In this podcast, Motley Fool analysts Deidre Woollard and Jim Gillies discuss:
- Europe's energy crunch and why Russia isn't playing along with price caps.
- Investing in economic cycles as a contrarian.
- Why AutoZone is "one of the best-managed companies and capital allocation stories."
Plus, Motley Fool contributor Brian Withers joins Motley Fool host Alison Southwick and Motley Fool personal finance expert Robert Brokamp to discuss how to encourage kids to invest.
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 Dec. 6, 2022.
Deidre Woollard: Europe's gotten energy conscious, AutoZone keeps driving along. You're listening to Motley Fool Money. Welcome to Motley Fool Money. Today we're looking at the impact of energy prices as cold weather gets real here in North America. We're checking out more retail results, and we'll be talking about kids and money. I'm Deidre Woollard sitting in for Chris Hill, and I'm joined by Motley Fool Senior Analyst Jim Gillies. Hi, Jim.
Jim Gillies: How are you doing?
Deidre Woollard: I'm doing all right. I'm a little bundled up today. I know you are probably a lot more bundled up than I am because you live in Guelph, Ontario, Canada, where I don't think it's very warm right now. We're getting close to winter. Energy is a huge problem this year. How bad could it get, and what areas are you looking at?
Jim Gillies: We're not that cold up here. Unfortunately, Ontario is pretty much all natural gas-fired housing heat plus a lot of energy. It's all very natural gas or nuclear. We actually live in a pretty decent area for energy, but that is not an energy pricing. That's not the case for a large part of America and Europe, even Canada for that matter. My approach to energy is basically this. There's a certain amount of demand worldwide for energy of all sorts. We're talking about heating, we're talking about electrical power, we're talking about driving your car. But there's a certain rather large number that represents the amount of aggregate demand. That number is growing just shy of about 2 percent annually, and it has for the last seven decades or something like that. So it's probable that trend will probably continue for the foreseeable future as much as we want to get on efficiency, and I think that's a great thing as a former environmental engineer, but big fan of energy efficiency. I think it's driven as well by the move to renewables and the move to more sustainable energy sources and just burning hydrocarbons. I'm a big fan of that.
I've got solar panels on my roof. When they work, they're great. But that giant bowl that we need to fill every year is growing by about 2 percent a year, and the amount of that bowl or the portion of that bowl has been filled by fossil fuels, the big three fossil fuels, coal, oil, and gas, is, tends to run between 75 and 80 percent, about 77 percent I think so, but say 75-80. That amount has not been changed for the better part of my lifetime, the last four decades plus. We can say, cold weather might portend higher heating bills or higher energy bills or higher cost of gasoline, although it's coming down. I step back and go like, one hot summer where everyone's running their AC, one cold winter, that doesn't change what I look at as the bigger drivers here. And the bigger driver is a gradually 2 percent a year expanding bowl that you have to fill. Heretofore we fill it mostly with fossil fuels.
While I'd love to see that change, and I think it's important to drive as much change as possible toward the renewable side of things or even toward the nuclear side of things. My present value investing dollar does tend to be more focused on what's working now and what will probably be working for the foreseeable, read less than the next decade, foreseeable future. That does tend to be oil and gas plays for me, especially when you're looking at a lot of the oil and gas plays today after a lot of them lived a little, shall we say, liberally in the last oil boom, when oil got up to about 100 bucks, averaged around 100 bucks 2012-2014. Those companies didn't make a lot of money because they were spending it all over the place and paying big dividends and living on company credit cards. Oil fell, those companies got destroyed and they're now coming back and they are living within their means more now, they're really focused on shareholder returns, those dividends, share buybacks, living within their means in terms of cash flow, they're not willy-nilly borrowing. I know it's not very popular, it's certainly not where I thought I'd be as an environmental engineer.
From an investing perspective, I like the oil and gas plays with some nuclear stuff. But oil and gas plays are for me. If I get 5 percent yield and I know you're going to probably buy in between 5 to 10 percent of your stock or your shares this year, and you're going to make a lot of money basically at oil prices above $55? That's where I'm putting my money.
Deidre Woollard: Well, that makes sense because what you talked about, how long this cycle is, it's exciting to have renewables, we want to have more renewables. It's where things are going. But as you pointed out, it's not where things are at right now. This year especially, we're facing the geopolitical concerns have been dramatic. We've got, last week the EU agreed to cap the Russians seaborne prices at $60. That's led to all of this concern about, is this process going to work? Are they instead just going to go to China, India, or anyone else and sell their oil there? There have been some tanker problems happening. This is all short-term stuff, but is it anything that we should keep an eye on?
Jim Gillies: I do like how it was worded. The EU agreed to cap Russian seaborne oil prices. Did Russia agree to this cap?
Deidre Woollard: Not so much.
Jim Gillies: No, not so much. I think that's always where I come down on these things. If you foist something upon a person, if you foist something upon a country or a company or whatever, you should expect they're going to work around it. That's probably a terrible analogy, but if there's a specific type of tax, it's leveled upon you as a citizen, regardless, some sort of an income tax, or they change the tax bracket where the higher income tax bracket might apply, what's going to happen to the people upon whom that tax is expected to fall? All those people are going to start shifting money around to try to report lower taxable earnings or take advantage of tax shelters, they're going to react, and so such taxes when they come in, never quite raise the tax revenue that they initially thought they're going to do. I look at this going, OK, so we've got this price cap on seaborne Russian oil, that is $60 a barrel. I did see that Ural crude, so the Russian oil price, it was about 80 bucks a barrel a month ago. Now it's barely over 60. It's certainly the pricing market seems to think that, oh yeah, great, it's going to be 60 bucks.
Yeah, if I'm Russia, I'm just sell it, like, OK fine to the EU. It's like, I'm going to China and India to the degree that the West and Europe can put pressure on China, India to not buy. I suppose that could hurt Russia a little bit. It sounds horribly cynical and I'm sorry for that, but I think most countries, most people are going to act in their own self-interest pretty much all of the time. You've just imposed this upon Russia. They're going to act in their own self-interest. Which means, yeah, picking up the phone and calling clients in China and India. I don't have to like it, but [laughs] I think it probably does flow in the direction -- no pun intended -- that you suggested.
Deidre Woollard: Well, let's take your contrarian point of view to retail. We had two very different companies reporting earnings today, and both did really well. We had AutoZone and we had Signet Jewelers. Different companies, but definitely specialty retailers. Let's start out with AutoZone. Good quarter for them. Net sales of $4 billion, their same-store sales -- you always got to look at that for retail -- that's up 5.6 percent. In the short term, it seems like AutoZone, great for if the recession, people were repairing their cars or car staying on the road longer. Is this a long-term play?
Jim Gillies: I think AutoZone has been one of the great long-term plays for the past couple of decades, and I've never owned a share, which more fool me, I suppose.
Jim Gillies: I think AutoZone has been probably one of the best-managed companies and one of the best capital allocation strategies the past few decades. Because what do they do? They basically have a market space that not a lot of people come into, all are going to be chasing them down the distribution network is already a prohibitive, I think, competitive advantage for potential interlopers. I think there's probably some argument that the rise of electric vehicles, if it does play out the way certain people think it'll play out, probably could be a bit of a detractor to AutoZone's business because a lot of the parts that that we replace in our internal combustion engine vehicles, a lot of those maintenance items, may migrate away or cars with regenerative braking so your not slamming on the brakes a lot as much because you're using the car's natural generative breaking to slow yourself down might extend say the life of your brake pads and your brake rotors and whatever. Maybe you replace them less, and if you're replacing them less, it weighs on AutoZone or competitors like O'Reilly. You probably still use the same amount of windshield wiper blades, but I think that this company has been and probably for the foreseeable future, probably continues doing what it's been doing. It's taken over. It's a saying I got from our colleague Bill Mann and I think it's a really good one.
Companies that take over mountains. No one else knows what they want until it's almost impossible to dislodge them. AutoZone's one of, I'll argue it's a duopoly in the auto-parts space, replacement parts, accessories, that sort of thing with O'Reilly. As a result, they have a distribution network second to none and they can leverage this whole thing to make a great amount of cash. Then what do they do with that cash? I'm a cash-flow based investor, probably a little too obsessed with it to be honest with you. But it is what it is. The amount of cash that they've generated has led them to just relentlessly buying back their own stock. When they done what they've done relentlessly buying back their own stock, it ratchets, I think the market cap today is about 45, 47 billion dollars, I'd have to go look up the number of years, but since they started being very aggressive with the buybacks, I think. Oh, here it is, since 1998. Just over two decades. Again, $45 billion market cap today, roughly 47 billion. They bought back $31 billion worth of stock. They bought back almost their entire self. What that's done is it's taken the share count for back in the day has gone from the share count from 150 million shares, I think like a yeah, like in 1998, there was 152 million shares outstanding. Today it is 19 million shares outstanding. They just been eating themselves.
Then you go look at, well, what's that done to the share price? Because as a company buys back its own stock, if you're not selling, you own a greater proportionate amount of the company because you didn't sell while the company bought in and took it out. Just over the past decade, I'm just looking at the last 10 years, it's gone from $360 a share ballpark to $2,500 a share. But just by doing nothing and letting this company generate cash and then return that cash back to you in the form of very aggressive share buybacks. You've got, what, an eight-bagger. It's not a very exciting story. It's more exciting -- cybersecurity is much more exciting, e-commerce, a much more exciting story. But it's these quiet little non exciting stories. These stories where again, it's essentially, I took over -- a seven-bagger -- I took over a mountain. No one else knew they wanted and have treated myself to 21 percent annualized returns, which is roughly what AutoZone has given you the past decades. I'm not very exciting myself, so I try to avoid the really exciting investing stories. Again, it's remarkable to me I've never owned a share of AutoZone, even though I respect the hell out of them.
Deidre Woollard: You're pretty exciting.
Jim Gillies: No, I'm not.
Deidre Woollard: What I think you talked about it being a quiet plan, but I think it's also a visible play. If you're driving around, you see them. There's thousands of stores all over, there are definitely visible. I want to talk about one more that's visible. Probably not your area of interest, but Signet Jewelers. They also reported, parent company of Zales, Jared, Kay Jewelers. They also recently bought Blue Nile. They've got a lock on consumer jewelry and we're headed into a recession potentially, inflation's high. You might think this is a bad time to be them and it hasn't been. They had a great quarter, they raised their forecast. What is happening here? Consumer discretionary seems to be doing a lot better than I would have thought.
Jim Gillies: Can I be contrarian?
Deidre Woollard: Please.
Jim Gillies: I'm not sure we're heading into a recession.
Deidre Woollard: Yeah. I'm not so sure, either, but everybody likes to talk about it. [laughs]
Jim Gillies: Well, that's just it. Everyone likes to talk about it. If there is a recession coming and there might be, but I think it's primed to be fairly mild and my evidence I'll cite against that is again, the unemployment numbers don't say recession. Yes, a lot of the big tech companies are doing some layoffs. But the more blue collar companies are as of yet not following along, and then the other pieces of evidence I would point to is, have you tried to travel recently? Boy, people are spending a lot of money to do practically anything. Then the third piece is this what you've just said here, the consumer discretionary and certainly the wealthy haven't noticed any inflationary issue. But for those of us, shall we say further down the socioeconomic ladder. Boy, there's a lot of spending going on and on consumer discretionary and jewelry on people still playing with cars [inaudible].
The pent-up demand, I think from the pandemic, from being largely shuttered depending where you live, I suppose, but having your options to go out and do things for much of 2020 and 2021, that demand has been unfettered and I think it's still running pretty hot. Because of that, I'm not sure we're into that much of a recession. If you're not in that much of recession, then companies like what's going on with Signet and what have you, I think makes a little bit more sense. Doesn't mean I'm buying a lot of jewelry [laughs] but some people are. I took your question about a specific company and went off in a macro rant, but that's more I'm like yeah, I'm not sure we're going to get the recession, some people think we're going to get, and if that's the case, then I actually think it portends fairly bullish things resolved.
Deidre Woollard: I think it portends fairly bullish things for stocks that people maybe thinking about a recession and think I should stay away from those stocks that are mostly discretionary. It seems like the contrarian view is maybe not. Well, I think that's a great place to end things. Thank you so much for your time. This was always a pleasure to talk to you, Jim.
Jim Gillies: Thank you very much.
Deidre Woollard: Want your kids to start investing? Then keep the conversation short. Motley Fool contributor Brian Withers joins Alison Southwick and Robert Brokamp to discuss how he got his kids in the market and let that compound interest go to work. Last month, Brian, you posted a thread on Twitter and it started, my kids will be millionaires by the time they are 40. Here's how, and that here's how wasn't because they will win the lottery or because of wealthy aunt is going to suffer a sudden tragic accident. Don't ask how you know that. The answer was because you introduced investing to your kids at a young age, which is an incredible gift to give someone you love. The younger, the better. Brian, how did this happen?
Brian Withers: Let's jump in the wayback machine back to 2004. Fancy music. I was 37 years old. My kids were 5 and 7, and I had just joined The Motley Fool and at the time, I had this realization that investing was all about time in the market and not timing the market. I've been investing for about six years at that point. This realization just hit me like a ton of bricks, and I was like, man, if I just realized this 10 years ago, 15 years ago, wait a minute. I can give my kids a head start that I didn't have. In fact, I can give them about a 30-year head start. That's when I committed that I was going to make this happen however I was going to try to make it happen.
Deidre Woollard: Your boys are now in their 20s, but you started when they were about 5 and 7. What exactly did you do? Because while I'm sure your kids were very advanced, they probably weren't ready for a discounted cash flow and EBITDA.
Brian Withers: I don't know that we've ever done this cash flow with the kids. But it all started with a piece of construction paper and a Buzz Lightyear figurine. It was something I called the pennies game. I took one of these 11 by 17 pieces of construction paper and broke it into six squares, or made it into six squares, and then I took a Buzz Lightyear figurine and put it on one of the squares. At the time, Pixar was a public company, and so that square, essentially represented Pixar. I drew the golden arches for McDonald's. I took a Nintendo game cartridges that they had for EA sports, and I filled in the rest of the squares with other companies they were familiar with. Then I sat them around the little piece of construction paper and it gave them a set of pennies and they said, invest each as many pennies as you want into the companies that you think have the brightest future, the ones that you like the best. They went ahead and they put their pennies down and five minutes later they were off back to their Game Boy colors, playing one of their Pokémon games. It was quick and done. They were like, whatever. [laughs]
Deidre Woollard: We'll get back to having low expectations. We'll probably visit that in a little bit here, but let's talk a little bit more than about, so they put the pennies where they wanted to, they allotted their little chit, so to speak. Then what did you do? How did this then works or the mechanics of the pennies game throughout the year?
Brian Withers: For each penny, it represented $100 and I invested a $100 into each of the companies that they had chosen on the piece of construction paper. The next year, I had them more involved in the process about picking the companies that went onto the piece of construction paper. We did it just once a year and part of the reason i did it once a year so, I can have enough money so that they could spread it out over a few companies. I always have it hard time just picking one stock if I can only invest in one stock today. That allowed for multiple purchases. The other piece that I did was I wanted to set them up for success. I picked from a vetted list of Stock Advisor buy recommendations so that I knew that these were good companies to start with. Then the last piece was, I let them pick. I didn't influence their picks and so they knew that they were in charge of what they were investing in and how much.
Deidre Woollard: What happened when your kids got older? Like how did the pennies games evolve or how did the conversations change?
Brian Withers: After a few years, I actually shared their portfolio with them and partially because I didn't want them already picking stocks that were already more than maybe 10 percent of their portfolio that they had. But as they got older and they got more savvy with computers, I set up a spreadsheet to split the money up between the stocks that they selected. Eventually, they set up the buy orders in their Fidelity account to buy the stocks. We rarely sold, but if there was a decision that came up, we thought it was a good time to do it. We always involve the kids and the decision and they had the final word. We did this once a year for about 12 years until the oldest started in college, and then we stopped funding the accounts.
Deidre Woollard: In the past, I've tried to talk to my child about investing. She's 9 now. It made me feel a bit better that you had a similar experience with your kids, which of course, as we've mentioned before, it leads to the advice of have low expectations on how much time you're going to spend actually talking stocks?
Brian Withers: I remember when I brought up it's time to do the pennies game again this summer. I would actually get eye rolls. [laughs] It's like, no, don't make me do it, like seriously. We did drag them through a few years, but I did share when good things happen, like there was a spiffy-pop or one of their stocks has doubled over the period of time they had owned it. I think the key thing here is like anything else is to expose your kids to as many experiences possible. Hopefully, something clicks along the way. I guess the other piece is, don't really force it and meet them where they are. I've always tried to ask them about why they picked certain stocks and I always get insightful answers. I've seen some parents insist on an investing journal, but [laughs] that would have never worked with my kids.
Deidre Woollard: No, I don't think mine, either. You talk about thinking about investing in like teachable moments. I'm reminded of a well-worn story here at The Motley Fool of how our founders first fell in love with investing. They tell the story all the time. Basically, they were with their dad at the grocery store and their dad pulled some chocolate pudding down from the shelf and said, "You see this chocolate pudding. We own shares of the company that makes this chocolate pudding. Let's buy some chocolate pudding." From a young age they made the connection that investing gets you something awesome, like chocolate pudding. What are some teachable moments that you've had with your kids about investing?
Brian Withers: There was one story of the Gardners. I remember when they had graduated from high school and they were gifted some stocks, I think, from their grandfather. When they looked at this portfolio statement, they were amazed at the super-low cost basis. Then the value of the stocks was mostly all in gains. I wanted that kind of experience for my kids, and so over this period of time, we started when they were 5 and 7 and like now they're in the 20s. Some of that did happen and that was really cool. But I remember one specific time when Zack was in a Chipotle with me, and he asked, how does Chipotle make money? I was like, oh boy, don't screw this up. [laughs] That went over pretty well and I loved Chipotle as a starter stock because it's pretty easy to understand. But I've also had the kids teach me. I remember they were buying Netflix in 2010 when I was selling. They've bought Apple multiple times, even though both of them are Android phone users. I was like why are you buying Apple stock when you own Android phones? They were like, Dad, didn't you just pay over $1,000 for the new iPhone X? I'm like, well, you got me there. Also Alex has had a tremendous conviction for Tesla from the very beginning.
Deidre Woollard: Let's talk about the type of account options you have for investing when you're a kid. I know this is a topic near and dear to Bro's heart. Bro, you've been sitting there so patiently and quiet. Let's hear everything you have to say about this topic.
Robert Brokamp: Well, maybe not everything, but I do have three options for you. The first is a custodial account like an UGMA and UTMA, that's what Brian used for his kids. There are some tax benefits, so investment earnings up to 1,150 is tax-free for the kid and then the next 1,150 is taxed at the kid's tax bracket now, but then gains taxed after that are taxed at the parents' tax bracket. I should add that these numbers are for 2022 and they're going up a bit in 2023. Another thing you need to know about these accounts as the kids get control at the age of majority and that varies by state, but it's generally 18 to 21, but can be as high as 25 in some states. Then at that point, once they get controlling, do whatever they want with the money. It's important to know that the account is considered an asset of the child on college financial aid applications, which lowers age eligibility when compared to maybe a parental asset. Then finally on this, it's an irrevocable gift, so the money must be used for the kid's benefit and you can't take it back. A second option might be a college savings account like a 529 or a Coverdell. These have tax benefits, too. The growth and withdrawals are tax-free if the money is used for qualified educational expenses. But this won't set your kid up to be a millionaire by age 40 as Brian is trying to do with his kids, because obviously the money will be spent on college. That said it can still teach kids about the power of just regularly contributing to a portfolio and letting it grow over the years. Then the third option is you just own the account, but you eventually gift it to the kid. The benefits of this are basically more control because you can spend the money however you want. You give it to the kid when you feel she or he is ready. Frankly, some kids aren't ready to just be given thousands of dollars when they're 21 or so. This will lower the impact and financial aid eligibility because it's considered a parental asset. The main downside of this is that you'll load the taxes on the interest, dividends and gains while the account is yours. When you give the account to your kid, the cost basis of the investments will carry over.
Deidre Woollard: Brian, before we get to your final advice here for people who want to get their young loved ones investing. Well, how can they connect with you online? You are on Twitter? I know you're on Twitter. Where else?
Brian Withers: I'm on Twitter @StockswithBrian and then I'm also on LinkedIn. Look me up, Brian Withers.
Deidre Woollard: Look him up. He's a nice guy, is great to hang out with. All right, Brian, what is your parting advice here?
Brian Withers: I guess last I'd like to encourage members to start with even a small amount. Just little math. I guess we can do math on the show. If you invest 600 bucks over 10 years, say your kids between the ages of 7 and 17, by the time they're 23, they could have $18,000 built up if they achieve a 10 percent annual growth rate, which is the market average over the last 50-100 years. Having that nest egg starting out could be a huge financial advantage. A side benefit is they already have 15 years of, air quotes here, investing experience. Hopefully, we'll realize the power of long-term buy and hold.
Deidre Woollard: 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 your hear. I'm Deidre Woollard. Thanks for listening. We'll see you tomorrow.
