulizer, aka Robert Brokamp not an actual doctor. Bro, you're a "glass maybe half-full but it's probably also poisoned" kind of guy, aren't you?
Robert Brokamp: Well, I don't think I'm that bad. But yes, [laughs] I would say that I have a tendency to contemplate the worst-case scenario when it comes to money. I would suppose a psychologist or financial therapist would likely point out that such tendencies have some route in our childhoods, and that's probably true for me. Had a very solid middle-class upbringing, a very happy childhood, very grateful to my parents. But at one point my dad's business did go under and we had a couple of pretty rough years and I saw the toll that took on my parents in their marriage, and definitely it taught me that you can't rely on the good times lasting forever. That's not an experience that's unique to me and my family, which I think is important for everyone to plan for less than awesome.
I listened to Daily Stoic podcast by Ryan Holiday. He points out that the Roman philosopher Seneca called this the premeditation of evils and wrote that we should project our thoughts ahead of us at every turn and have in mind every possible eventuality instead of only the usual course of events. I suppose in more modern business-y terms this is often called a premortem as opposed to a postmortem, during which a team imagines that you have a project or maybe a whole organization you're managing that it's failed, and then you work backwards to determine the possible threats and what can be done about them ahead of time.
Yes, I know this all sounds very doom and gloomy. But the truth is, a key part of financial planning is preparing for potentially bad outcomes because they may happen and when it comes to economic recessions which is the topic of this podcast, it's not really a question of if but when because we haven't yet eliminated the boom and bust cycles with the economy.
Alison Southwick: But I didn't mean to call out your pessimism as necessarily a bad thing, I just wanted to call it out so that our audience understands just how uniquely, [laughs] well credentialed you are to talk to in this episode.
Robert Brokamp: Thank you.
Alison Southwick: Everyone is concerned about things going south, it's you Dr. Awfulizer. You could probably get away with saying we're in a recession when the country has experienced two quarters of declining GDP. In the first quarter of this year GDP in this country declined for the first time since the start of the pandemic. But there are other factors economists consider when putting their finger to the wind of our economy. What is causing economists to say that a recession is on its way now?
Robert Brokamp: You're right, that's two quarters of declining GDP is definitely a sign of trouble and so it's a good rule of thumb. Officially, though recession has occurred only when the folks at the National Bureau of Economic Research say so and the NBER is a private non-profit research organization made up of like 1,700 economists and there are the folks who officially designate when recessions begin and end, and here's one definition offered by the NBER. A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. In that context, real means inflation-adjusted. You can tell from the definition the downturn has been pretty spread out throughout the economy to be a recession. Inflation is a little bogeyman here.
The Fed is raising interest rates and intentionally slowing down the economy to curb inflation and many experts are skeptical that inflation can be brought to heel, so to speak, without tipping the economy into a recession. An example is that in an interview with Bloomberg recently, former Treasury Secretary Larry Summer said, "If you look at history, there's never been a moment where inflation is above 4% and unemployment is below 5%, where we did not have a recession within two years, and we definitely meet both of those criteria."
You likely have heard that JPMorgan CEO Jamie Dimon recently said that he's preparing the bank for "economic hurricane," saying you better brace yourselves. One of my favorite economists, Mark Zandi at Moody's Analytics, recently said in his podcast that he thinks there is a 1 in 3 chance of a recession over the next 12 months. Now, to be sure there are plenty of good things going on in the economy, just as an example, last Friday's jobs report was really good. But now is definitely a good time to take a look at your finances and get on defensive footing at least in the short term.
Alison Southwick: Is the thinking here that things have been so good, now we need to keep it from being so good, but we're going to pull back too hard and swing the other way?
Robert Brokamp: Yes, exactly. I mean, the fear is that because inflation is so high, the Federal Reserve really has to put the brakes on the economy and rein in some excesses. It's too difficult to do the soft landing, it will probably have to go a little too much in the other direction.
Alison Southwick: Well, before we get into what our listeners can do to recession-proof their finances, it's probably helpful if we give a little more context to recessions in general. Some history, fun fact time: Recessions used to be much more common.
Robert Brokamp: Yeah, the NBER provides data on recessions that go back as far as 1857. Since then, we've had 34 recessions. Basically, we have a recession on average every 4.8 years. However, there's more than a decade between two of the last three recessions. In the last expansion, which is the opposite of the recession it's what the term economist uses to describe the times when the economy is growing, that expansion lasted from 2008 to 2020 and that was the longest expansion on record. I also point out that the last recession, which was caused by the pandemic panic of 2020, lasted just two months and that was the shortest recession ever.
Alison Southwick: I've really am a summer child, I didn't think about that. But as long as I've been investing, things have actually been pretty good. Just a little more context in history here, I'm going to name an asset or other fun economic indicator and you tell me whether it tends to go up or down in a recession, feel free to play along at home. The first one, is stocks.
Robert Brokamp: The answer is course is they tend to go down. The average decline during the recession since the 1920s is around 35%, so you have to understand that stocks are leading indicators. Very generally speaking, they tend to decline six months before a recession and bottom out six months into a recession. But that's very general. Every recession is a little different. I think back to the dot-com crash, the stock market start dropping a year before the recession, and then we had three calendar years of declines before the market recovered.
Alison Southwick: All right. Interest rates.
Robert Brokamp: Down, usually. I mean, the Fed is raising rates now to slow down the economy, they're generally successful, so then they have to reverse course to stimulate the economy and when it's declining. However, we all hear a lot nowadays about the '70s stagflation when we had high inflation and not great economic growth, and there were some instances there, particularly in '73, '74 recession where the economy went down, but interest rates kept going up because the Fed still had to fight inflation.
Alison Southwick: All right. Bonds.
Robert Brokamp: Bonds actually go up because bond prices move inversely to interest rates. Plus, during the recession, the stock market is going down. You will see that there's often a flight to safety during the recession, which means people sell their stocks, buy bonds, drive up the price of bonds, but it does depend on the quality of the bonds. If Treasuries hold up well, lower-rated bonds like junk bonds actually go down like stocks. Usually not as much.
Alison Southwick: Home prices.
Robert Brokamp: Take a guess, everyone. They actually generally go up, and that might be surprising, but when you look back to the six recessions since 1980, home prices only went down in two of those. In one of those, the decline was less than 1%, so it was basically flat. Research to Mark Hulbert of MarketWatch founded in 1952, home prices on average actually grew more during bear markets and stocks than during bull markets. I think people will find it surprising because they look back to the 2009 period, which has come to be known as the Great Recession, and that's when stocks and houses went down. But actually, historically, it was pretty much an outlier.
Alison Southwick: Last one, inflation. Does it go up or down?
Robert Brokamp: Down, we hope. That's the whole point of this. That's the whole reason the Fed is trying to put the brakes on the economy to bring inflation down. Generally, they succeed, although again, people will often point to the seven days that it took really high-interest rates. It was 10-year Treasury reaching 15%, 16% in 1981 before inflation finally came down.
Alison Southwick: I know it's tempting and often inaccurate to think, but this time it's different. But I don't know Brok, what do you think? Could this time be different?
Robert Brokamp: To a certain extent, yes. I would say that's because if you look at anything that's going on now and you attribute it to the pandemic, such as the supply chain issues and the shutdowns in China, we could possibly start seeing inflation come down over the next several months. In fact, the bond market is currently predicting lower inflation than it was, say, a month or two ago. On the other hand, food and energy prices are soaring partially due to the war in Ukraine and we have no idea of how that's going to shake out. There are some other geopolitical challenges going on.
One example is that India, which like Ukraine and Russia, is a big wheat exporter is experiencing extreme heat, we're talking like day after day of 100-degree temps, reaching as high as 120 in some places. The heat has so damaged its wheat crop that it put an embargo on exporting its wheat, so food prices could stay higher for longer. If the current inflation, and thus the Fed's efforts to slow down the economy were just due to the aftershocks of the pandemic, I'd say if we do have a recession, it may not be so bad. But these international factors could keep inflation higher for longer.
Alison Southwick: What can people do to come out relatively unscathed or even ahead of a recession?
Robert Brokamp: I'll just start with that boring yet important Foolish advice to make sure that you protect any money you need in the next few years by keeping it mostly in cash, short-term bonds, maybe Treasury, something like that. What you should do beyond that depends a lot on where you are along the road to retirement. If you're a decade or more away from retiring, the No. 1e risk of a recession to you is your income, in other words, your job. Now is the time to shore up your human capital. Look for ways to demonstrate your value to your employer and your customers. Keep an eye on how your company's doing so you can anticipate any layoffs. Maintain a professional network, keep your skills up to date in case you need to hit the job market and make sure you have an emergency fund to pay the bills in the meantime.
If you're nearing retirement, the concern is more for your portfolio since you'll be using it as a paycheck if you're not already. This is where asset allocation and diversification become really important. Start building what we call an income cushion, which is five years' worth of portfolio-provided income and cash or short-term bonds, so you can live off of that. But also having a mix of different types of stocks and owning enough of them, at least 25, I prefer even more with some index funds running, and you have to think of like how you diversify the stocks that you own.
Just an example, for every stock like Tesla you own, you should also own something like Berkshire Hathaway. By the way, those are two stocks that I personally own. You can invest in growth-oriented tech stocks but also have some solid dividend-paying consumer staple stocks. You don't want too much of your portfolio relying on just one sector, industry, or style of investing. According to Morningstar, the average stock allocation in target-date funds for retirees is 46%. To me, that's a bit more conservative than I think is necessary, especially for The Motley Fool audience, which tends to be a little bit more aggressive. I think 60% in the stock market is a good starting point and then you can adjust for your situation. Then finally, I'll just add that one of the best things retirees can do for the longevity of their portfolio is to not sell stocks when they're down. That means retirees may have to cut back on spending during recession.
Alison Southwick: I know, Dr. Awfulizer that my last question here could be quite painful for you to answer. But couldn't the case be made that a little recession now that it is actually good for us in the long run? I mean, as an investor can I view this as an opportunity?
Robert Brokamp: I would say absolutely. I have to say, I see economic expansions in boom times as sort of the holiday season. We all spend more, we eat more, we go to parties, we travel to relatives, and our credit card balances go up. We really don't spend too much time thinking about budgeting or things like that. Also, coincidentally, December is actually one of the best months for the stock market, historically speaking, and the recession is like January 1st. You wake up the next day, it's a new year, it's time to revisit the budget, pay off the debt, make some resolutions of how we get better with our money, maybe better in our jobs.
Take a look at our portfolios, reassess our asset allocations, and maybe do some rebalancing. Once a year, you should look at your portfolio and determine whether you are taking the right amount of risk for you. It essentially hunkers down for the winter but looks forward to spring because an expansion in the bull market follows every recession just as reliably as the change of season. Economic winter may be coming or not, but if so, it never lasts forever. In the meantime, with every contribution to your 401(k) and IRA, you're able to invest in companies at cheaper prices.
Alison Southwick: Well, the good news for you, our dear listeners, and Dr. Awfulizer here is that we're not actually done talking about market downturns and dark times. In the coming weeks, we're taking you to school with Morgan Housel. He's a partner at the Collaborative Fund and author of The Psychology of Money. Every episode will focus on a different market crash; what led up to it, how bad did it get, and what lessons you can glean to help weather any financial storm. Get on the bus kiddos, summer school starts next week, and I promise, you'll actually enjoy it.
Chris 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 them, 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.
